Dynamics of unemployment and real wages, Managerial Economics

Assignment Help:

Dynamics  of Unemployment and  Real  Wages through Productivity Shocks 

The model  that you  are  studying here  is  in  the  tradition of  the  real  business cycle theory that you have studied in earlier units. As you know,  this kind of a model works out the implications of  shocks to productivity. The model has  the following implications  to employment  and wages. 

1)  A temporary qverse shock to productivity decreases hiring (as it decreases the  marginal productivity  of  labour  and  hence  the  benefit  of  hiring  the marginal unit of labour) and  increases unemployment. As  the shock is,  by definition,  temporary, productivity  and  the  net marginal value  of  labour return  to  their original  level, but,  it can be  shown that  the unemployment rate only slowly returns to normal through increased hiring. Moreover, since it  is  cheaper for  the  firm  to  hire  when  there  are  more unemployed,  a productivity shock has greater effect on unemployment when it is high than when  it  is  low.  This is,  of  course,  implicit  in  the  non-linearity  of  the equation explaining u*, the natural rate of unemployment. 

2)  The model explains why fluctuations  in employment may be associated with smaller fluctuations in real wages. This will happen if 6,  the share obtained by workers, is constant, as is assumed  in the model, and small. Real wages vary  in the model with productivity and high rates of hiring are Associated with high real wages. The model thus explains the observed empirical fact of  a  pro-cyclical increase  in  real wages, but  to  a smaller extent  than  the increase  in employment, if the share obtained by workers is small in relation to that obtained by the hiring firms.  


Related Discussions:- Dynamics of unemployment and real wages

Uses of indifference curve analysis, Uses of Indifference Curve Analysis ...

Uses of Indifference Curve Analysis Indifference curve analysis is useful when studying welfare economics as follows: They are used to indicate the amount of income and

Explain the shut down point, Q. Explain the Shut down point? ShutdownP...

Q. Explain the Shut down point? ShutdownPoint: With MR = MC, firm attains equilibrium at point E where it produces OM amount of the output. To produce this output, firm incur

What is an effective need of demand, What is an effective need of demand ...

What is an effective need of demand 1.  An Effective Need: Effective need demands that there must be a need supported by the capacity and readiness to shell out. Henceforth there

What is normative economics, What is Normative economics It is concerne...

What is Normative economics It is concerned with varied corrective measures that a management undertakes under lots of circumstances. It deals with goal determination, goal dev

Stakeholders, The following represents the section headers you should consi...

The following represents the section headers you should consider for your reasoned document.   Each section should have (at least) two research citations to support your work :

Budget Constraint line, 1. The price of a CD (PC) is $10 and the price of a...

1. The price of a CD (PC) is $10 and the price of a DVD (PD) is $20. Philip has his income (M) of $100 to spend on the two goods. Consider three consumption bundles: (C, D) = (2, 3

Define national income, National Income National Income is a measure o...

National Income National Income is a measure of the money value of goods and services becoming available to a nation from economic activities. It can also be defined as the to

Shifts in demand curve, Shifts in demand curve Shifts in the demand cu...

Shifts in demand curve Shifts in the demand curve are brought about by the changes in factors like taste, prices of other related commodities, income etc other than the price

Short run cost curve, Ajax has the following short run cost curve when tc=8...

Ajax has the following short run cost curve when tc=800000-5000Q+100Q2

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd