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49:34
Transcript
0:16
Today we're going to look at the we're
0:18
going to start looking into the labor
0:20
market. Now the labor market
0:23
is very interesting for a wide variety
0:25
of reasons that we will not discuss in
0:26
this course because it's not about labor
0:28
economics, it's about macroeconomics.
0:31
But there are at least two reasons
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0:33
why labor markets are very important in
0:36
in macro.
0:39
One is because things like an employment
0:42
rate
0:43
is an very important indicator of the
0:45
macroeconomic health
0:48
of a country or an an economy.
0:51
And the second one
0:52
which is quite relevant these days is
0:55
that the inflation rate
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0:57
is
0:58
one of the main drivers of the inflation
1:00
rate is what is going on in the in the
1:03
in the labor market. And and we will try
1:06
to understand this this mechanism
1:09
in the next couple of lectures.
1:12
What you have there is the is the
1:14
inflation rate in the US and I'm I'm
1:16
showing you this picture several times.
1:19
You know, after going through a long
1:20
period in which the
1:22
inflation rate hovered around 2%, you
1:24
know, with cycles
1:26
we are experiencing an episode of very
1:28
high inflation.
1:31
Things are coming down, but they're
1:32
still at extremely high levels, 6% or
1:34
so. And actually very recently these
1:36
numbers have picked up again a little.
1:40
So that's very high
1:41
very high inflation rate, way too high
1:43
for an economy like the US to feel
1:45
comfortable with. And
1:49
whenever you know
1:51
some member of the FOMC comes out and
1:54
explains why interest rates are so high
1:57
at this moment it says and and and and
2:00
explains why they are likely to remain
2:01
high for quite a while. They say, "Well,
2:03
look, inflation is uncomfortably
2:06
uncomfortably high at the high levels
2:09
and and labor market conditions are very
2:12
tight."
2:14
And that suggests that the inflation
2:17
problem is not likely to go away in in
2:20
in in the near future. Okay? So that's
2:23
something we need to understand in
2:24
macro. Why is it that the labor market
2:26
being tight says anything about the
2:29
inflation rate, for example. Okay? And
2:31
that's the kind of things we're going to
2:32
discuss
2:34
in particular in the on on the Monday
2:36
lecture.
2:37
Now today we're going to start with sort
2:38
of more basics of the of of of the
2:42
of the labor market.
2:45
And
2:47
and at the same time we're going to
2:48
begin a transition in the course in
2:50
which we have been focusing on things
2:52
that are
2:53
in the very short run into things that
2:55
take more time. Okay? Because many of
2:58
the things that we we're going to
2:59
discuss today are things that you're not
3:01
likely to see in in every single
3:04
quarter, but they are things that you're
3:06
likely to see over averages over, you
3:09
know, several quarters, several months.
3:11
That's what we're going to look at
3:12
today.
3:13
So remember let me just recap a little
3:16
bit what we have been doing up to now.
3:20
We have been looking at this ISLM model
3:23
which is a great model.
3:25
It's it's a very good model
3:29
to build on, but it's a very nice model
3:31
starting point to understand what
3:33
happens in a recession and what are the
3:37
what are what are the likely
3:39
what are the likely impact of the
3:41
different macroeconomic policies,
3:43
monetary policy, fiscal policy and so
3:45
on.
3:46
It is not such a great model
3:48
once
3:51
the aggregate supply side of the
3:52
economy, something we have completely
3:54
ignored
3:55
starts becoming binding.
3:57
Okay? Remember that till now in the ISLM
4:00
model we had basically ISLM model we had
4:02
two assumptions.
4:05
Related assumptions. One, prices were
4:07
fully sticky. They didn't move at all.
4:10
Second, that output was aggregate demand
4:14
determined. So whatever aggregate demand
4:15
wanted
4:17
producers found a way to produce it at
4:19
some given price.
4:22
That's that
4:23
that combination is unlikely to happen
4:27
when for example, when
4:31
firms are finding trouble finding new
4:33
workers because, you know, there may be
4:34
more demand, more demand for these
4:36
goods, but but the firm may find it hard
4:38
to expand production.
4:40
And it's also highly likely that in a
4:42
situation like that firms are going to
4:44
want to keep prices constant. At some
4:46
point they will kill you. Look, you you
4:47
want to have lots of meals in my
4:49
restaurant. I cannot find people to work
4:51
in my restaurant. I'll
4:53
I'll I'll hide the prices so at least,
4:55
you know, fewer tables and I can manage
4:57
one way or the other.
4:59
So
5:00
we're going to start building a model
5:01
that
5:02
makes those takes those things into
5:04
consideration. What what is the impact
5:06
of
5:07
of a tight supply side of the economy on
5:09
on prices and and and how that starts
5:13
affecting feeds back into equilibrium
5:16
output eventually.
5:19
So the main thing I would say we're
5:21
going to do really
5:23
relative to ISLM model in the next two
5:25
three lectures is endogenize the
5:27
inflation rate. Okay? We have kept
5:30
prices fixed.
5:31
But now we want to endogenize.
5:34
And and the story of that endogenization
5:36
of
5:37
of of inflation starts from the labor
5:40
market. And that's the reason we're
5:41
going to start looking at the labor
5:42
market today. Okay?
5:44
Now let me remind you a few things that
5:46
I think we discussed in the first
5:48
lecture or so or maybe second, I don't
5:50
remember.
5:54
Let me give you a picture of the labor
5:56
market and some variables
5:59
important statistics of the labor market
6:01
that are
6:02
that that
6:03
that that matter for for understanding
6:06
inflation and so on.
6:08
So this is a picture that's this is the
6:10
one that you have in the book of
6:14
the labor the the labor market. It's a
6:16
picture of the labor market at some
6:17
point in 2018. I don't know when. It's
6:20
it's a picture at one point.
6:22
And that's at the time the US had about
6:25
330 million people.
6:28
That the non-institutional civilian
6:30
population, that is those people that in
6:32
principle could work
6:34
were about 260 million.
6:37
That excludes people under 16 years old,
6:40
people that are incarcerated, people
6:42
that are in the in the armed forces.
6:45
Those are excluded from
6:47
that's the difference. That's the reason
6:49
you have such a big gap between these
6:50
two numbers. Okay?
