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Today we're going to look at the we're

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going to start looking into the labor

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market. Now the labor market

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is very interesting for a wide variety

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of reasons that we will not discuss in

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this course because it's not about labor

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economics, it's about macroeconomics.

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But there are at least two reasons

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why labor markets are very important in

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in macro.

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One is because things like an employment

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rate

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is an very important indicator of the

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macroeconomic health

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of a country or an an economy.

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And the second one

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which is quite relevant these days is

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that the inflation rate

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is

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one of the main drivers of the inflation

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rate is what is going on in the in the

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in the labor market. And and we will try

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to understand this this mechanism

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in the next couple of lectures.

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What you have there is the is the

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inflation rate in the US and I'm I'm

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showing you this picture several times.

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You know, after going through a long

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period in which the

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inflation rate hovered around 2%, you

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know, with cycles

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we are experiencing an episode of very

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high inflation.

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Things are coming down, but they're

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still at extremely high levels, 6% or

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so. And actually very recently these

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numbers have picked up again a little.

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So that's very high

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very high inflation rate, way too high

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for an economy like the US to feel

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comfortable with. And

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whenever you know

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some member of the FOMC comes out and

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explains why interest rates are so high

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at this moment it says and and and and

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explains why they are likely to remain

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high for quite a while. They say, "Well,

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look, inflation is uncomfortably

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uncomfortably high at the high levels

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and and labor market conditions are very

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tight."

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And that suggests that the inflation

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problem is not likely to go away in in

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in in the near future. Okay? So that's

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something we need to understand in

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macro. Why is it that the labor market

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being tight says anything about the

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inflation rate, for example. Okay? And

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that's the kind of things we're going to

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discuss

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in particular in the on on the Monday

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lecture.

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Now today we're going to start with sort

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of more basics of the of of of the

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of the labor market.

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And

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and at the same time we're going to

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begin a transition in the course in

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which we have been focusing on things

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that are

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in the very short run into things that

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take more time. Okay? Because many of

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the things that we we're going to

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discuss today are things that you're not

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likely to see in in every single

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quarter, but they are things that you're

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likely to see over averages over, you

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know, several quarters, several months.

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That's what we're going to look at

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today.

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So remember let me just recap a little

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bit what we have been doing up to now.

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We have been looking at this ISLM model

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which is a great model.

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It's it's a very good model

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to build on, but it's a very nice model

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starting point to understand what

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happens in a recession and what are the

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what are what are the likely

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what are the likely impact of the

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different macroeconomic policies,

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monetary policy, fiscal policy and so

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on.

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It is not such a great model

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once

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the aggregate supply side of the

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economy, something we have completely

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ignored

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starts becoming binding.

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Okay? Remember that till now in the ISLM

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model we had basically ISLM model we had

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two assumptions.

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Related assumptions. One, prices were

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fully sticky. They didn't move at all.

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Second, that output was aggregate demand

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determined. So whatever aggregate demand

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wanted

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producers found a way to produce it at

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some given price.

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That's that

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that combination is unlikely to happen

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when for example, when

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firms are finding trouble finding new

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workers because, you know, there may be

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more demand, more demand for these

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goods, but but the firm may find it hard

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to expand production.

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And it's also highly likely that in a

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situation like that firms are going to

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want to keep prices constant. At some

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point they will kill you. Look, you you

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want to have lots of meals in my

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restaurant. I cannot find people to work

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in my restaurant. I'll

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I'll I'll hide the prices so at least,

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you know, fewer tables and I can manage

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one way or the other.

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So

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we're going to start building a model

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that

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makes those takes those things into

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consideration. What what is the impact

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of

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of a tight supply side of the economy on

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on prices and and and how that starts

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affecting feeds back into equilibrium

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output eventually.

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So the main thing I would say we're

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going to do really

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relative to ISLM model in the next two

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three lectures is endogenize the

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inflation rate. Okay? We have kept

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prices fixed.

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But now we want to endogenize.

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And and the story of that endogenization

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of

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of of inflation starts from the labor

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market. And that's the reason we're

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going to start looking at the labor

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market today. Okay?

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Now let me remind you a few things that

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I think we discussed in the first

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lecture or so or maybe second, I don't

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remember.

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Let me give you a picture of the labor

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market and some variables

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important statistics of the labor market

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that are

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that that

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that that matter for for understanding

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inflation and so on.

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So this is a picture that's this is the

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one that you have in the book of

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the labor the the labor market. It's a

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picture of the labor market at some

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point in 2018. I don't know when. It's

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it's a picture at one point.

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And that's at the time the US had about

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330 million people.

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That the non-institutional civilian

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population, that is those people that in

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principle could work

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were about 260 million.

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That excludes people under 16 years old,

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people that are incarcerated, people

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that are in the in the armed forces.

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Those are excluded from

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that's the difference. That's the reason

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you have such a big gap between these

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two numbers. Okay?

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Now out of these people that potentially

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could work some of them

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want to work and that's what we call the

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civilian labor force

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and then some of them are out of the

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labor force.

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Again, at one point in time doesn't mean

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that these people are permanently out of

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the labor force. They may be temporarily

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out of the labor force and so on.

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But but about, you know, we started with

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about 330 million and by the time that

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we look at the people that really want

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to work

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at that point when the picture was taken

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was about half of that, 162 million

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people. Okay?

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Now these 162 million people

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the the great majority of them are

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typically employed. They have a job.

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Okay?

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And then there's a group of people that

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would want to have a job. That's the

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reason they're part of the civilian

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labor force, but do not have one.

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And that's about 6 million in that

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picture there. Okay?

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So when you hear unemployment or the

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unemployment rate you're really talking

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about these people here. And when you

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talk hear about the unemployment rate is

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these people not divided over total

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population, but it's these people

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divided by the civilian labor force.

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Okay? So that's the picture.

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The US.

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The most recent numbers we have about

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that kind of statistics is

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here you have them. I mean, the

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unemployment rate in the US today is

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about 3.4%. That's very low. I'll show

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you

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historical data in a minute and I have

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shown you historical data in the recent

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past. But this number is very very low.

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And

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the change in the employment level

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in in this is for January

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was a reduction. This is this is not

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rate. It's number of people that are

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that are that were no it's not number of

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people that were employed that are no

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longer so. You look at the total stock

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of unemployed in December and then you

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look at the total stock of unemployed in

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January 2023. The difference between

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these two is 28,000 workers. So 28,000

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less workers are in the unemployment

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pool.

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Now notice that how this number is made.

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It's it's not it's not that that, you

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know, 25 28,000 people just gained a

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job. That's not what happened.

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What happens is

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first

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employment 895,000

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and 84,000 people got a job.

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Much bigger number.

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But also the civilian labor force went

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up by 866

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and

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and

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thousand people. Okay? So if you go back

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to

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this picture, what you have in in

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January

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or the numbers reported in January, I do

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not know which month they correspond to

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exactly is that yes, this this decline

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but that decline was made of

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a big increase in employment

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together with a big increase in the

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civilian labor force. Okay?

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So that must have been mostly movement

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out of the labor force and probably had

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that something to Well, I'm not going to

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get into that here, but

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All these numbers are seasonally

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adjusted, so they're corrected relative

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to what happens normally in January and

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so on.

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And COVID and weather can sort of derail

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a lot

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what happens in January, February.

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Numbers tend to be very noisy. Since

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COVID, they have been very noisy because

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the seasonal adjustments are different.

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And and also weather matters a lot in

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January, February and so on. So, you can

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get pretty large fluctuations which are

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really not that interesting to

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macroeconomists, but anyways, those are

283
00:10:32,559 --> 00:10:35,839
the numbers.

284
00:10:34,240 --> 00:10:38,360
You look at the civilian labor force

285
00:10:35,840 --> 00:10:40,080
participation, then it was about 62%,

286
00:10:38,360 --> 00:10:42,800
62.5%.

287
00:10:40,080 --> 00:10:44,720
And the employment population ratio is

288
00:10:42,799 --> 00:10:47,399
of the order of 60%, okay? So, the

289
00:10:44,720 --> 00:10:48,440
employment population ratio is is just

290
00:10:47,399 --> 00:10:53,000
this

291
00:10:48,440 --> 00:10:53,000
uh divided by total population, okay?

292
00:10:53,440 --> 00:10:58,080
Um

293
00:10:55,799 --> 00:11:00,479
Those are the averages. The number of

294
00:10:58,080 --> 00:11:03,200
unemployed in 2022, about 6 million

295
00:11:00,480 --> 00:11:04,440
people. That's that's unemployed.

296
00:11:03,200 --> 00:11:06,160
Okay.

297
00:11:04,440 --> 00:11:08,200
So, there you have the unemployment

298
00:11:06,159 --> 00:11:09,959
rate, you know, and it moves as you

299
00:11:08,200 --> 00:11:12,000
would expect it. It typically goes up in

300
00:11:09,960 --> 00:11:13,800
recessions. Uh

301
00:11:12,000 --> 00:11:15,200
the last sort of large recession we had

302
00:11:13,799 --> 00:11:17,359
big swings.

303
00:11:15,200 --> 00:11:19,000
Uh one thing that was interesting and we

304
00:11:17,360 --> 00:11:21,320
couldn't quite understand what was going

305
00:11:19,000 --> 00:11:22,519
on is as you notice right before COVID,

306
00:11:21,320 --> 00:11:24,680
the unemployment rate had already

307
00:11:22,519 --> 00:11:26,240
declined to very low levels.

308
00:11:24,679 --> 00:11:27,439
And so, people were wondering whether

309
00:11:26,240 --> 00:11:29,320
something we're going to talk about

310
00:11:27,440 --> 00:11:31,360
later in the this lecture, whether the

311
00:11:29,320 --> 00:11:34,080
natural rate of unemployment had changed

312
00:11:31,360 --> 00:11:34,080
for some reason.

313
00:11:34,279 --> 00:11:39,519
We'll come back to that. Then we got we

314
00:11:37,200 --> 00:11:41,520
got COVID, obviously a very

315
00:11:39,519 --> 00:11:43,559
recessionary shock initially, massive

316
00:11:41,519 --> 00:11:45,439
unemployment and so on.

