Summary
Summary ECO1011S
- Course
- ECO1011S
- Institution
- University Of Cape Town (UCT)
The following document is a summary of units 9, 10 and 13 in the ECO1011S course.
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Unit 9Labour Market: Wages, profits and Unemployment
First Industrial revolution impact
Steam engines, cotton spinning machines, rail roads
Introduction to factory system instead of individual production
(clear distinction between owners and workers)
- Urbanization (work opportunities)
- Exploitation of working class (not as valuable as before)
- Opportunities for only a few people
- Pollution and environmental concerns
Second industrial revolution
Telecommunications, cars and planes, lightbulbs and adoption of electricity
- Increased urbanization (house price)
- Communication became easier; some jobs were not as valuable as before
- Living standards improve
- Mass production = loss of jobs, price of goods fall, Labour unions created
Cost of unemployment
Cost to individual: loss of income, decrease in living standards
Cost to society: crime, spreading of diseases, lower health standard
Cost to country: should be spending money on education but rather spending on
unemployment issue
,Labour model: Labour market- purchasing people time and effort
Model tells us how the economy wide market for Labour determines wages and
employment
Wants to build a model that tells
the entire Labour market story
Vertica axis= real wage
Horizontal axis= employment level
(quantity of employment)
Purpose of a model
To tell a story
Assumption one being:
Only input to production is Labour, so only cost is the wages
Profits are determined by:
- nominal wage (actual amount received in a particular currency) (cost)
- Price at which firm sells good
- Average output produced by worker per hour (Quantity)
Assumption 2 (gross simplification)
- Identical workers
- Offering same wage
Firms and employees:
Firms must set wages sufficiently high so that there is an employment rent
- Motivates workers
- If high unemployment- wage must be a lot higher
Employment rent: value of having job vs cost of not having a job
- Motivates employees to work harder for employers
- Cost to job loss
- If employment is high, need higher wage to keep her in the business
- Employees will base their effort off of best response curve
Setting prices
Firms face a tradeoff between selling more goods and setting higher prices
Need a combination that will maximize profits
(marketing firm)
Real wage: nominal wage, adjusted to take account of changes in prices between different
time periods. Measures the amount of goods and services a worker can buy
- Depends on prices set by the firms throughout the economy, not just her own firm
,What wage to pay?
- HR department determines lowest wage it can pay
- Must not undermine workers motivation to work
- Depends on wages other firms are paying
- What other firms are charging
- Unemployment rate in country
What to charge/the price to sell goods at?
-Marketing department sets the price
- Choose best isoprofit curve
- Demand of good
- Based on firm’s nominal wage (cost of wages)
- Shape and position of the demand curve (elastic
or inelastic)
How many people to hire?
-Production department calculate show many people to
hire
- Have to be hired to produce the output determined by marketing department based
on firm’s production
Economy split into:
Real wage worker receives Real profit owner receives
If all firms setting the same price and same nominal wage, then
Higher real wage = a lower markup
(1-(W/P))
Wage setting curve= upward sloping
Positive relationship
Gives the real wage necessary at each level of economy wide employment to provide
workers with incentives to work well
, Price setting curve: gives the value of the real wage that is consistent with a firm profit
maximizing markup over production cost
*Model the Labour market of the entire economy
Within one labor market you have variety of jobs- have to make assumptions
Employment and Unemployment
Characteristic:
o Needs to be of working age 15-64
o Person must not be in self-employment or paid employment
o Person is available for employment or self-employment
o Individual is seeking work, which means they had taken specific steps in that period
to seek paid employment or self-employment
Discouraged workers: a person who was not employed during the survey period, but
wanted to work but did not take active steps to find work
Labour force: number of people in population of working age who are, or wish to be, in
work outside the house-hold. Can be employed or unemployed
Participation rate: the proportion of the working age population that is in the Labour force
-the ratio of the number of people in the Labour force to the population of working age
Participation rate= Labour force/population of working age
*Labour force= employed and unemployed
Unemployment rate: shows the proportion of the Labour force that is unemployed
-the ratio of the number of the unemployed to the total Labour force
Unemployment rate= unemployed people/ Labour force
Employment rate: shows the proportion of the working age population that are employed
- The ratio of the number of employed to the population of working age
Employment rate= employed/population of working age
Wage setting curve
Vertical axis= economy wide wage
Horizontal= represents the proportion of
the working age population
Labour force line:
- Vertical line
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