6:52
Now out of these people that potentially
6:54
could work some of them
6:57
want to work and that's what we call the
6:59
civilian labor force
7:01
and then some of them are out of the
7:03
labor force.
7:04
Again, at one point in time doesn't mean
7:06
that these people are permanently out of
7:07
the labor force. They may be temporarily
7:09
out of the labor force and so on.
7:11
But but about, you know, we started with
7:14
about 330 million and by the time that
7:16
we look at the people that really want
7:18
to work
7:19
at that point when the picture was taken
7:21
was about half of that, 162 million
7:25
people. Okay?
7:27
Now these 162 million people
7:30
the the great majority of them are
7:32
typically employed. They have a job.
7:35
Okay?
7:36
And then there's a group of people that
7:38
would want to have a job. That's the
7:40
reason they're part of the civilian
7:41
labor force, but do not have one.
7:43
And that's about 6 million in that
7:45
picture there. Okay?
7:48
So when you hear unemployment or the
7:51
unemployment rate you're really talking
7:54
about these people here. And when you
7:56
talk hear about the unemployment rate is
7:58
these people not divided over total
8:00
population, but it's these people
8:01
divided by the civilian labor force.
8:04
Okay? So that's the picture.
8:06
The US.
8:08
The most recent numbers we have about
8:10
that kind of statistics is
8:14
here you have them. I mean, the
8:15
unemployment rate in the US today is
8:17
about 3.4%. That's very low. I'll show
8:20
you
8:21
historical data in a minute and I have
8:23
shown you historical data in the recent
8:26
past. But this number is very very low.
8:30
And
8:31
the change in the employment level
8:34
in in this is for January
8:36
was a reduction. This is this is not
8:39
rate. It's number of people that are
8:42
that are that were no it's not number of
8:45
people that were employed that are no
8:46
longer so. You look at the total stock
8:48
of unemployed in December and then you
8:50
look at the total stock of unemployed in
8:52
January 2023. The difference between
8:55
these two is 28,000 workers. So 28,000
8:59
less workers are in the unemployment
9:01
pool.
9:03
Now notice that how this number is made.
9:05
It's it's not it's not that that, you
9:07
know, 25 28,000 people just gained a
9:10
job. That's not what happened.
9:13
What happens is
9:14
first
9:16
employment 895,000
9:18
and 84,000 people got a job.
9:22
Much bigger number.
9:23
But also the civilian labor force went
9:26
up by 866
9:28
and
9:30
and
9:31
thousand people. Okay? So if you go back
9:34
to
9:35
this picture, what you have in in
9:37
January
9:39
or the numbers reported in January, I do
9:40
not know which month they correspond to
9:42
exactly is that yes, this this decline
9:47
but that decline was made of
9:50
a big increase in employment
9:53
together with a big increase in the
9:54
civilian labor force. Okay?
9:56
So that must have been mostly movement
9:58
out of the labor force and probably had
9:59
that something to Well, I'm not going to
10:01
get into that here, but
10:06
All these numbers are seasonally
10:07
adjusted, so they're corrected relative
10:09
to what happens normally in January and
10:11
so on.
10:12
And COVID and weather can sort of derail
10:15
a lot
10:16
what happens in January, February.
10:18
Numbers tend to be very noisy. Since
10:20
COVID, they have been very noisy because
10:21
the seasonal adjustments are different.
10:23
And and also weather matters a lot in
10:26
January, February and so on. So, you can
10:27
get pretty large fluctuations which are
10:28
really not that interesting to
10:30
macroeconomists, but anyways, those are
10:32
the numbers.
10:34
You look at the civilian labor force
10:35
participation, then it was about 62%,
10:38
62.5%.
10:40
And the employment population ratio is
10:42
of the order of 60%, okay? So, the
10:44
employment population ratio is is just
10:47
this
10:48
uh divided by total population, okay?
10:53
Um
10:55
Those are the averages. The number of
10:58
unemployed in 2022, about 6 million
11:00
people. That's that's unemployed.
11:03
Okay.
11:04
So, there you have the unemployment
11:06
rate, you know, and it moves as you
11:08
would expect it. It typically goes up in
11:09
recessions. Uh
11:12
the last sort of large recession we had
11:13
big swings.
11:15
Uh one thing that was interesting and we
11:17
couldn't quite understand what was going
11:19
on is as you notice right before COVID,
11:21
the unemployment rate had already
11:22
declined to very low levels.
11:24
And so, people were wondering whether
11:26
something we're going to talk about
11:27
later in the this lecture, whether the
11:29
natural rate of unemployment had changed
11:31
for some reason.
11:34
We'll come back to that. Then we got we
11:37
got COVID, obviously a very
11:39
recessionary shock initially, massive
11:41
unemployment and so on.
11:43
But then it came back very quickly and
11:45
today we have record low levels of
11:47
unemployment. We hadn't seen numbers
11:49
like this since, you know, the '60s,
11:51
uh really. Very low levels of
11:53
unemployment. So, when when uh one of
11:55
the things that that
11:57
when you hear the FOMC members talking
11:59
about the labor market being very tight,
12:02
well, one of the things they're looking
12:03
at is this. One, there are other
12:05
statistics I'll show you, but but but
12:07
this is one of them. The unemployment
12:08
rate is really, really low.
12:12
Sometimes again, especially post-COVID
12:15
because of movements in and out of the
12:17
labor force, uh
12:20
the unemployment rate is not such a
12:21
great statistic, not as reliable because
12:24
many people left the labor force. So,
12:25
people look a lot at the
12:27
employment rate, uh which is this is
12:31
this is um this is
12:33
not the employment population ratio,
12:35
it's employment rate. So, employed over
12:38
uh
12:39
uh the non-civilian
12:41
population, no?
12:45
And that number, you can see we have
12:48
discussed this before,
12:49
was trending up here because of the
12:51
increase in the labor participation of
12:52
women, then it came down, had a lot to
12:55
do with the students and things like
12:56
that, uh systematically, but then it was
12:58
climbing up enormously, it collapsed
13:01
during COVID. That's mostly unemployment
13:04
and and and and and people out of the
13:07
labor force.
13:08
Uh
13:09
and then recovery, but the recovery has
13:11
not picked up to back to the trend. See,
13:14
we are back to sort of more or less the
13:15
levels we had before COVID, but we're
13:18
certainly off the trend.