317
00:11:43,559 --> 00:11:47,759
But then it came back very quickly and

318
00:11:45,440 --> 00:11:49,200
today we have record low levels of

319
00:11:47,759 --> 00:11:51,639
unemployment. We hadn't seen numbers

320
00:11:49,200 --> 00:11:53,280
like this since, you know, the '60s,

321
00:11:51,639 --> 00:11:55,919
uh really. Very low levels of

322
00:11:53,279 --> 00:11:57,838
unemployment. So, when when uh one of

323
00:11:55,919 --> 00:11:59,919
the things that that

324
00:11:57,839 --> 00:12:02,800
when you hear the FOMC members talking

325
00:11:59,919 --> 00:12:03,959
about the labor market being very tight,

326
00:12:02,799 --> 00:12:05,319
well, one of the things they're looking

327
00:12:03,960 --> 00:12:07,440
at is this. One, there are other

328
00:12:05,320 --> 00:12:08,800
statistics I'll show you, but but but

329
00:12:07,440 --> 00:12:12,120
this is one of them. The unemployment

330
00:12:08,799 --> 00:12:12,120
rate is really, really low.

331
00:12:12,960 --> 00:12:17,440
Sometimes again, especially post-COVID

332
00:12:15,440 --> 00:12:20,200
because of movements in and out of the

333
00:12:17,440 --> 00:12:21,760
labor force, uh

334
00:12:20,200 --> 00:12:24,160
the unemployment rate is not such a

335
00:12:21,759 --> 00:12:25,960
great statistic, not as reliable because

336
00:12:24,159 --> 00:12:27,838
many people left the labor force. So,

337
00:12:25,960 --> 00:12:31,040
people look a lot at the

338
00:12:27,839 --> 00:12:33,680
employment rate, uh which is this is

339
00:12:31,039 --> 00:12:35,120
this is um this is

340
00:12:33,679 --> 00:12:38,679
not the employment population ratio,

341
00:12:35,120 --> 00:12:39,240
it's employment rate. So, employed over

342
00:12:38,679 --> 00:12:41,559
uh

343
00:12:39,240 --> 00:12:44,240
uh the non-civilian

344
00:12:41,559 --> 00:12:44,239
population, no?

345
00:12:45,120 --> 00:12:49,839
And that number, you can see we have

346
00:12:48,039 --> 00:12:51,360
discussed this before,

347
00:12:49,839 --> 00:12:52,800
was trending up here because of the

348
00:12:51,360 --> 00:12:55,039
increase in the labor participation of

349
00:12:52,799 --> 00:12:56,399
women, then it came down, had a lot to

350
00:12:55,039 --> 00:12:58,879
do with the students and things like

351
00:12:56,399 --> 00:13:01,399
that, uh systematically, but then it was

352
00:12:58,879 --> 00:13:04,120
climbing up enormously, it collapsed

353
00:13:01,399 --> 00:13:07,000
during COVID. That's mostly unemployment

354
00:13:04,120 --> 00:13:08,560
and and and and and people out of the

355
00:13:07,000 --> 00:13:09,480
labor force.

356
00:13:08,559 --> 00:13:11,919
Uh

357
00:13:09,480 --> 00:13:14,200
and then recovery, but the recovery has

358
00:13:11,919 --> 00:13:15,759
not picked up to back to the trend. See,

359
00:13:14,200 --> 00:13:18,600
we are back to sort of more or less the

360
00:13:15,759 --> 00:13:20,480
levels we had before COVID, but we're

361
00:13:18,600 --> 00:13:21,879
certainly off the trend.

362
00:13:20,480 --> 00:13:23,440
And one of the reasons the labor markets

363
00:13:21,879 --> 00:13:26,200
are very tight is that is that we

364
00:13:23,440 --> 00:13:28,880
haven't recovered sort of uh

365
00:13:26,200 --> 00:13:31,720
the employment uh um

366
00:13:28,879 --> 00:13:33,559
rate that that we used to have, okay?

367
00:13:31,720 --> 00:13:36,160
This has to do with migration flows,

368
00:13:33,559 --> 00:13:38,679
with a variety of things, uh but that's

369
00:13:36,159 --> 00:13:41,319
that's the issue.

370
00:13:38,679 --> 00:13:42,919
Okay. So, that's that's sort of

371
00:13:41,320 --> 00:13:44,480
those are very static pictures of the

372
00:13:42,919 --> 00:13:46,159
labor market. What is the stock of

373
00:13:44,480 --> 00:13:47,639
unemployment at one point? What is the

374
00:13:46,159 --> 00:13:48,719
unemployment rate and so on and so

375
00:13:47,639 --> 00:13:50,879
forth?

376
00:13:48,720 --> 00:13:53,080
But the truth is that labor markets are

377
00:13:50,879 --> 00:13:55,919
very dynamic,

378
00:13:53,080 --> 00:13:58,440
especially in an economy like the US.

379
00:13:55,919 --> 00:14:00,079
The flows are very large. So, what I

380
00:13:58,440 --> 00:14:02,280
have there, and I don't know for which

381
00:14:00,080 --> 00:14:04,120
date, this is in the book, but the

382
00:14:02,279 --> 00:14:06,039
pictures look more or less the same for

383
00:14:04,120 --> 00:14:08,839
the point I want to make.

384
00:14:06,039 --> 00:14:09,519
This is monthly labor flow flows. And

385
00:14:08,839 --> 00:14:11,000
this

386
00:14:09,519 --> 00:14:13,879
this happened in some month, I don't

387
00:14:11,000 --> 00:14:16,200
care, 2018 at some point.

388
00:14:13,879 --> 00:14:17,559
Look at what happened there.

389
00:14:16,200 --> 00:14:20,079
You have this is we were talking about

390
00:14:17,559 --> 00:14:22,399
the stocks recently. So, employment in

391
00:14:20,078 --> 00:14:25,679
that month was of the order of 132

392
00:14:22,399 --> 00:14:27,159
million uh dollars, 132 million people,

393
00:14:25,679 --> 00:14:29,519
okay?

394
00:14:27,159 --> 00:14:32,399
Out of the labor force, about 79 million

395
00:14:29,519 --> 00:14:33,879
people. Unemployed, about 8.6 million.

396
00:14:32,399 --> 00:14:35,319
That's those were the stocks. Those were

397
00:14:33,879 --> 00:14:37,720
the type of numbers I was showing you

398
00:14:35,320 --> 00:14:40,000
before, okay?

399
00:14:37,720 --> 00:14:42,360
But look at these arrows.

400
00:14:40,000 --> 00:14:45,159
These are flows. So, in every single

401
00:14:42,360 --> 00:14:46,639
month, you see in the US about 3 million

402
00:14:45,159 --> 00:14:50,120
people that move from one job to

403
00:14:46,639 --> 00:14:52,879
another. So, employment to employment.

404
00:14:50,120 --> 00:14:55,919
You see about 1.8 million that move from

405
00:14:52,879 --> 00:14:58,679
employment to unemployment.

406
00:14:55,919 --> 00:15:01,078
And about 2 million people that move

407
00:14:58,679 --> 00:15:02,719
from unemployment to employment. Large

408
00:15:01,078 --> 00:15:04,399
flows.

409
00:15:02,720 --> 00:15:05,959
Not only so, not everything goes from

410
00:15:04,399 --> 00:15:07,559
unemployment to employment. There are

411
00:15:05,958 --> 00:15:09,519
people that are also moving out of the

412
00:15:07,559 --> 00:15:12,439
labor force and into the labor force,

413
00:15:09,519 --> 00:15:14,919
into unemployment, into employment. Here

414
00:15:12,440 --> 00:15:16,520
in this particular case, out the flow

415
00:15:14,919 --> 00:15:18,919
out of the labor force into employment

416
00:15:16,519 --> 00:15:21,279
is 3.4 million.

417
00:15:18,919 --> 00:15:22,759
Flows from employment without going

418
00:15:21,279 --> 00:15:25,360
through unemployment to out of the labor

419
00:15:22,759 --> 00:15:27,519
force, 3.7 million.

420
00:15:25,360 --> 00:15:29,639
Okay. During COVID, there was a this

421
00:15:27,519 --> 00:15:31,720
must have been a very thick arrow.

422
00:15:29,639 --> 00:15:34,720
Lots of people move out from employment

423
00:15:31,720 --> 00:15:36,440
to out of the labor force, okay?

424
00:15:34,720 --> 00:15:38,079
And and one of the problems the economy

425
00:15:36,440 --> 00:15:40,520
has had in the recovery on the on the

426
00:15:38,078 --> 00:15:42,559
labor market side is that this arrow

427
00:15:40,519 --> 00:15:43,639
hasn't been as strong as we would want

428
00:15:42,559 --> 00:15:44,359
it.

429
00:15:43,639 --> 00:15:46,120
Okay.

430
00:15:44,360 --> 00:15:48,120
This arrow, or this arrow for that

431
00:15:46,120 --> 00:15:49,519
matter of fact, people coming coming out

432
00:15:48,120 --> 00:15:51,039
of the labor force into unemployment,

433
00:15:49,519 --> 00:15:52,559
that's also big flow.

434
00:15:51,039 --> 00:15:53,759
Sometimes people are not working and

435
00:15:52,559 --> 00:15:55,359
then they decide that, you know, they

436
00:15:53,759 --> 00:15:56,958
run out of unemployment insurance or

437
00:15:55,360 --> 00:15:58,600
something like that, and so they decide

438
00:15:56,958 --> 00:15:59,559
to start looking, you know, and they

439
00:15:58,600 --> 00:16:01,879
move

440
00:15:59,559 --> 00:16:02,559
into unemployment here,

441
00:16:01,879 --> 00:16:05,120
okay?

442
00:16:02,559 --> 00:16:07,039
Or or they run out of savings and and

443
00:16:05,120 --> 00:16:08,639
they have to come back and they may not

444
00:16:07,039 --> 00:16:09,879
find a job initially. They have to go

445
00:16:08,639 --> 00:16:11,000
through unemployment,

446
00:16:09,879 --> 00:16:13,439
okay?

447
00:16:11,000 --> 00:16:14,799
So, the point is that these flows are

448
00:16:13,440 --> 00:16:17,040
very large.

449
00:16:14,799 --> 00:16:19,399
And and the

450
00:16:17,039 --> 00:16:20,319
and these flows matter a lot

451
00:16:19,399 --> 00:16:21,759
uh

452
00:16:20,320 --> 00:16:24,400
for for the kind of things we want to

453
00:16:21,759 --> 00:16:26,078
talk about in in this course.

454
00:16:24,399 --> 00:16:26,838
Look at what we have here.

455
00:16:26,078 --> 00:16:28,799
Uh

456
00:16:26,839 --> 00:16:32,079
the red line is the unemployment rate

457
00:16:28,799 --> 00:16:34,679
and it's measured on the left axis.

458
00:16:32,078 --> 00:16:37,159
And what we have here in the blue line

459
00:16:34,679 --> 00:16:39,719
is measured in a in an inverse scale.

460
00:16:37,159 --> 00:16:41,319
Look at this this goes up

461
00:16:39,720 --> 00:16:43,399
as you go down.

462
00:16:41,320 --> 00:16:45,240
Is is the

463
00:16:43,399 --> 00:16:47,559
percentage of employed unemployed

464
00:16:45,240 --> 00:16:49,000
workers becoming employed.

465
00:16:47,559 --> 00:16:50,399
Okay.

466
00:16:49,000 --> 00:16:51,958
So, it's the job finding rate from

467
00:16:50,399 --> 00:16:53,039
unemployment. So, you have unemployed

468
00:16:51,958 --> 00:16:55,279
people

469
00:16:53,039 --> 00:16:56,559
and they will be finding jobs. They will

470
00:16:55,279 --> 00:16:58,120
be looking for jobs and they will be

471
00:16:56,559 --> 00:17:00,319
finding jobs.

472
00:16:58,120 --> 00:17:01,519
This number here, this blue line here,

473
00:17:00,320 --> 00:17:03,839
shows you

474
00:17:01,519 --> 00:17:05,319
uh the likelihood that they'll find a

475
00:17:03,839 --> 00:17:06,959
job

476
00:17:05,319 --> 00:17:08,720
in inverted scale,

477
00:17:06,959 --> 00:17:10,120
okay? So,

478
00:17:08,720 --> 00:17:12,759
what do you what correlation do you

479
00:17:10,119 --> 00:17:12,759
notice there?

480
00:17:19,439 --> 00:17:24,240
It's very tight.

481
00:17:21,720 --> 00:17:26,838
Yeah. As the percent of people

482
00:17:24,240 --> 00:17:29,079
um that get a job each month is smaller,

483
00:17:26,838 --> 00:17:31,039
there's more people without a job.

484
00:17:29,079 --> 00:17:33,960
Exactly. That means when the

485
00:17:31,039 --> 00:17:35,759
unemployment rate is high,

486
00:17:33,960 --> 00:17:37,600
it is harder for unemployed workers to

487
00:17:35,759 --> 00:17:40,039
find a job.

488
00:17:37,599 --> 00:17:41,599
Or another way of an direct implication

489
00:17:40,039 --> 00:17:43,039
of that is that a typical unemployed

490
00:17:41,599 --> 00:17:44,678
worker will spend more time in

491
00:17:43,039 --> 00:17:46,599
unemployment because they're going to be

492
00:17:44,679 --> 00:17:48,000
looking for jobs and it's more

493
00:17:46,599 --> 00:17:49,319
it's harder to get a job, so you're

494
00:17:48,000 --> 00:17:51,319
going to be looking for a job for a

495
00:17:49,319 --> 00:17:53,678
longer period of time.

496
00:17:51,319 --> 00:17:54,678
Why are we talking about these things?

497
00:17:53,679 --> 00:17:56,560
Well,

498
00:17:54,679 --> 00:17:57,120
because of this type of

499
00:17:56,559 --> 00:17:59,319
uh

500
00:17:57,119 --> 00:18:02,319
reasons. Well, this means that when

501
00:17:59,319 --> 00:18:04,960
unemployment is high, workers are worse

502
00:18:02,319 --> 00:18:06,159
off in at least two ways.

503
00:18:04,960 --> 00:18:08,559
And there are two ways that are going to

504
00:18:06,160 --> 00:18:09,920
be important for what I'll say next.

505
00:18:08,559 --> 00:18:11,319
One

506
00:18:09,920 --> 00:18:12,679
is that the employed workers face a

507
00:18:11,319 --> 00:18:14,240
higher probability of losing a job.

508
00:18:12,679 --> 00:18:15,880
That's what happens when unemployment is

509
00:18:14,240 --> 00:18:17,160
the reason unemployment gets to be high

510
00:18:15,880 --> 00:18:19,520
is because

511
00:18:17,160 --> 00:18:22,960
firms are firing workers and so on and

512
00:18:19,519 --> 00:18:25,519
so forth, no? And so

513
00:18:22,960 --> 00:18:27,720
so so when unemployment is high, the

514
00:18:25,519 --> 00:18:30,039
first thing the workers know is that

515
00:18:27,720 --> 00:18:33,679
it's very likely they'll lose their job,

516
00:18:30,039 --> 00:18:35,079
more likely that they'll lose their job.

517
00:18:33,679 --> 00:18:37,519
But the second channel, which is what

518
00:18:35,079 --> 00:18:39,000
this picture highlights here, is that is

519
00:18:37,519 --> 00:18:40,679
that if you fall on employment, it's

520
00:18:39,000 --> 00:18:42,720
going to take a it's going to be a lot

521
00:18:40,679 --> 00:18:44,960
harder to get out of unemployment,

522
00:18:42,720 --> 00:18:46,640
okay? So, when unemployment is high is

523
00:18:44,960 --> 00:18:49,120
high, it's scary for workers for two

524
00:18:46,640 --> 00:18:50,560
reasons. Once, you're more likely to

525
00:18:49,119 --> 00:18:52,119
lose a job because it's capturing

526
00:18:50,559 --> 00:18:54,319
recessionary conditions and so on in the

527
00:18:52,119 --> 00:18:55,479
economy, but second, if you end up in

528
00:18:54,319 --> 00:18:57,720
unemployment, it's going to be hard to

529
00:18:55,480 --> 00:18:59,559
get out of it,

530
00:18:57,720 --> 00:19:02,559
okay?

531
00:18:59,559 --> 00:19:05,799
And and later on this unemployment rate

532
00:19:02,559 --> 00:19:07,319
is going to show up in wage bargaining

533
00:19:05,799 --> 00:19:09,918
and the main reason it's going to show

534
00:19:07,319 --> 00:19:12,000
up is of this kind.

535
00:19:09,919 --> 00:19:14,960
And also think about the other side.

536
00:19:12,000 --> 00:19:16,839
When there's bargaining, there's two

537
00:19:14,960 --> 00:19:18,720
There's going to be firm and workers.

538
00:19:16,839 --> 00:19:20,519
From the firm point of view,

539
00:19:18,720 --> 00:19:23,240
if there's a lot of unemployment, do you

540
00:19:20,519 --> 00:19:24,720
think it's hard or or or or or easy to

541
00:19:23,240 --> 00:19:26,919
find a worker?

542
00:19:24,720 --> 00:19:30,000
If you replace a worker that decides to

543
00:19:26,919 --> 00:19:30,000
leave for whatever reason,

544
00:19:30,079 --> 00:19:35,279
Easy, no? You have lots of people to

545
00:19:31,720 --> 00:19:37,679
choose from, so it becomes easy. So,

546
00:19:35,279 --> 00:19:39,079
unemployment is high, workers are more

547
00:19:37,679 --> 00:19:41,840
scared.

548
00:19:39,079 --> 00:19:43,319
If they get out, it it is they're scared

549
00:19:41,839 --> 00:19:46,158
of losing their job. If they get out,

550
00:19:43,319 --> 00:19:47,799
it's it it's it's hard to get a job. And

551
00:19:46,159 --> 00:19:49,560
on the other side, the firms for the

552
00:19:47,799 --> 00:19:51,158
firms, it's not that they're scared to

553
00:19:49,559 --> 00:19:53,639
lose a worker because it's pretty fairly

554
00:19:51,159 --> 00:19:55,960
easy to replace that worker.

555
00:19:53,640 --> 00:19:57,520
Today, firms are very worried about

556
00:19:55,960 --> 00:19:59,160
losing their workers. In some sectors,

557
00:19:57,519 --> 00:20:01,200
no, in some sectors are getting rid of

558
00:19:59,160 --> 00:20:03,440
workers, but but if you run a

559
00:20:01,200 --> 00:20:05,880
restaurant, you're very scared of losing

560
00:20:03,440 --> 00:20:07,160
your your your workers, you know,

561
00:20:05,880 --> 00:20:09,680
because it's going to be very difficult

562
00:20:07,160 --> 00:20:12,519
to find a replacement for that worker.

563
00:20:09,680 --> 00:20:16,560
So, surprise, surprise, wages in that

564
00:20:12,519 --> 00:20:18,039
industry are going up a lot, okay?

565
00:20:16,559 --> 00:20:20,799
We're going to get there.

566
00:20:18,039 --> 00:20:22,599
So, that's what comes in wage

567
00:20:20,799 --> 00:20:24,159
determination. Look at the what I'm what

568
00:20:22,599 --> 00:20:25,839
I'm trying to build here. I'm starting

569
00:20:24,160 --> 00:20:27,920
from telling you stories about the labor

570
00:20:25,839 --> 00:20:29,679
market, what things are important for

571
00:20:27,920 --> 00:20:30,960
workers, and so on.

572
00:20:29,680 --> 00:20:33,240
Now, I'm going to get into wage

573
00:20:30,960 --> 00:20:34,960
determination, and obviously this

574
00:20:33,240 --> 00:20:37,079
variables I talked about are going to be

575
00:20:34,960 --> 00:20:38,680
important in this wage determination,

576
00:20:37,079 --> 00:20:41,199
but my ultimate goal is to talk about

577
00:20:38,680 --> 00:20:42,320
inflation. So, the next step, so I'm

578
00:20:41,200 --> 00:20:44,039
going to talk about wage determination

579
00:20:42,319 --> 00:20:46,279
here, and then we're going to talk about

580
00:20:44,039 --> 00:20:49,000
prices, and there we're going to be one

581
00:20:46,279 --> 00:20:50,519
step closer to talking about inflation,

582
00:20:49,000 --> 00:20:54,359
okay? So, let's go through the

583
00:20:50,519 --> 00:20:55,639
intermediate step, wage determination.