13:20
And one of the reasons the labor markets
13:21
are very tight is that is that we
13:23
haven't recovered sort of uh
13:26
the employment uh um
13:28
rate that that we used to have, okay?
13:31
This has to do with migration flows,
13:33
with a variety of things, uh but that's
13:36
that's the issue.
13:38
Okay. So, that's that's sort of
13:41
those are very static pictures of the
13:42
labor market. What is the stock of
13:44
unemployment at one point? What is the
13:46
unemployment rate and so on and so
13:47
forth?
13:48
But the truth is that labor markets are
13:50
very dynamic,
13:53
especially in an economy like the US.
13:55
The flows are very large. So, what I
13:58
have there, and I don't know for which
14:00
date, this is in the book, but the
14:02
pictures look more or less the same for
14:04
the point I want to make.
14:06
This is monthly labor flow flows. And
14:08
this
14:09
this happened in some month, I don't
14:11
care, 2018 at some point.
14:13
Look at what happened there.
14:16
You have this is we were talking about
14:17
the stocks recently. So, employment in
14:20
that month was of the order of 132
14:22
million uh dollars, 132 million people,
14:25
okay?
14:27
Out of the labor force, about 79 million
14:29
people. Unemployed, about 8.6 million.
14:32
That's those were the stocks. Those were
14:33
the type of numbers I was showing you
14:35
before, okay?
14:37
But look at these arrows.
14:40
These are flows. So, in every single
14:42
month, you see in the US about 3 million
14:45
people that move from one job to
14:46
another. So, employment to employment.
14:50
You see about 1.8 million that move from
14:52
employment to unemployment.
14:55
And about 2 million people that move
14:58
from unemployment to employment. Large
15:01
flows.
15:02
Not only so, not everything goes from
15:04
unemployment to employment. There are
15:05
people that are also moving out of the
15:07
labor force and into the labor force,
15:09
into unemployment, into employment. Here
15:12
in this particular case, out the flow
15:14
out of the labor force into employment
15:16
is 3.4 million.
15:18
Flows from employment without going
15:21
through unemployment to out of the labor
15:22
force, 3.7 million.
15:25
Okay. During COVID, there was a this
15:27
must have been a very thick arrow.
15:29
Lots of people move out from employment
15:31
to out of the labor force, okay?
15:34
And and one of the problems the economy
15:36
has had in the recovery on the on the
15:38
labor market side is that this arrow
15:40
hasn't been as strong as we would want
15:42
it.
15:43
Okay.
15:44
This arrow, or this arrow for that
15:46
matter of fact, people coming coming out
15:48
of the labor force into unemployment,
15:49
that's also big flow.
15:51
Sometimes people are not working and
15:52
then they decide that, you know, they
15:53
run out of unemployment insurance or
15:55
something like that, and so they decide
15:56
to start looking, you know, and they
15:58
move
15:59
into unemployment here,
16:01
okay?
16:02
Or or they run out of savings and and
16:05
they have to come back and they may not
16:07
find a job initially. They have to go
16:08
through unemployment,
16:09
okay?
16:11
So, the point is that these flows are
16:13
very large.
16:14
And and the
16:17
and these flows matter a lot
16:19
uh
16:20
for for the kind of things we want to
16:21
talk about in in this course.
16:24
Look at what we have here.
16:26
Uh
16:26
the red line is the unemployment rate
16:28
and it's measured on the left axis.
16:32
And what we have here in the blue line
16:34
is measured in a in an inverse scale.
16:37
Look at this this goes up
16:39
as you go down.
16:41
Is is the
16:43
percentage of employed unemployed
16:45
workers becoming employed.
16:47
Okay.
16:49
So, it's the job finding rate from
16:50
unemployment. So, you have unemployed
16:51
people
16:53
and they will be finding jobs. They will
16:55
be looking for jobs and they will be
16:56
finding jobs.
16:58
This number here, this blue line here,
17:00
shows you
17:01
uh the likelihood that they'll find a
17:03
job
17:05
in inverted scale,
17:06
okay? So,
17:08
what do you what correlation do you
17:10
notice there?
17:19
It's very tight.
17:21
Yeah. As the percent of people
17:24
um that get a job each month is smaller,
17:26
there's more people without a job.
17:29
Exactly. That means when the
17:31
unemployment rate is high,
17:33
it is harder for unemployed workers to
17:35
find a job.
17:37
Or another way of an direct implication
17:40
of that is that a typical unemployed
17:41
worker will spend more time in
17:43
unemployment because they're going to be
17:44
looking for jobs and it's more
17:46
it's harder to get a job, so you're
17:48
going to be looking for a job for a
17:49
longer period of time.
17:51
Why are we talking about these things?
17:53
Well,
17:54
because of this type of
17:56
uh
17:57
reasons. Well, this means that when
17:59
unemployment is high, workers are worse
18:02
off in at least two ways.
18:04
And there are two ways that are going to
18:06
be important for what I'll say next.
18:08
One
18:09
is that the employed workers face a
18:11
higher probability of losing a job.
18:12
That's what happens when unemployment is
18:14
the reason unemployment gets to be high
18:15
is because
18:17
firms are firing workers and so on and
18:19
so forth, no? And so
18:22
so so when unemployment is high, the
18:25
first thing the workers know is that
18:27
it's very likely they'll lose their job,
18:30
more likely that they'll lose their job.
18:33
But the second channel, which is what
18:35
this picture highlights here, is that is
18:37
that if you fall on employment, it's
18:39
going to take a it's going to be a lot
18:40
harder to get out of unemployment,
18:42
okay? So, when unemployment is high is
18:44
high, it's scary for workers for two
18:46
reasons. Once, you're more likely to
18:49
lose a job because it's capturing
18:50
recessionary conditions and so on in the
18:52
economy, but second, if you end up in
18:54
unemployment, it's going to be hard to
18:55
get out of it,
18:57
okay?
18:59
And and later on this unemployment rate
19:02
is going to show up in wage bargaining
19:05
and the main reason it's going to show
19:07
up is of this kind.
19:09
And also think about the other side.
19:12
When there's bargaining, there's two
19:14
There's going to be firm and workers.
19:16
From the firm point of view,
19:18
if there's a lot of unemployment, do you
19:20
think it's hard or or or or or easy to
19:23
find a worker?