584
00:20:54,359 --> 00:20:57,399
Uh

585
00:20:55,640 --> 00:21:00,360
So, just to give you a little

586
00:20:57,400 --> 00:21:02,000
background, you know, sometimes

587
00:21:00,359 --> 00:21:04,159
uh wages are set by collective

588
00:21:02,000 --> 00:21:05,279
bargaining, unions

589
00:21:04,160 --> 00:21:07,400
in particular.

590
00:21:05,279 --> 00:21:08,279
Now, in the US, unions are not a big

591
00:21:07,400 --> 00:21:09,759
thing.

592
00:21:08,279 --> 00:21:10,960
Okay? They were a much bigger thing many

593
00:21:09,759 --> 00:21:13,039
years back.

594
00:21:10,960 --> 00:21:14,319
They aren't today.

595
00:21:13,039 --> 00:21:16,039
Um

596
00:21:14,319 --> 00:21:20,319
in other economies, they are a big

597
00:21:16,039 --> 00:21:21,440
thing, okay? Japan, in Europe.

598
00:21:20,319 --> 00:21:23,079
Uh

599
00:21:21,440 --> 00:21:24,600
and the unions can happen at different

600
00:21:23,079 --> 00:21:26,960
levels of aggregation, at the level of

601
00:21:24,599 --> 00:21:29,199
the firm, at the level of the sector,

602
00:21:26,960 --> 00:21:31,680
and and and and

603
00:21:29,200 --> 00:21:33,920
and you name it.

604
00:21:31,680 --> 00:21:35,920
In general, regardless of the level you

605
00:21:33,920 --> 00:21:38,320
of unionization you have

606
00:21:35,920 --> 00:21:40,080
uh in a country or in a sector,

607
00:21:38,319 --> 00:21:41,559
the higher the skill needed to a job,

608
00:21:40,079 --> 00:21:43,839
the more likely this other bargaining

609
00:21:41,559 --> 00:21:46,639
takes place between an individual

610
00:21:43,839 --> 00:21:48,279
between an employer and an individual

611
00:21:46,640 --> 00:21:50,600
rather than a union, okay? Because it's

612
00:21:48,279 --> 00:21:52,799
sort of much more idiosyncratic

613
00:21:50,599 --> 00:21:54,919
and customized, and so on.

614
00:21:52,799 --> 00:21:58,639
But, either way, regardless of whether

615
00:21:54,920 --> 00:22:00,120
uh whether uh uh wages are set

616
00:21:58,640 --> 00:22:01,679
at a collective level or at at the

617
00:22:00,119 --> 00:22:04,959
individual level,

618
00:22:01,679 --> 00:22:08,880
the main macroeconomic drivers

619
00:22:04,960 --> 00:22:09,840
of uh wages are similar across both of

620
00:22:08,880 --> 00:22:11,040
them.

621
00:22:09,839 --> 00:22:13,119
Of course, the particulars are going to

622
00:22:11,039 --> 00:22:15,639
be different, even the dynamics can be

623
00:22:13,119 --> 00:22:18,199
different, and so on. But, the big

624
00:22:15,640 --> 00:22:19,720
drivers, the big macro drivers

625
00:22:18,200 --> 00:22:21,319
are similar, regardless of the

626
00:22:19,720 --> 00:22:23,039
bargaining mode you have at the level at

627
00:22:21,319 --> 00:22:24,839
which it happens, and so on. And those

628
00:22:23,039 --> 00:22:27,240
are the things we're going to highlight

629
00:22:24,839 --> 00:22:27,240
here.

630
00:22:28,640 --> 00:22:33,280
So,

631
00:22:29,799 --> 00:22:36,839
a fact of life is that workers' wages

632
00:22:33,279 --> 00:22:38,319
typically exceed the reservation wage.

633
00:22:36,839 --> 00:22:40,879
Now, what does it mean the reservation

634
00:22:38,319 --> 00:22:42,279
wage? The reservation wage is a wage

635
00:22:40,880 --> 00:22:43,840
that would leave you indifferent between

636
00:22:42,279 --> 00:22:48,000
employed or unemployed. Doesn't mean

637
00:22:43,839 --> 00:22:49,399
there's a nice wage, anything. But,

638
00:22:48,000 --> 00:22:50,519
I mean, that's and certainly doesn't

639
00:22:49,400 --> 00:22:52,040
mean that you wouldn't prefer to have to

640
00:22:50,519 --> 00:22:54,000
have a higher wage.

641
00:22:52,039 --> 00:22:55,480
But, it tells you that, look, at that

642
00:22:54,000 --> 00:22:57,279
wage, you'd rather be employed than

643
00:22:55,480 --> 00:22:59,519
unemployed.

644
00:22:57,279 --> 00:23:00,960
Okay? And there's a wait long list of

645
00:22:59,519 --> 00:23:03,119
reasons why

646
00:23:00,960 --> 00:23:04,480
that ends up being the equilibrium type

647
00:23:03,119 --> 00:23:05,439
wage, and I'm not going to discuss them

648
00:23:04,480 --> 00:23:06,360
here,

649
00:23:05,440 --> 00:23:08,360
but

650
00:23:06,359 --> 00:23:10,359
take it as a fact for now.

651
00:23:08,359 --> 00:23:12,199
Okay? So, that is

652
00:23:10,359 --> 00:23:13,479
workers prefer to be employed.

653
00:23:12,200 --> 00:23:15,279
They may take the risk of becoming

654
00:23:13,480 --> 00:23:18,519
unemployed, but they typically prefer to

655
00:23:15,279 --> 00:23:18,519
be employed.

656
00:23:18,559 --> 00:23:22,519
Um

657
00:23:20,480 --> 00:23:23,679
Now, wages, and this is where it becomes

658
00:23:22,519 --> 00:23:25,799
uh

659
00:23:23,679 --> 00:23:27,800
uh important for interesting for us in

660
00:23:25,799 --> 00:23:32,159
macro, is

661
00:23:27,799 --> 00:23:34,559
the wages that are finally set depend

662
00:23:32,160 --> 00:23:36,920
on labor market conditions.

663
00:23:34,559 --> 00:23:39,759
So, very clearly, the lower is the

664
00:23:36,920 --> 00:23:41,759
unemployment rate, the higher the wages

665
00:23:39,759 --> 00:23:43,559
will tend to be. Okay? And you're seeing

666
00:23:41,759 --> 00:23:45,839
it now. The unemployment rate is very

667
00:23:43,559 --> 00:23:46,919
low, wages are rising a lot.

668
00:23:45,839 --> 00:23:50,000
Okay?

669
00:23:46,920 --> 00:23:52,080
And workers' bargaining power depends on

670
00:23:50,000 --> 00:23:53,640
this again. There's a huge literature on

671
00:23:52,079 --> 00:23:55,919
these things, I'm just compressing it

672
00:23:53,640 --> 00:23:58,400
into

673
00:23:55,920 --> 00:24:00,360
as the very minimums.

674
00:23:58,400 --> 00:24:02,240
Uh the bargaining power of a worker is a

675
00:24:00,359 --> 00:24:03,799
thing that we already discussed.

676
00:24:02,240 --> 00:24:05,920
Well, it depends on how costly for the

677
00:24:03,799 --> 00:24:07,359
firm to find a worker. So, obviously, if

678
00:24:05,920 --> 00:24:08,960
unemployment is very high, it's very

679
00:24:07,359 --> 00:24:10,639
easy for firms to buy a work find a

680
00:24:08,960 --> 00:24:12,240
worker. That's not good for the

681
00:24:10,640 --> 00:24:13,960
bargaining for of a work If you want to

682
00:24:12,240 --> 00:24:15,679
bargain with your employer,

683
00:24:13,960 --> 00:24:16,799
and there's lots of people like you out

684
00:24:15,679 --> 00:24:18,280
there,

685
00:24:16,799 --> 00:24:20,159
uh you're not going to have a lot of

686
00:24:18,279 --> 00:24:21,279
bargaining power. So, it's unlikely that

687
00:24:20,160 --> 00:24:22,960
you're going to come up with a very high

688
00:24:21,279 --> 00:24:23,839
wage, okay?

689
00:24:22,960 --> 00:24:25,440
Uh

690
00:24:23,839 --> 00:24:26,879
and it's also the other side of it is

691
00:24:25,440 --> 00:24:28,720
how hard it is for workers to find

692
00:24:26,880 --> 00:24:29,840
another job if they were to leave the

693
00:24:28,720 --> 00:24:31,160
firms. I mean, if you know that there

694
00:24:29,839 --> 00:24:34,279
are lots of jobs like the one you

695
00:24:31,160 --> 00:24:37,360
currently have out there which are not

696
00:24:34,279 --> 00:24:38,279
occupied, so there's empty vacant jobs,

697
00:24:37,359 --> 00:24:40,159
then you're probably going to have a

698
00:24:38,279 --> 00:24:41,559
much stronger hand with your employer

699
00:24:40,160 --> 00:24:43,120
because you can say, "Okay, if you don't

700
00:24:41,559 --> 00:24:44,759
pay me what I want, I move to the next

701
00:24:43,119 --> 00:24:46,199
door." Okay?

702
00:24:44,759 --> 00:24:47,879
And in terms of the macroeconomic

703
00:24:46,200 --> 00:24:49,720
variables we care about,

704
00:24:47,880 --> 00:24:52,720
a situation like that is very likely to

705
00:24:49,720 --> 00:24:53,640
happen when unemployment is very low.

706
00:24:52,720 --> 00:24:55,880
Okay?

707
00:24:53,640 --> 00:24:57,080
Because that means that other

708
00:24:55,880 --> 00:24:59,240
jobs

709
00:24:57,079 --> 00:25:00,399
are are unlikely to be filled

710
00:24:59,240 --> 00:25:01,679
because, you know, there there are lots

711
00:25:00,400 --> 00:25:03,759
of people looking for things, but it's

712
00:25:01,679 --> 00:25:06,280
difficult for the firms to find

713
00:25:03,759 --> 00:25:08,279
the workers, and therefore

714
00:25:06,279 --> 00:25:09,639
you're going to be a lot more attractive

715
00:25:08,279 --> 00:25:11,440
to that

716
00:25:09,640 --> 00:25:13,480
labor market.

717
00:25:11,440 --> 00:25:15,759
So, in summary,

718
00:25:13,480 --> 00:25:19,200
at the aggregate level,

719
00:25:15,759 --> 00:25:20,920
we can write a wage-setting equation

720
00:25:19,200 --> 00:25:22,440
of this form.