19:24
If you replace a worker that decides to
19:26
leave for whatever reason,
19:30
Easy, no? You have lots of people to
19:31
choose from, so it becomes easy. So,
19:35
unemployment is high, workers are more
19:37
scared.
19:39
If they get out, it it is they're scared
19:41
of losing their job. If they get out,
19:43
it's it it's it's hard to get a job. And
19:46
on the other side, the firms for the
19:47
firms, it's not that they're scared to
19:49
lose a worker because it's pretty fairly
19:51
easy to replace that worker.
19:53
Today, firms are very worried about
19:55
losing their workers. In some sectors,
19:57
no, in some sectors are getting rid of
19:59
workers, but but if you run a
20:01
restaurant, you're very scared of losing
20:03
your your your workers, you know,
20:05
because it's going to be very difficult
20:07
to find a replacement for that worker.
20:09
So, surprise, surprise, wages in that
20:12
industry are going up a lot, okay?
20:16
We're going to get there.
20:18
So, that's what comes in wage
20:20
determination. Look at the what I'm what
20:22
I'm trying to build here. I'm starting
20:24
from telling you stories about the labor
20:25
market, what things are important for
20:27
workers, and so on.
20:29
Now, I'm going to get into wage
20:30
determination, and obviously this
20:33
variables I talked about are going to be
20:34
important in this wage determination,
20:37
but my ultimate goal is to talk about
20:38
inflation. So, the next step, so I'm
20:41
going to talk about wage determination
20:42
here, and then we're going to talk about
20:44
prices, and there we're going to be one
20:46
step closer to talking about inflation,
20:49
okay? So, let's go through the
20:50
intermediate step, wage determination.
20:54
Uh
20:55
So, just to give you a little
20:57
background, you know, sometimes
21:00
uh wages are set by collective
21:02
bargaining, unions
21:04
in particular.
21:05
Now, in the US, unions are not a big
21:07
thing.
21:08
Okay? They were a much bigger thing many
21:09
years back.
21:10
They aren't today.
21:13
Um
21:14
in other economies, they are a big
21:16
thing, okay? Japan, in Europe.
21:20
Uh
21:21
and the unions can happen at different
21:23
levels of aggregation, at the level of
21:24
the firm, at the level of the sector,
21:26
and and and and
21:29
and you name it.
21:31
In general, regardless of the level you
21:33
of unionization you have
21:35
uh in a country or in a sector,
21:38
the higher the skill needed to a job,
21:40
the more likely this other bargaining
21:41
takes place between an individual
21:43
between an employer and an individual
21:46
rather than a union, okay? Because it's
21:48
sort of much more idiosyncratic
21:50
and customized, and so on.
21:52
But, either way, regardless of whether
21:54
uh whether uh uh wages are set
21:58
at a collective level or at at the
22:00
individual level,
22:01
the main macroeconomic drivers
22:04
of uh wages are similar across both of
22:08
them.
22:09
Of course, the particulars are going to
22:11
be different, even the dynamics can be
22:13
different, and so on. But, the big
22:15
drivers, the big macro drivers
22:18
are similar, regardless of the
22:19
bargaining mode you have at the level at
22:21
which it happens, and so on. And those
22:23
are the things we're going to highlight
22:24
here.
22:28
So,
22:29
a fact of life is that workers' wages
22:33
typically exceed the reservation wage.
22:36
Now, what does it mean the reservation
22:38
wage? The reservation wage is a wage
22:40
that would leave you indifferent between
22:42
employed or unemployed. Doesn't mean
22:43
there's a nice wage, anything. But,
22:48
I mean, that's and certainly doesn't
22:49
mean that you wouldn't prefer to have to
22:50
have a higher wage.
22:52
But, it tells you that, look, at that
22:54
wage, you'd rather be employed than
22:55
unemployed.
22:57
Okay? And there's a wait long list of
22:59
reasons why
23:00
that ends up being the equilibrium type
23:03
wage, and I'm not going to discuss them
23:04
here,
23:05
but
23:06
take it as a fact for now.
23:08
Okay? So, that is
23:10
workers prefer to be employed.
23:12
They may take the risk of becoming
23:13
unemployed, but they typically prefer to
23:15
be employed.
23:18
Um
23:20
Now, wages, and this is where it becomes
23:22
uh
23:23
uh important for interesting for us in
23:25
macro, is
23:27
the wages that are finally set depend
23:32
on labor market conditions.
23:34
So, very clearly, the lower is the
23:36
unemployment rate, the higher the wages
23:39
will tend to be. Okay? And you're seeing
23:41
it now. The unemployment rate is very
23:43
low, wages are rising a lot.
23:45
Okay?
23:46
And workers' bargaining power depends on
23:50
this again. There's a huge literature on
23:52
these things, I'm just compressing it
23:53
into
23:55
as the very minimums.
23:58
Uh the bargaining power of a worker is a
24:00
thing that we already discussed.
24:02
Well, it depends on how costly for the
24:03
firm to find a worker. So, obviously, if
24:05
unemployment is very high, it's very
24:07
easy for firms to buy a work find a
24:08
worker. That's not good for the
24:10
bargaining for of a work If you want to
24:12
bargain with your employer,
24:13
and there's lots of people like you out
24:15
there,
24:16
uh you're not going to have a lot of
24:18
bargaining power. So, it's unlikely that
24:20
you're going to come up with a very high
24:21
wage, okay?
24:22
Uh
24:23
and it's also the other side of it is
24:25
how hard it is for workers to find
24:26
another job if they were to leave the
24:28
firms. I mean, if you know that there
24:29
are lots of jobs like the one you
24:31
currently have out there which are not
24:34
occupied, so there's empty vacant jobs,
24:37
then you're probably going to have a
24:38
much stronger hand with your employer
24:40
because you can say, "Okay, if you don't
24:41
pay me what I want, I move to the next
24:43
door." Okay?
24:44
And in terms of the macroeconomic
24:46
variables we care about,
24:47
a situation like that is very likely to
24:49
happen when unemployment is very low.
24:52
Okay?
24:53
Because that means that other
24:55
jobs
24:57
are are unlikely to be filled
24:59
because, you know, there there are lots
25:00
of people looking for things, but it's
25:01
difficult for the firms to find
25:03
the workers, and therefore
25:06
you're going to be a lot more attractive
25:08
to that
25:09
labor market.
25:11
So, in summary,
25:13
at the aggregate level,
25:15
we can write a wage-setting equation
25:19
of this form.