721
00:25:20,920 --> 00:25:23,800
So, the wage, and this is the nominal

722
00:25:22,440 --> 00:25:24,480
wage,

723
00:25:23,799 --> 00:25:26,879
uh

724
00:25:24,480 --> 00:25:30,079
can be written as an increasing function

725
00:25:26,880 --> 00:25:32,760
of expected price.

726
00:25:30,079 --> 00:25:34,159
Meaning, wages are not set in most

727
00:25:32,759 --> 00:25:35,799
professions, they're not set second

728
00:25:34,160 --> 00:25:37,240
second by second. You set them you know,

729
00:25:35,799 --> 00:25:40,159
you bargain for a wage, and so on, and

730
00:25:37,240 --> 00:25:41,559
that thing it sticks for a year or so,

731
00:25:40,160 --> 00:25:43,080
at least.

732
00:25:41,559 --> 00:25:45,799
Some Okay?

733
00:25:43,079 --> 00:25:47,960
Well, obviously, if you expect this

734
00:25:45,799 --> 00:25:49,879
inflation is zero,

735
00:25:47,960 --> 00:25:51,679
you know, you're going to demand a wage

736
00:25:49,880 --> 00:25:54,240
that is more or less

737
00:25:51,679 --> 00:25:56,720
what you need today.

738
00:25:54,240 --> 00:25:58,440
If inflation is 10%,

739
00:25:56,720 --> 00:26:00,839
you you say, "Well, I'm going to have to

740
00:25:58,440 --> 00:26:02,440
demand a higher wage because I have to

741
00:26:00,839 --> 00:26:04,480
live with this wage for a year, and

742
00:26:02,440 --> 00:26:07,080
prices are going to be rising while

743
00:26:04,480 --> 00:26:08,559
while I have this wage." And so so, if

744
00:26:07,079 --> 00:26:11,199
they expect lots of inflation, if they

745
00:26:08,559 --> 00:26:12,279
expect prices to be high in the future,

746
00:26:11,200 --> 00:26:14,640
they're going to ask for a higher

747
00:26:12,279 --> 00:26:16,720
nominal wage today because I'm going to

748
00:26:14,640 --> 00:26:18,480
have to live with that wage on average

749
00:26:16,720 --> 00:26:21,480
for the next uh

750
00:26:18,480 --> 00:26:22,559
year or so, okay? So, that's the first

751
00:26:21,480 --> 00:26:24,240
thing, and it's going to play an

752
00:26:22,559 --> 00:26:26,759
important role. It says wages are an

753
00:26:24,240 --> 00:26:28,880
increasing function on the price level

754
00:26:26,759 --> 00:26:30,879
workers expect. They expect a high price

755
00:26:28,880 --> 00:26:32,640
level in the future or during the life

756
00:26:30,880 --> 00:26:35,000
of the wage contract, then they

757
00:26:32,640 --> 00:26:36,480
obviously going to demand a higher wage.

758
00:26:35,000 --> 00:26:38,400
Other things equal.

759
00:26:36,480 --> 00:26:40,759
What are other things? Well, the the

760
00:26:38,400 --> 00:26:42,880
arguments of this function here.

761
00:26:40,759 --> 00:26:45,000
Unemployment.

762
00:26:42,880 --> 00:26:47,640
If I'm employed for any given expected

763
00:26:45,000 --> 00:26:49,079
price, if the unemployment rate is high,

764
00:26:47,640 --> 00:26:50,120
workers are going to demand a lower

765
00:26:49,079 --> 00:26:52,759
wage.

766
00:26:50,119 --> 00:26:52,759
Why is that?

767
00:26:57,480 --> 00:27:00,720
Because it's going to be um harder for

768
00:26:59,279 --> 00:27:02,200
them to find a job, so they have less

769
00:27:00,720 --> 00:27:04,440
bargaining power. They have less

770
00:27:02,200 --> 00:27:06,000
bargaining power, exactly, okay?

771
00:27:04,440 --> 00:27:07,920
Um so, they're going to like they're

772
00:27:06,000 --> 00:27:10,400
going to demand a lower wage.

773
00:27:07,920 --> 00:27:13,279
This variable Z here

774
00:27:10,400 --> 00:27:15,440
is a catch-all variable for

775
00:27:13,279 --> 00:27:17,559
a a strength workers' strength in the

776
00:27:15,440 --> 00:27:19,480
bargaining position situation, something

777
00:27:17,559 --> 00:27:20,039
like that. So,

778
00:27:19,480 --> 00:27:22,480
uh

779
00:27:20,039 --> 00:27:25,000
for example, uh

780
00:27:22,480 --> 00:27:26,920
this is things like uh employment

781
00:27:25,000 --> 00:27:28,160
protection laws.

782
00:27:26,920 --> 00:27:30,160
Okay?

783
00:27:28,160 --> 00:27:33,400
Firing costs. If it is difficult to fire

784
00:27:30,160 --> 00:27:35,679
someone, the Z will tend to be high. So,

785
00:27:33,400 --> 00:27:38,200
this only tells you that given the level

786
00:27:35,679 --> 00:27:40,800
of unemployment, if it is very hard to

787
00:27:38,200 --> 00:27:43,160
fire someone, wages workers are going to

788
00:27:40,799 --> 00:27:45,240
be willing to they're going to they're

789
00:27:43,160 --> 00:27:46,480
very likely to demand a higher wage. No,

790
00:27:45,240 --> 00:27:48,319
it's hard

791
00:27:46,480 --> 00:27:51,200
it's hard for you to fire me,

792
00:27:48,319 --> 00:27:53,599
I'm going to bargain harder for my wage,

793
00:27:51,200 --> 00:27:56,360
and this type of institutions

794
00:27:53,599 --> 00:27:59,039
institutional factors play a huge role

795
00:27:56,359 --> 00:28:01,279
in Europe, much more than in the US.

796
00:27:59,039 --> 00:28:01,279
Okay?

797
00:28:01,599 --> 00:28:04,359
Good.

798
00:28:02,319 --> 00:28:05,519
But, as a matter of a definition, we're

799
00:28:04,359 --> 00:28:07,959
going to say

800
00:28:05,519 --> 00:28:09,960
an increase in Z is Z is something that

801
00:28:07,960 --> 00:28:11,679
increases the bargaining power of

802
00:28:09,960 --> 00:28:13,600
workers. Okay?

803
00:28:11,679 --> 00:28:15,600
And therefore, for any given level of

804
00:28:13,599 --> 00:28:17,000
unemployment and expected prices,

805
00:28:15,599 --> 00:28:19,039
they're going to lead to a higher wage

806
00:28:17,000 --> 00:28:21,119
demand. This is the wage This is the

807
00:28:19,039 --> 00:28:22,599
workers' demand in a wage.

808
00:28:21,119 --> 00:28:24,119
We have to figure out what happens in

809
00:28:22,599 --> 00:28:28,000
equilibrium, but this is what the

810
00:28:24,119 --> 00:28:28,000
workers are demanding. Okay?

811
00:28:29,000 --> 00:28:33,519
Is it clear what we have here?

812
00:28:31,359 --> 00:28:33,519
Good.

813
00:28:36,200 --> 00:28:40,319
So, let's now move to the other side.

814
00:28:38,640 --> 00:28:42,440
Okay? So, that's one side of the

815
00:28:40,319 --> 00:28:44,079
scissor. We have the workers, and they

816
00:28:42,440 --> 00:28:45,679
given certain

817
00:28:44,079 --> 00:28:47,480
macroeconomic conditions summarized by

818
00:28:45,679 --> 00:28:50,159
the unemployment rate and expected

819
00:28:47,480 --> 00:28:51,919
prices, they demand certain wages.

820
00:28:50,159 --> 00:28:53,760
Now, we can't find equilibrium wage

821
00:28:51,919 --> 00:28:56,000
until we don't see the other side, what

822
00:28:53,759 --> 00:28:58,559
firms are willing to pay, and so on. So,

823
00:28:56,000 --> 00:29:00,400
we need to explore this other side.

824
00:28:58,559 --> 00:29:01,839
And the starting point of that other

825
00:29:00,400 --> 00:29:04,600
side

826
00:29:01,839 --> 00:29:05,839
is the production function, meaning

827
00:29:04,599 --> 00:29:07,439
you know,

828
00:29:05,839 --> 00:29:09,119
uh

829
00:29:07,440 --> 00:29:10,440
firms are going to end up setting prices

830
00:29:09,119 --> 00:29:12,839
for goods,

831
00:29:10,440 --> 00:29:14,000
but producing those goods will take

832
00:29:12,839 --> 00:29:16,119
factors of production. They're going to

833
00:29:14,000 --> 00:29:17,919
have to use something

834
00:29:16,119 --> 00:29:19,399
uh to produce that.

835
00:29:17,919 --> 00:29:20,960
And the cost of that something will

836
00:29:19,400 --> 00:29:23,200
determine, importantly, what is the

837
00:29:20,960 --> 00:29:25,759
price they end up charging.

838
00:29:23,200 --> 00:29:27,360
I'm going to simplify things a lot here.

839
00:29:25,759 --> 00:29:30,000
Uh I'm going to assume the production

840
00:29:27,359 --> 00:29:31,559
function is first linear and linear only

841
00:29:30,000 --> 00:29:32,679
on labor, so no other factors of

842
00:29:31,559 --> 00:29:33,599
production.

843
00:29:32,679 --> 00:29:36,080
Meaning,

844
00:29:33,599 --> 00:29:38,158
this says that to produce one unit of

845
00:29:36,079 --> 00:29:38,839
the aggregate good,

846
00:29:38,159 --> 00:29:41,440
uh

847
00:29:38,839 --> 00:29:43,359
you need well,

848
00:29:41,440 --> 00:29:44,919
this says that if you have if you add an

849
00:29:43,359 --> 00:29:46,559
extra worker

850
00:29:44,919 --> 00:29:48,200
uh uh,

851
00:29:46,559 --> 00:29:49,399
to the big production function of the

852
00:29:48,200 --> 00:29:51,440
economy,

853
00:29:49,400 --> 00:29:52,800
then you're going to get a more units of

854
00:29:51,440 --> 00:29:53,600
output.

855
00:29:52,799 --> 00:29:55,319
Okay?

856
00:29:53,599 --> 00:29:57,879
That's what this says.