25:20
So, the wage, and this is the nominal
25:22
wage,
25:23
uh
25:24
can be written as an increasing function
25:26
of expected price.
25:30
Meaning, wages are not set in most
25:32
professions, they're not set second
25:34
second by second. You set them you know,
25:35
you bargain for a wage, and so on, and
25:37
that thing it sticks for a year or so,
25:40
at least.
25:41
Some Okay?
25:43
Well, obviously, if you expect this
25:45
inflation is zero,
25:47
you know, you're going to demand a wage
25:49
that is more or less
25:51
what you need today.
25:54
If inflation is 10%,
25:56
you you say, "Well, I'm going to have to
25:58
demand a higher wage because I have to
26:00
live with this wage for a year, and
26:02
prices are going to be rising while
26:04
while I have this wage." And so so, if
26:07
they expect lots of inflation, if they
26:08
expect prices to be high in the future,
26:11
they're going to ask for a higher
26:12
nominal wage today because I'm going to
26:14
have to live with that wage on average
26:16
for the next uh
26:18
year or so, okay? So, that's the first
26:21
thing, and it's going to play an
26:22
important role. It says wages are an
26:24
increasing function on the price level
26:26
workers expect. They expect a high price
26:28
level in the future or during the life
26:30
of the wage contract, then they
26:32
obviously going to demand a higher wage.
26:35
Other things equal.
26:36
What are other things? Well, the the
26:38
arguments of this function here.
26:40
Unemployment.
26:42
If I'm employed for any given expected
26:45
price, if the unemployment rate is high,
26:47
workers are going to demand a lower
26:49
wage.
26:50
Why is that?
26:57
Because it's going to be um harder for
26:59
them to find a job, so they have less
27:00
bargaining power. They have less
27:02
bargaining power, exactly, okay?
27:04
Um so, they're going to like they're
27:06
going to demand a lower wage.
27:07
This variable Z here
27:10
is a catch-all variable for
27:13
a a strength workers' strength in the
27:15
bargaining position situation, something
27:17
like that. So,
27:19
uh
27:20
for example, uh
27:22
this is things like uh employment
27:25
protection laws.
27:26
Okay?
27:28
Firing costs. If it is difficult to fire
27:30
someone, the Z will tend to be high. So,
27:33
this only tells you that given the level
27:35
of unemployment, if it is very hard to
27:38
fire someone, wages workers are going to
27:40
be willing to they're going to they're
27:43
very likely to demand a higher wage. No,
27:45
it's hard
27:46
it's hard for you to fire me,
27:48
I'm going to bargain harder for my wage,
27:51
and this type of institutions
27:53
institutional factors play a huge role
27:56
in Europe, much more than in the US.
27:59
Okay?
28:01
Good.
28:02
But, as a matter of a definition, we're
28:04
going to say
28:05
an increase in Z is Z is something that
28:07
increases the bargaining power of
28:09
workers. Okay?
28:11
And therefore, for any given level of
28:13
unemployment and expected prices,
28:15
they're going to lead to a higher wage
28:17
demand. This is the wage This is the
28:19
workers' demand in a wage.
28:21
We have to figure out what happens in
28:22
equilibrium, but this is what the
28:24
workers are demanding. Okay?
28:29
Is it clear what we have here?
28:31
Good.
28:36
So, let's now move to the other side.
28:38
Okay? So, that's one side of the
28:40
scissor. We have the workers, and they
28:42
given certain
28:44
macroeconomic conditions summarized by
28:45
the unemployment rate and expected
28:47
prices, they demand certain wages.
28:50
Now, we can't find equilibrium wage
28:51
until we don't see the other side, what
28:53
firms are willing to pay, and so on. So,
28:56
we need to explore this other side.
28:58
And the starting point of that other
29:00
side
29:01
is the production function, meaning
29:04
you know,
29:05
uh
29:07
firms are going to end up setting prices
29:09
for goods,
29:10
but producing those goods will take
29:12
factors of production. They're going to
29:14
have to use something
29:16
uh to produce that.
29:17
And the cost of that something will
29:19
determine, importantly, what is the
29:20
price they end up charging.
29:23
I'm going to simplify things a lot here.
29:25
Uh I'm going to assume the production
29:27
function is first linear and linear only
29:30
on labor, so no other factors of
29:31
production.
29:32
Meaning,
29:33
this says that to produce one unit of
29:36
the aggregate good,
29:38
uh
29:38
you need well,
29:41
this says that if you have if you add an
29:43
extra worker
29:44
uh uh,
29:46
to the big production function of the
29:48
economy,
29:49
then you're going to get a more units of
29:51
output.
29:52
Okay?
29:53
That's what this says.
29:55
So, Y is output, the output we've been
29:57
talking about, measured in the way we
29:59
have been talking about and so on.
30:01
N is employment, and A is labor
30:04
productivity. That is the output per
30:05
worker.
30:06
Okay?
30:07
I want to make things very simple. We're
30:08
going to talk a lot about in the next
30:10
part of the course, in the part of
30:11
growth, about this A, what moves this A
30:13
over time, what it does, and so on.
30:15
But, but,
30:17
I'm going to simplify things a lot here
30:19
for now, and I'm going to set A equal to
30:22
1.
30:23
So, it doesn't get any simpler than this
30:25
as a production function. This
30:26
production function says, you want to
30:28
produce one more good, you need one more
30:30
worker.
30:33
Okay?
30:34
This is what this says.
30:35
If you have 10 workers, you produce 10
30:37
units of good.
30:38
If you have 11 workers, you produce 11
30:40
units of goods. Okay, so to produce one
30:42
more unit of good, you need
30:44
one
30:45
worker more.
30:49
Now, why do you think I'm
30:51
I'm simplifying it so much and I'm right
30:53
I'm even repeating this idea that one
30:56
more worker, one more unit of good.
31:00
That tells you that how much does it
31:01
cost to the firm
31:04
to the firm that has this production
31:05
function
31:07
to produce
31:08
one extra unit of workers or
31:12
one extra unit of goods?
31:14
Well, you have to ask the question,
31:15
well, what will the firm have to do?
31:18
Well,
31:19
the first So, suppose a firm wants to
31:20
produce one more units of goods. What is
31:22
it that it needs to do?
31:27
It needs to hire another worker. How
31:28
much will that cost?
31:36
The wage. The wage. Exactly, no? So, now
31:39
we're beginning to So, so this is the
31:41
wage in this case is the cost per unit
31:43
of production for this guy. So,
31:45
the marginal cost of production for this
31:47
firm is the wage.
31:49
All the rest, intermediate inputs, is
31:51
all summarized. This is value added.
31:53
Built on something else.
31:56
So, this production function, as simple
31:58
as it is, says exactly that. The
31:59
marginal cost of production is equal to
32:01
the wage.
32:03
So, assume that the wage that I'm going
32:05
to So, now I'm going to come up with a
32:06
pricing model, a price setting rule. So,
32:08
firms that understand how much more it
32:11
costs to produce an
32:13
an extra unit of good, now have to
32:15
decide the price they want to charge for
32:17
that extra unit of the good.
32:20
There's a lot that that comes into in
32:23
that decision, but but we're going to
32:24
summarize it with a markup. Very simple.
32:27
We're going to say, "Look,
32:28
the the firm will do the following.
32:30
We'll say, "It cost me one worker to
32:33
produce one one unit of
32:35
extra of good. A worker cost me W, so my
32:39
the price I want to charge is 1 + M, M
32:41
is a positive number, times W."
32:43
Okay? So, M is a number like 0.2.
32:46
So, you pay 100 in in in the in the
32:48
wage, then you're going to charge the
32:51
And suppose the wage is 100,
32:53
uh, if the markup is 20%, you're going
32:56
to set a price of 120.
32:59
Okay? That's the price setting rule
33:01
that we're going to adopt, and again,
33:05
it's not that crazy.
33:07
Simple, but not that crazy.
33:10
So, that's we call this the price
33:12
setting equation.
33:14
The firm takes the wage, because that's
33:16
the marginal cost of production,
33:18
and and then,
33:20
uh, adds a markup, and that's the final
33:22
price.
33:24
Now, we can
33:25
rewrite this price setting equation
33:28
as a as a wage equation in the following
33:30
sense. It's still a price setting
33:32
equation, but this All that I've done
33:34
here, no, is I divided by P and by one
33:37
by P and 1 + M, and I get that the wage
33:41
the the real wage the firm is willing to
33:43
pay
33:45
is equal to 1 over 1 + the markup.
33:47
That's another way of saying it. It's
33:48
the same, huh? I took this price setting
33:50
equation, and I just rewrote it.
33:53
I rewrote it this way because then, you
33:55
know, I had when I look at the wage
33:56
setting equation, I also wrote it that
33:59
that way, W over something. I want to
34:01
write the price setting equation in the
34:03
same sort of units as as my wage setting
34:06
equation, so then I can use that one
34:08
diagram, put them together easily,
34:10
and and find an
34:12
an equilibrium of something.
34:15
Okay?
34:16
So, what you see here is, for example,
34:18
is that the higher is the markup,
34:21
the lower is the real wage the firm is
34:23
willing to offer.
34:25
You see that?
34:26
They have And this is an equilibrium at
34:28
the level of the economy. It's not you
34:29
individually, but on average, that's
34:31
what ends up happening. If firms on
34:33
average end up charging a higher markup,
34:35
it has to be the case
34:37
that in equilibrium, the real wage
34:39
offered by the firms is lower.
34:42
That's what this says.
34:44
Okay?
34:45
So, if we're in a situation where the
34:47
markup was zero,
34:49
and now all of the sudden, because of
34:51
imperfect competition or perhaps the
34:53
some price of a key input went up and
34:56
it's not really measuring value added or
34:57
whatever,
34:58
uh,
34:59
uh,
35:00
if the markup goes to to to one,
35:03
then the real wage in equilibrium will
35:05
fall
35:06
to half what it used to be.
35:09
That's what this question That's what
35:10
the firms will offer.
35:13
Whether that's an equilibrium or not, we
35:14
shall see.
35:15
Or how do we get to that to be an
35:17
equilibrium, we shall see.
35:18
But that's what the firms will offer.
35:20
That's what the price setting equation
35:21
says.
35:22
In fact,
35:23
you already know from this equation that
35:25
that's what the real wage will be,
35:27
because there's no variable here that
35:29
can adjust to that.
35:31
What happens is something else will have
35:32
to give in the economy, so this ends up
35:34
being the equilibrium wage. Okay? But
35:37
you'll understand that a little later.
35:39
Or you'll understand it better a little
35:40
later.
35:43
Okay. So, now we're almost ready to come
35:47
up with to discuss a very important
35:49
concept in macroeconomics.
35:52
And that's the concept of the natural
35:54
rate of unemployment.
35:56
Now, the first warning is that there's
35:59
nothing natural about the natural rate
36:01
of unemployment. It's not sort of, you
36:03
know, something that God gave us or
36:05
anything like that.
36:06
Okay?
36:07
I'll say, for us,
36:10
and and what typically means the natural
36:12
rate of unemployment,
36:15
simply means what I wrote there,
36:18
which is that employment that takes
36:20
place when the
36:22
expected price is equal to actual
36:24
prices.
36:26
Okay?
36:27
That's what we'll define for this
36:29
class, for this course, we'll define the
36:31
natural rate of unemployment. The
36:33
natural rate of unemployment is when the
36:35
expected price is equal to P.
36:37
That's what we mean. If I we ask you any
36:39
question about the natural rate of
36:40
unemployment,
36:41
we don't mean that that's what is good,
36:43
that that's what is bad, that that's
36:44
what God decided or someone else decided
36:47
or whatever. This is all that it means
36:49
is that in any equation where you have
36:51
P, you can stick in P, and then solve
36:53
for equilibrium, and that the employment
36:55
rate that comes from that is what we
36:57
call the natural rate of unemployment.
37:00
Because of this, you can also think of
37:03
that unemployment rate as a sort of
37:06
as a good
37:07
proxy for what is likely to be the
37:09
average rate of unemployment of an
37:11
economy over a longer period of time.
37:14
You know, because people are unlikely to
37:16
be fooled all the time in the same
37:17
direction. So, sometimes they're going
37:19
to expect a higher price than it is,
37:20
sometimes it's a lower, and so on. On
37:22
average, unless there's something very
37:24
weird going on, they're going to get it
37:26
right. But because you know what more or
37:28
less what the level of inflation of the
37:29
economy is, sometimes you'll miss up,
37:31
sometimes you'll miss down, but on
37:32
average, you're going to be right if you
37:34
if you take an average over a long
37:35
period of time.