857
00:29:55,319 --> 00:29:59,439
So, Y is output, the output we've been

858
00:29:57,880 --> 00:30:01,560
talking about, measured in the way we

859
00:29:59,440 --> 00:30:04,080
have been talking about and so on.

860
00:30:01,559 --> 00:30:05,759
N is employment, and A is labor

861
00:30:04,079 --> 00:30:06,759
productivity. That is the output per

862
00:30:05,759 --> 00:30:07,640
worker.

863
00:30:06,759 --> 00:30:08,879
Okay?

864
00:30:07,640 --> 00:30:10,120
I want to make things very simple. We're

865
00:30:08,880 --> 00:30:11,160
going to talk a lot about in the next

866
00:30:10,119 --> 00:30:13,519
part of the course, in the part of

867
00:30:11,160 --> 00:30:15,640
growth, about this A, what moves this A

868
00:30:13,519 --> 00:30:17,240
over time, what it does, and so on.

869
00:30:15,640 --> 00:30:19,280
But, but,

870
00:30:17,240 --> 00:30:22,079
I'm going to simplify things a lot here

871
00:30:19,279 --> 00:30:23,039
for now, and I'm going to set A equal to

872
00:30:22,079 --> 00:30:25,119
1.

873
00:30:23,039 --> 00:30:26,359
So, it doesn't get any simpler than this

874
00:30:25,119 --> 00:30:28,279
as a production function. This

875
00:30:26,359 --> 00:30:30,759
production function says, you want to

876
00:30:28,279 --> 00:30:33,200
produce one more good, you need one more

877
00:30:30,759 --> 00:30:33,200
worker.

878
00:30:33,279 --> 00:30:35,799
Okay?

879
00:30:34,359 --> 00:30:37,199
This is what this says.

880
00:30:35,799 --> 00:30:38,759
If you have 10 workers, you produce 10

881
00:30:37,200 --> 00:30:40,440
units of good.

882
00:30:38,759 --> 00:30:42,359
If you have 11 workers, you produce 11

883
00:30:40,440 --> 00:30:44,519
units of goods. Okay, so to produce one

884
00:30:42,359 --> 00:30:45,519
more unit of good, you need

885
00:30:44,519 --> 00:30:48,319
one

886
00:30:45,519 --> 00:30:48,319
worker more.

887
00:30:49,000 --> 00:30:53,839
Now, why do you think I'm

888
00:30:51,960 --> 00:30:56,039
I'm simplifying it so much and I'm right

889
00:30:53,839 --> 00:31:00,000
I'm even repeating this idea that one

890
00:30:56,039 --> 00:31:00,000
more worker, one more unit of good.

891
00:31:00,039 --> 00:31:04,480
That tells you that how much does it

892
00:31:01,880 --> 00:31:05,800
cost to the firm

893
00:31:04,480 --> 00:31:07,240
to the firm that has this production

894
00:31:05,799 --> 00:31:08,519
function

895
00:31:07,240 --> 00:31:12,079
to produce

896
00:31:08,519 --> 00:31:14,720
one extra unit of workers or

897
00:31:12,079 --> 00:31:15,720
one extra unit of goods?

898
00:31:14,720 --> 00:31:18,240
Well, you have to ask the question,

899
00:31:15,720 --> 00:31:19,160
well, what will the firm have to do?

900
00:31:18,240 --> 00:31:20,920
Well,

901
00:31:19,160 --> 00:31:22,960
the first So, suppose a firm wants to

902
00:31:20,920 --> 00:31:25,759
produce one more units of goods. What is

903
00:31:22,960 --> 00:31:25,759
it that it needs to do?

904
00:31:27,160 --> 00:31:32,200
It needs to hire another worker. How

905
00:31:28,920 --> 00:31:32,200
much will that cost?

906
00:31:36,720 --> 00:31:41,279
The wage. The wage. Exactly, no? So, now

907
00:31:39,400 --> 00:31:43,519
we're beginning to So, so this is the

908
00:31:41,279 --> 00:31:45,559
wage in this case is the cost per unit

909
00:31:43,519 --> 00:31:47,599
of production for this guy. So,

910
00:31:45,559 --> 00:31:49,599
the marginal cost of production for this

911
00:31:47,599 --> 00:31:51,639
firm is the wage.

912
00:31:49,599 --> 00:31:53,678
All the rest, intermediate inputs, is

913
00:31:51,640 --> 00:31:56,320
all summarized. This is value added.

914
00:31:53,679 --> 00:31:58,000
Built on something else.

915
00:31:56,319 --> 00:31:59,399
So, this production function, as simple

916
00:31:58,000 --> 00:32:01,599
as it is, says exactly that. The

917
00:31:59,400 --> 00:32:03,519
marginal cost of production is equal to

918
00:32:01,599 --> 00:32:05,000
the wage.

919
00:32:03,519 --> 00:32:06,799
So, assume that the wage that I'm going

920
00:32:05,000 --> 00:32:08,920
to So, now I'm going to come up with a

921
00:32:06,799 --> 00:32:11,440
pricing model, a price setting rule. So,

922
00:32:08,920 --> 00:32:13,240
firms that understand how much more it

923
00:32:11,440 --> 00:32:15,160
costs to produce an

924
00:32:13,240 --> 00:32:17,400
an extra unit of good, now have to

925
00:32:15,160 --> 00:32:20,720
decide the price they want to charge for

926
00:32:17,400 --> 00:32:20,720
that extra unit of the good.

927
00:32:20,799 --> 00:32:24,879
There's a lot that that comes into in

928
00:32:23,039 --> 00:32:27,480
that decision, but but we're going to

929
00:32:24,880 --> 00:32:28,760
summarize it with a markup. Very simple.

930
00:32:27,480 --> 00:32:30,440
We're going to say, "Look,

931
00:32:28,759 --> 00:32:33,599
the the firm will do the following.

932
00:32:30,440 --> 00:32:35,759
We'll say, "It cost me one worker to

933
00:32:33,599 --> 00:32:39,119
produce one one unit of

934
00:32:35,759 --> 00:32:41,759
extra of good. A worker cost me W, so my

935
00:32:39,119 --> 00:32:43,879
the price I want to charge is 1 + M, M

936
00:32:41,759 --> 00:32:46,559
is a positive number, times W."

937
00:32:43,880 --> 00:32:48,840
Okay? So, M is a number like 0.2.

938
00:32:46,559 --> 00:32:51,399
So, you pay 100 in in in the in the

939
00:32:48,839 --> 00:32:53,799
wage, then you're going to charge the

940
00:32:51,400 --> 00:32:56,080
And suppose the wage is 100,

941
00:32:53,799 --> 00:32:59,159
uh, if the markup is 20%, you're going

942
00:32:56,079 --> 00:33:01,599
to set a price of 120.

943
00:32:59,160 --> 00:33:05,040
Okay? That's the price setting rule

944
00:33:01,599 --> 00:33:07,759
that we're going to adopt, and again,

945
00:33:05,039 --> 00:33:10,159
it's not that crazy.

946
00:33:07,759 --> 00:33:12,559
Simple, but not that crazy.

947
00:33:10,160 --> 00:33:14,200
So, that's we call this the price

948
00:33:12,559 --> 00:33:16,240
setting equation.

949
00:33:14,200 --> 00:33:18,279
The firm takes the wage, because that's

950
00:33:16,240 --> 00:33:20,000
the marginal cost of production,

951
00:33:18,279 --> 00:33:22,160
and and then,

952
00:33:20,000 --> 00:33:24,200
uh, adds a markup, and that's the final

953
00:33:22,160 --> 00:33:25,840
price.

954
00:33:24,200 --> 00:33:28,799
Now, we can

955
00:33:25,839 --> 00:33:30,799
rewrite this price setting equation

956
00:33:28,799 --> 00:33:32,399
as a as a wage equation in the following

957
00:33:30,799 --> 00:33:34,799
sense. It's still a price setting

958
00:33:32,400 --> 00:33:37,759
equation, but this All that I've done

959
00:33:34,799 --> 00:33:41,559
here, no, is I divided by P and by one

960
00:33:37,759 --> 00:33:43,720
by P and 1 + M, and I get that the wage

961
00:33:41,559 --> 00:33:45,000
the the real wage the firm is willing to

962
00:33:43,720 --> 00:33:47,440
pay

963
00:33:45,000 --> 00:33:48,960
is equal to 1 over 1 + the markup.

964
00:33:47,440 --> 00:33:50,759
That's another way of saying it. It's

965
00:33:48,960 --> 00:33:53,240
the same, huh? I took this price setting

966
00:33:50,759 --> 00:33:55,279
equation, and I just rewrote it.

967
00:33:53,240 --> 00:33:56,759
I rewrote it this way because then, you

968
00:33:55,279 --> 00:33:59,160
know, I had when I look at the wage

969
00:33:56,759 --> 00:34:01,720
setting equation, I also wrote it that

970
00:33:59,160 --> 00:34:03,519
that way, W over something. I want to

971
00:34:01,720 --> 00:34:06,200
write the price setting equation in the

972
00:34:03,519 --> 00:34:08,039
same sort of units as as my wage setting

973
00:34:06,200 --> 00:34:10,800
equation, so then I can use that one

974
00:34:08,039 --> 00:34:12,878
diagram, put them together easily,

975
00:34:10,800 --> 00:34:15,480
and and find an

976
00:34:12,878 --> 00:34:16,440
an equilibrium of something.

977
00:34:15,480 --> 00:34:18,679
Okay?

978
00:34:16,440 --> 00:34:21,800
So, what you see here is, for example,

979
00:34:18,679 --> 00:34:23,440
is that the higher is the markup,

980
00:34:21,800 --> 00:34:25,800
the lower is the real wage the firm is

981
00:34:23,440 --> 00:34:26,878
willing to offer.

982
00:34:25,800 --> 00:34:28,240
You see that?

983
00:34:26,878 --> 00:34:29,759
They have And this is an equilibrium at

984
00:34:28,239 --> 00:34:31,839
the level of the economy. It's not you

985
00:34:29,760 --> 00:34:33,040
individually, but on average, that's

986
00:34:31,840 --> 00:34:35,720
what ends up happening. If firms on

987
00:34:33,039 --> 00:34:37,358
average end up charging a higher markup,

988
00:34:35,719 --> 00:34:39,759
it has to be the case

989
00:34:37,358 --> 00:34:42,960
that in equilibrium, the real wage

990
00:34:39,760 --> 00:34:44,720
offered by the firms is lower.

991
00:34:42,960 --> 00:34:45,960
That's what this says.

992
00:34:44,719 --> 00:34:47,678
Okay?

993
00:34:45,960 --> 00:34:49,398
So, if we're in a situation where the

994
00:34:47,679 --> 00:34:51,639
markup was zero,

995
00:34:49,398 --> 00:34:53,719
and now all of the sudden, because of

996
00:34:51,639 --> 00:34:56,039
imperfect competition or perhaps the

997
00:34:53,719 --> 00:34:57,679
some price of a key input went up and

998
00:34:56,039 --> 00:34:58,639
it's not really measuring value added or

999
00:34:57,679 --> 00:34:59,480
whatever,

1000
00:34:58,639 --> 00:35:00,358
uh,

1001
00:34:59,480 --> 00:35:03,719
uh,

1002
00:35:00,358 --> 00:35:05,440
if the markup goes to to to one,

1003
00:35:03,719 --> 00:35:06,679
then the real wage in equilibrium will

1004
00:35:05,440 --> 00:35:09,079
fall

1005
00:35:06,679 --> 00:35:10,960
to half what it used to be.

1006
00:35:09,079 --> 00:35:13,159
That's what this question That's what

1007
00:35:10,960 --> 00:35:14,400
the firms will offer.

1008
00:35:13,159 --> 00:35:15,599
Whether that's an equilibrium or not, we

1009
00:35:14,400 --> 00:35:17,039
shall see.

1010
00:35:15,599 --> 00:35:18,679
Or how do we get to that to be an

1011
00:35:17,039 --> 00:35:20,000
equilibrium, we shall see.

1012
00:35:18,679 --> 00:35:21,440
But that's what the firms will offer.

1013
00:35:20,000 --> 00:35:22,239
That's what the price setting equation

1014
00:35:21,440 --> 00:35:23,280
says.

1015
00:35:22,239 --> 00:35:25,159
In fact,

1016
00:35:23,280 --> 00:35:27,560
you already know from this equation that

1017
00:35:25,159 --> 00:35:29,199
that's what the real wage will be,

1018
00:35:27,559 --> 00:35:31,599
because there's no variable here that

1019
00:35:29,199 --> 00:35:32,879
can adjust to that.

1020
00:35:31,599 --> 00:35:34,799
What happens is something else will have

1021
00:35:32,880 --> 00:35:37,440
to give in the economy, so this ends up

1022
00:35:34,800 --> 00:35:39,400
being the equilibrium wage. Okay? But

1023
00:35:37,440 --> 00:35:40,880
you'll understand that a little later.

1024
00:35:39,400 --> 00:35:43,200
Or you'll understand it better a little

1025
00:35:40,880 --> 00:35:43,200
later.

1026
00:35:43,519 --> 00:35:49,199
Okay. So, now we're almost ready to come

1027
00:35:47,039 --> 00:35:52,440
up with to discuss a very important

1028
00:35:49,199 --> 00:35:54,079
concept in macroeconomics.

1029
00:35:52,440 --> 00:35:56,920
And that's the concept of the natural

1030
00:35:54,079 --> 00:35:59,079
rate of unemployment.

1031
00:35:56,920 --> 00:36:01,200
Now, the first warning is that there's

1032
00:35:59,079 --> 00:36:03,719
nothing natural about the natural rate

1033
00:36:01,199 --> 00:36:05,439
of unemployment. It's not sort of, you

1034
00:36:03,719 --> 00:36:06,559
know, something that God gave us or

1035
00:36:05,440 --> 00:36:07,960
anything like that.

1036
00:36:06,559 --> 00:36:10,480
Okay?

1037
00:36:07,960 --> 00:36:12,960
I'll say, for us,

1038
00:36:10,480 --> 00:36:15,000
and and what typically means the natural

1039
00:36:12,960 --> 00:36:18,000
rate of unemployment,

1040
00:36:15,000 --> 00:36:20,039
simply means what I wrote there,

1041
00:36:18,000 --> 00:36:22,079
which is that employment that takes

1042
00:36:20,039 --> 00:36:24,279
place when the

1043
00:36:22,079 --> 00:36:26,239
expected price is equal to actual

1044
00:36:24,280 --> 00:36:27,160
prices.

1045
00:36:26,239 --> 00:36:29,639
Okay?

1046
00:36:27,159 --> 00:36:31,879
That's what we'll define for this

1047
00:36:29,639 --> 00:36:33,400
class, for this course, we'll define the

1048
00:36:31,880 --> 00:36:35,440
natural rate of unemployment. The

1049
00:36:33,400 --> 00:36:37,880
natural rate of unemployment is when the

1050
00:36:35,440 --> 00:36:39,639
expected price is equal to P.

1051
00:36:37,880 --> 00:36:40,599
That's what we mean. If I we ask you any

1052
00:36:39,639 --> 00:36:41,759
question about the natural rate of

1053
00:36:40,599 --> 00:36:43,719
unemployment,

1054
00:36:41,760 --> 00:36:44,920
we don't mean that that's what is good,

1055
00:36:43,719 --> 00:36:47,199
that that's what is bad, that that's

1056
00:36:44,920 --> 00:36:49,960
what God decided or someone else decided

1057
00:36:47,199 --> 00:36:51,559
or whatever. This is all that it means

1058
00:36:49,960 --> 00:36:53,960
is that in any equation where you have

1059
00:36:51,559 --> 00:36:55,960
P, you can stick in P, and then solve

1060
00:36:53,960 --> 00:36:57,679
for equilibrium, and that the employment

1061
00:36:55,960 --> 00:37:00,559
rate that comes from that is what we

1062
00:36:57,679 --> 00:37:03,599
call the natural rate of unemployment.

1063
00:37:00,559 --> 00:37:06,279
Because of this, you can also think of

1064
00:37:03,599 --> 00:37:07,719
that unemployment rate as a sort of

1065
00:37:06,280 --> 00:37:09,480
as a good

1066
00:37:07,719 --> 00:37:11,839
proxy for what is likely to be the

1067
00:37:09,480 --> 00:37:14,880
average rate of unemployment of an

1068
00:37:11,840 --> 00:37:16,680
economy over a longer period of time.

1069
00:37:14,880 --> 00:37:17,960
You know, because people are unlikely to

1070
00:37:16,679 --> 00:37:19,358
be fooled all the time in the same

1071
00:37:17,960 --> 00:37:20,760
direction. So, sometimes they're going

1072
00:37:19,358 --> 00:37:22,559
to expect a higher price than it is,

1073
00:37:20,760 --> 00:37:24,680
sometimes it's a lower, and so on. On

1074
00:37:22,559 --> 00:37:26,199
average, unless there's something very

1075
00:37:24,679 --> 00:37:28,239
weird going on, they're going to get it

1076
00:37:26,199 --> 00:37:29,559
right. But because you know what more or

1077
00:37:28,239 --> 00:37:31,199
less what the level of inflation of the

1078
00:37:29,559 --> 00:37:32,599
economy is, sometimes you'll miss up,

1079
00:37:31,199 --> 00:37:34,519
sometimes you'll miss down, but on

1080
00:37:32,599 --> 00:37:35,719
average, you're going to be right if you

1081
00:37:34,519 --> 00:37:36,960
if you take an average over a long

1082
00:37:35,719 --> 00:37:38,039
period of time.

1083
00:37:36,960 --> 00:37:39,840
So, for that reason, you can also

1084
00:37:38,039 --> 00:37:42,000
interpret this natural rate of

1085
00:37:39,840 --> 00:37:43,640
unemployment as an employment rate of

1086
00:37:42,000 --> 00:37:45,599
the medium run, if you will. So, when

1087
00:37:43,639 --> 00:37:46,839
you have collected enough data,

1088
00:37:45,599 --> 00:37:48,519
positive errors are balanced with

1089
00:37:46,840 --> 00:37:50,039
negative errors, and so on.

1090
00:37:48,519 --> 00:37:51,119
Okay?

1091
00:37:50,039 --> 00:37:53,400
But that's all that we mean by the

1092
00:37:51,119 --> 00:37:54,358
natural rate of unemployment.

1093
00:37:53,400 --> 00:37:57,000
Okay?

1094
00:37:54,358 --> 00:37:59,400
Now, notice that with this assumption

1095
00:37:57,000 --> 00:38:02,039
that PE is equal to P, I can go back to

1096
00:37:59,400 --> 00:38:05,000
my wage setting equation, which was W

1097
00:38:02,039 --> 00:38:06,960
over PE equal to F dot. I think it I

1098
00:38:05,000 --> 00:38:08,599
don't remember where I divided by P, but

1099
00:38:06,960 --> 00:38:11,079
I had PE there.

1100
00:38:08,599 --> 00:38:13,759
I'm going to divide by P both sides,

1101
00:38:11,079 --> 00:38:15,519
and then I'm going to set PE equal to P,

1102
00:38:13,760 --> 00:38:18,320
and now I have that my wage setting

1103
00:38:15,519 --> 00:38:20,000
equation can be written this way, and

1104
00:38:18,320 --> 00:38:21,400
notice that that employment rate I put

1105
00:38:20,000 --> 00:38:22,599
here is the N.

1106
00:38:21,400 --> 00:38:24,559
And it's the natural rate of

1107
00:38:22,599 --> 00:38:26,799
unemployment.

1108
00:38:24,559 --> 00:38:28,599
Because once I get in a model in which

1109
00:38:26,800 --> 00:38:29,960
you assume that P is equal to P, that

1110
00:38:28,599 --> 00:38:32,799
employment rate that comes out of that

1111
00:38:29,960 --> 00:38:34,358
is a natural rate of unemployment.

1112
00:38:32,800 --> 00:38:36,000
Okay? That's That's all that it just

1113
00:38:34,358 --> 00:38:38,199
means. It says, "Okay,

1114
00:38:36,000 --> 00:38:39,800
you allow me to to replace PE by P,

1115
00:38:38,199 --> 00:38:41,279
well, then I can call my unemployment

1116
00:38:39,800 --> 00:38:43,880
rate here the natural rate of

1117
00:38:41,280 --> 00:38:43,880
unemployment."