37:36
So, for that reason, you can also
37:38
interpret this natural rate of
37:39
unemployment as an employment rate of
37:42
the medium run, if you will. So, when
37:43
you have collected enough data,
37:45
positive errors are balanced with
37:46
negative errors, and so on.
37:48
Okay?
37:50
But that's all that we mean by the
37:51
natural rate of unemployment.
37:53
Okay?
37:54
Now, notice that with this assumption
37:57
that PE is equal to P, I can go back to
37:59
my wage setting equation, which was W
38:02
over PE equal to F dot. I think it I
38:05
don't remember where I divided by P, but
38:06
I had PE there.
38:08
I'm going to divide by P both sides,
38:11
and then I'm going to set PE equal to P,
38:13
and now I have that my wage setting
38:15
equation can be written this way, and
38:18
notice that that employment rate I put
38:20
here is the N.
38:21
And it's the natural rate of
38:22
unemployment.
38:24
Because once I get in a model in which
38:26
you assume that P is equal to P, that
38:28
employment rate that comes out of that
38:29
is a natural rate of unemployment.
38:32
Okay? That's That's all that it just
38:34
means. It says, "Okay,
38:36
you allow me to to replace PE by P,
38:38
well, then I can call my unemployment
38:39
rate here the natural rate of
38:41
unemployment."
38:46
And it has lots of names. It's the
38:48
natural rate, the structural rate of
38:50
unemployment, and so on.
38:54
Now, what this tells you,
38:56
I mean, you can see the slope of this
38:58
function.
39:00
If the natural rate of unemployment is
39:02
higher in this economy,
39:04
what is the real wage that comes from
39:07
the wage setting equation?
39:09
Lower.
39:11
curve in the space of wages to real
39:13
wages to unemployment.
39:15
to the natural rate of unemployment.
39:17
It's a downward sloping curve for the
39:18
reasons we discussed before, bargaining
39:20
power, and so on. Okay?
39:22
So, I can put together, remember the the
39:25
price setting equation led me to also an
39:28
equation of the real wage, which was not
39:30
a function of anything. It was only a
39:32
function of parameters. So, that's a
39:33
horizontal
39:34
curve in the space of real wages and
39:36
unemployment, natural rate of
39:38
unemployment. Here, we have a downward
39:40
sloping curve,
39:41
and the intersection of these two curves
39:44
is the natural rate of unemployment.
39:46
Okay?
39:47
So, this was the price setting relation.
39:49
Remember, it's 1 over 1 plus M.
39:52
This is the wage setting equation.
39:56
Uh
39:56
with the assumption that PE is equal to
39:58
P.
40:00
And that's the natural rate of
40:03
unemployment.
40:04
And here you can understand what I said
40:05
before is that
40:07
you see, in this economy
40:09
the real wage, because this price
40:11
setting equation is flat in the simple
40:13
economy, the real wage is pinned down by
40:15
the firm.
40:17
By the firms collectively.
40:19
And not collectively in an oligopolistic
40:23
way. It's, you know, it's what happens
40:25
in equilibrium.
40:26
Uh
40:27
it's set by that, but the equilibrium
40:29
unemployment natural rate of
40:30
unemployment is intersection of that
40:32
real wage set by the firms
40:34
and the wage setting relationship.
40:40
So, what happens
40:43
in a to a point say to the right?
40:46
What happens in this point here?
40:48
What is the situation we have?
40:57
Well,
40:58
at that high level of unemployment
41:00
workers are willing to work for much
41:03
lower real wages than the firms are
41:04
offering.
41:07
Okay?
41:08
This is what workers at this level of
41:10
unemployment, very high level of
41:11
unemployment
41:12
workers would be fine with this.
41:14
Firms are paying that.
41:17
Okay?
41:18
So,
41:19
unemployment is very likely to be
41:21
falling because workers are not
41:23
demanding a lot and and and firms, you
41:25
know, are going to hire all these
41:26
workers back.
41:28
The opposite here.
41:30
If here workers are demanding a wage
41:32
that is much higher than firms are
41:34
willing to pay.
41:36
Well, that's likely to lead to more
41:37
unemployment because firms are going to
41:39
be very reluctant to hire
41:41
uh these very expensive workers.
41:43
Okay? So, that's going to build
41:45
unemployment in this direction.
41:47
Good. So, that's
41:49
that's the natural rate of unemployment.
41:51
Again, nothing natural about it. It's
41:52
the equilibrium when you assume the
41:54
expected price is equal to
41:56
uh price. So, there are some important
41:58
parameters in this diagram here.
42:00
One is this M.
42:02
The markup. That's a parameter, very
42:04
important markup here. To So, see,
42:06
if the markup changes the natural rate
42:09
of unemployment will change.
42:11
There's another set of parameters here
42:13
which is
42:14
Z. We took as given the institution that
42:17
protect
42:18
the bargaining power of workers
42:19
institutions, supporting institutions.
42:22
The Z. That's a parameter here. If that
42:25
changes, the natural rate of
42:26
unemployment will change.
42:28
Which is again something that confirms
42:31
there's nothing natural about the
42:32
natural rate of unemployment.
42:34
So, let me just do it in equations very
42:36
quickly and then and then
42:39
uh
42:39
I'll do a
42:41
a couple of important shifts.
42:43
Uh so, in terms of equation, all that I
42:45
did is say, "Look, the wage wage setting
42:47
equation the price setting equation
42:49
gives us that.
42:51
The wage setting equation gives us that.
42:53
Therefore, that equal to that. That's
42:55
the point we found. That's the natural
42:56
rate of unemployment." Okay?
42:58
So, from here
43:00
that's when the two are equal. This is
43:02
what's the flat curve. This is what's
43:03
the downward sloping curve. Well, these
43:05
two are equal
43:07
uh
43:08
when these two things are equal. Okay?
43:11
And that's where you get there. So, from
43:12
there you solve the natural rate of
43:13
unemployment.
43:15
What do you think happens to the natural
43:17
rate of unemployment if Z goes up?
43:23
Let's just be very mechanical at this
43:25
point. Just math.
43:28
If Z goes up
43:30
what what happens to F?
43:36
Goes up, no? If Z was positive.
43:40
Well, the right hand side hasn't gone
43:42
up.
43:43
So, this went up.
43:46
Something has to give, so F comes back
43:48
down.
43:50
And the only thing that can give, the
43:51
only thing is endogenous in that picture
43:53
there is the natural rate of
43:54
unemployment.
43:56
So, if Z goes up, F goes up. Well, I
43:58
need to bring F back down because the
44:00
right hand side hasn't given an inch.
44:03
So, what do I have to do to natural rate
44:06
of unemployment for F to come back down?
44:10
Price, no? Because that's what will
44:11
weaken bargaining power.
44:13
Workers bargaining power got stronger
44:15
because increasing Z, well, I have to
44:17
weaken it some. I don't have to
44:18
Equilibrium will weaken it somehow
44:21
so that we end up in the same situation
44:22
with the same real wage that we had
44:24
before, which was equal to 1 over 1 plus
44:26
M.
44:28
What happens if M goes up?
44:31
Well, if M goes up markups go up. That
44:34
means firms real wage
44:37
uh
44:37
the real wage firms offer drops.
44:41
So, I need If this right hand side
44:44
drops, then I need the left hand side to
44:46
drop drop as well.
44:48
And the only thing that is endogenous
44:49
here is the natural rate of
44:50
unemployment.
44:52
So, I know that I need to but to drop F,
44:55
what do I need to do to UN?
44:59
So, I need to bring F down. And the only
45:02
tool you have, it's not a tool, but in
45:04
equilibrium everything that will
45:06
can change here is UN.
45:08
It will
45:10
It will increase UN.
45:12
Because that will reduce bargaining
45:14
power of workers and that will reduce
45:15
their their real wage demand and
45:17
therefore you restore equilibrium that
45:18
way.
45:19
So, this environment is a very nasty
45:21
environment for workers in a sense, no?
45:23
Because
45:24
it's always the the scapegoat is is the
45:27
natural rate of unemployment.
45:30
So, here you have what I just said in in
45:32
pictures. So, that's the example of Z
45:34
going up.
45:36
Bargaining power of workers going up.
45:38
So, suppose you start at an at an
45:39
equilibrium like this.
45:42
And now and now Z goes up.
45:45
Well, that means that workers for any
45:47
given level of unemployment natural rate
45:50
of unemployment want a higher wage.
45:52
Because they have more bargaining power.
45:55
Well, that higher wage is inconsistent
45:57
with the wage that firms want to pay.
46:00
What restores equilibrium is
46:01
unemployment the natural rate of
46:02
unemployment goes up
46:05
enough so that the wage demand sort of
46:08
comes down to the same original level
46:10
because this this price setting equation
46:12
is completely flat.
46:13
Okay?
46:14
So, there you have a a situation where
46:16
bargaining power of workers went up.
46:19
And all that ended up happening is is
46:21
that in the medium run at least
46:23
that the natural rate of unemployment
46:25
went up.
46:27
That's very much the story of Europe, by
46:29
the way.
46:30
In the '80s, France in particular. In
46:32
France they sort of made your labor
46:34
reforms
46:35
Z boosting, if you will, in the 1980s.
46:38
Initially it was a great deal for
46:39
workers. Real wages went up and so on.
46:41
It was wonderful.
46:42
But eventually with the passage of time
46:44
they end up just with a much higher real
46:46
not a much higher real wage, but a much
46:48
higher real
46:49
unemployment rate. Okay? They went from
46:52
uh single digit lows in the digits to,
46:55
you know, 15% unemployment rates and
46:57
things like that. And since then they
46:59
have been sort of
47:00
reforming the labor market to fix some
47:02
of that. But
47:03
but that's that's that was very much
47:06
what happened in continental Europe
47:08
in the '80s.
47:10
This is the case of a markup increase.
47:12
It's the other one I described, no? So,
47:15
uh if if markups go up
47:18
then initially that means firms in
47:20
equilibrium are not willing to pay real
47:22
wages uh
47:24
they they want to pay a lower real wage.
47:27
Well, at this level of unemployment
47:28
workers are not going to take it.
47:30
The only thing that will restore
47:31
equilibrium is that the natural rate of
47:32
unemployment goes up. That weakens
47:35
the hand of workers.
47:37
And you end up
47:38
uh with this. And again, there's nothing
47:40
natural about this. I'm not saying this
47:42
is good, bad. I have no idea why the
47:44
markups went up. If it is just imperfect
47:46
competition going up, that's clearly not
47:48
a good thing.
47:49
Uh but it may have been something else.
47:51
The price of oil went up a lot. I don't
47:52
know. Uh was a war somewhere and then
47:55
productivity came down. So, something of
47:57
that kind.
47:58
So, I don't know what did it. But but
48:00
the only thing I'm describing here is
48:01
the mechanics.
48:03
Okay?
48:06
Good.
48:08
So,
48:09
uh
48:10
the quiz is up to here.
48:11
Right? So, the the quiz ends here.
48:14
Okay?
48:15
Uh in the next lecture we're going to
48:17
learn I'm going to start the Phillips
48:19
curve, which is now
48:21
using this model, but looking at
48:22
deviations, situations where the price
48:24
is not equal to expected price or
48:26
expected price is not equal to to
48:28
to the actual price. And and that's
48:31
going to lead to interesting situations.
48:33
Uh
48:33
and there we're going to be talking
48:35
about inflation. Here this is not a
48:36
model to talk about inflation. I'm
48:38
talking about what happens in the medium
48:39
run. I haven't told you whether
48:42
adjustment happens through the nominal
48:43
wage, through the prices, or what. I
48:45
mean, there are many ways of
48:47
reaching the same real wage.
48:50
You know, you could have it
48:51
uh you could you could lower real real
48:54
wages by increasing
48:55
wages by 50% and prices by 60, say.
48:59
No?
49:00
Or you could do it by, you know,
49:02
lowering nominal wages by 10 and not
49:04
moving prices. So, there are many ways
49:06
of doing it. The Phillips curve doesn't
49:07
allow us to
49:08
to get into that part. But it's not
49:10
going to be part of your quiz. The quiz
49:12
that's going to be part of of the second
49:14
quiz. So, in the next lecture we're
49:15
going to talk about the Phillips curve
49:16
and then on Wednesday a review and
49:19
and then you have your quiz. Okay?
— end of transcript —
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