1118
00:38:46,920 --> 00:38:50,240
And it has lots of names. It's the

1119
00:38:48,599 --> 00:38:53,400
natural rate, the structural rate of

1120
00:38:50,239 --> 00:38:53,399
unemployment, and so on.

1121
00:38:54,679 --> 00:38:58,559
Now, what this tells you,

1122
00:38:56,960 --> 00:39:00,800
I mean, you can see the slope of this

1123
00:38:58,559 --> 00:39:02,320
function.

1124
00:39:00,800 --> 00:39:04,920
If the natural rate of unemployment is

1125
00:39:02,320 --> 00:39:07,080
higher in this economy,

1126
00:39:04,920 --> 00:39:09,480
what is the real wage that comes from

1127
00:39:07,079 --> 00:39:11,679
the wage setting equation?

1128
00:39:09,480 --> 00:39:13,639
Lower.

1129
00:39:11,679 --> 00:39:15,399
curve in the space of wages to real

1130
00:39:13,639 --> 00:39:17,159
wages to unemployment.

1131
00:39:15,400 --> 00:39:18,840
to the natural rate of unemployment.

1132
00:39:17,159 --> 00:39:20,399
It's a downward sloping curve for the

1133
00:39:18,840 --> 00:39:22,880
reasons we discussed before, bargaining

1134
00:39:20,400 --> 00:39:25,519
power, and so on. Okay?

1135
00:39:22,880 --> 00:39:28,160
So, I can put together, remember the the

1136
00:39:25,519 --> 00:39:30,199
price setting equation led me to also an

1137
00:39:28,159 --> 00:39:32,000
equation of the real wage, which was not

1138
00:39:30,199 --> 00:39:33,239
a function of anything. It was only a

1139
00:39:32,000 --> 00:39:34,800
function of parameters. So, that's a

1140
00:39:33,239 --> 00:39:36,839
horizontal

1141
00:39:34,800 --> 00:39:38,039
curve in the space of real wages and

1142
00:39:36,840 --> 00:39:40,240
unemployment, natural rate of

1143
00:39:38,039 --> 00:39:41,679
unemployment. Here, we have a downward

1144
00:39:40,239 --> 00:39:44,359
sloping curve,

1145
00:39:41,679 --> 00:39:46,480
and the intersection of these two curves

1146
00:39:44,360 --> 00:39:47,400
is the natural rate of unemployment.

1147
00:39:46,480 --> 00:39:49,719
Okay?

1148
00:39:47,400 --> 00:39:52,400
So, this was the price setting relation.

1149
00:39:49,719 --> 00:39:56,159
Remember, it's 1 over 1 plus M.

1150
00:39:52,400 --> 00:39:56,960
This is the wage setting equation.

1151
00:39:56,159 --> 00:39:58,920
Uh

1152
00:39:56,960 --> 00:40:00,720
with the assumption that PE is equal to

1153
00:39:58,920 --> 00:40:03,320
P.

1154
00:40:00,719 --> 00:40:04,719
And that's the natural rate of

1155
00:40:03,320 --> 00:40:05,800
unemployment.

1156
00:40:04,719 --> 00:40:07,159
And here you can understand what I said

1157
00:40:05,800 --> 00:40:09,039
before is that

1158
00:40:07,159 --> 00:40:11,519
you see, in this economy

1159
00:40:09,039 --> 00:40:13,480
the real wage, because this price

1160
00:40:11,519 --> 00:40:15,800
setting equation is flat in the simple

1161
00:40:13,480 --> 00:40:17,440
economy, the real wage is pinned down by

1162
00:40:15,800 --> 00:40:19,760
the firm.

1163
00:40:17,440 --> 00:40:23,559
By the firms collectively.

1164
00:40:19,760 --> 00:40:25,080
And not collectively in an oligopolistic

1165
00:40:23,559 --> 00:40:26,360
way. It's, you know, it's what happens

1166
00:40:25,079 --> 00:40:27,039
in equilibrium.

1167
00:40:26,360 --> 00:40:29,400
Uh

1168
00:40:27,039 --> 00:40:30,480
it's set by that, but the equilibrium

1169
00:40:29,400 --> 00:40:32,440
unemployment natural rate of

1170
00:40:30,480 --> 00:40:34,679
unemployment is intersection of that

1171
00:40:32,440 --> 00:40:39,000
real wage set by the firms

1172
00:40:34,679 --> 00:40:39,000
and the wage setting relationship.

1173
00:40:40,400 --> 00:40:43,320
So, what happens

1174
00:40:43,360 --> 00:40:48,720
in a to a point say to the right?

1175
00:40:46,719 --> 00:40:51,839
What happens in this point here?

1176
00:40:48,719 --> 00:40:51,839
What is the situation we have?

1177
00:40:57,599 --> 00:41:00,920
Well,

1178
00:40:58,519 --> 00:41:03,159
at that high level of unemployment

1179
00:41:00,920 --> 00:41:04,680
workers are willing to work for much

1180
00:41:03,159 --> 00:41:07,000
lower real wages than the firms are

1181
00:41:04,679 --> 00:41:07,000
offering.

1182
00:41:07,159 --> 00:41:10,079
Okay?

1183
00:41:08,559 --> 00:41:11,360
This is what workers at this level of

1184
00:41:10,079 --> 00:41:12,480
unemployment, very high level of

1185
00:41:11,360 --> 00:41:14,640
unemployment

1186
00:41:12,480 --> 00:41:17,519
workers would be fine with this.

1187
00:41:14,639 --> 00:41:18,639
Firms are paying that.

1188
00:41:17,519 --> 00:41:19,960
Okay?

1189
00:41:18,639 --> 00:41:21,279
So,

1190
00:41:19,960 --> 00:41:23,159
unemployment is very likely to be

1191
00:41:21,280 --> 00:41:25,200
falling because workers are not

1192
00:41:23,159 --> 00:41:26,399
demanding a lot and and and firms, you

1193
00:41:25,199 --> 00:41:28,319
know, are going to hire all these

1194
00:41:26,400 --> 00:41:30,559
workers back.

1195
00:41:28,320 --> 00:41:32,720
The opposite here.

1196
00:41:30,559 --> 00:41:34,360
If here workers are demanding a wage

1197
00:41:32,719 --> 00:41:36,359
that is much higher than firms are

1198
00:41:34,360 --> 00:41:37,680
willing to pay.

1199
00:41:36,360 --> 00:41:39,000
Well, that's likely to lead to more

1200
00:41:37,679 --> 00:41:41,039
unemployment because firms are going to

1201
00:41:39,000 --> 00:41:43,280
be very reluctant to hire

1202
00:41:41,039 --> 00:41:45,000
uh these very expensive workers.

1203
00:41:43,280 --> 00:41:47,920
Okay? So, that's going to build

1204
00:41:45,000 --> 00:41:49,840
unemployment in this direction.

1205
00:41:47,920 --> 00:41:51,159
Good. So, that's

1206
00:41:49,840 --> 00:41:52,720
that's the natural rate of unemployment.

1207
00:41:51,159 --> 00:41:54,079
Again, nothing natural about it. It's

1208
00:41:52,719 --> 00:41:56,000
the equilibrium when you assume the

1209
00:41:54,079 --> 00:41:58,239
expected price is equal to

1210
00:41:56,000 --> 00:42:00,440
uh price. So, there are some important

1211
00:41:58,239 --> 00:42:02,439
parameters in this diagram here.

1212
00:42:00,440 --> 00:42:04,000
One is this M.

1213
00:42:02,440 --> 00:42:06,639
The markup. That's a parameter, very

1214
00:42:04,000 --> 00:42:09,000
important markup here. To So, see,

1215
00:42:06,639 --> 00:42:11,799
if the markup changes the natural rate

1216
00:42:09,000 --> 00:42:13,320
of unemployment will change.

1217
00:42:11,800 --> 00:42:14,640
There's another set of parameters here

1218
00:42:13,320 --> 00:42:17,200
which is

1219
00:42:14,639 --> 00:42:18,319
Z. We took as given the institution that

1220
00:42:17,199 --> 00:42:19,799
protect

1221
00:42:18,320 --> 00:42:22,880
the bargaining power of workers

1222
00:42:19,800 --> 00:42:25,240
institutions, supporting institutions.

1223
00:42:22,880 --> 00:42:26,599
The Z. That's a parameter here. If that

1224
00:42:25,239 --> 00:42:28,799
changes, the natural rate of

1225
00:42:26,599 --> 00:42:31,159
unemployment will change.

1226
00:42:28,800 --> 00:42:32,240
Which is again something that confirms

1227
00:42:31,159 --> 00:42:34,759
there's nothing natural about the

1228
00:42:32,239 --> 00:42:36,719
natural rate of unemployment.

1229
00:42:34,760 --> 00:42:39,160
So, let me just do it in equations very

1230
00:42:36,719 --> 00:42:39,759
quickly and then and then

1231
00:42:39,159 --> 00:42:41,279
uh

1232
00:42:39,760 --> 00:42:43,520
I'll do a

1233
00:42:41,280 --> 00:42:45,840
a couple of important shifts.

1234
00:42:43,519 --> 00:42:47,920
Uh so, in terms of equation, all that I

1235
00:42:45,840 --> 00:42:49,680
did is say, "Look, the wage wage setting

1236
00:42:47,920 --> 00:42:51,039
equation the price setting equation

1237
00:42:49,679 --> 00:42:53,480
gives us that.

1238
00:42:51,039 --> 00:42:55,320
The wage setting equation gives us that.

1239
00:42:53,480 --> 00:42:56,800
Therefore, that equal to that. That's

1240
00:42:55,320 --> 00:42:58,800
the point we found. That's the natural

1241
00:42:56,800 --> 00:43:00,680
rate of unemployment." Okay?

1242
00:42:58,800 --> 00:43:02,400
So, from here

1243
00:43:00,679 --> 00:43:03,759
that's when the two are equal. This is

1244
00:43:02,400 --> 00:43:05,800
what's the flat curve. This is what's

1245
00:43:03,760 --> 00:43:07,400
the downward sloping curve. Well, these

1246
00:43:05,800 --> 00:43:08,560
two are equal

1247
00:43:07,400 --> 00:43:11,079
uh

1248
00:43:08,559 --> 00:43:12,079
when these two things are equal. Okay?

1249
00:43:11,079 --> 00:43:13,279
And that's where you get there. So, from

1250
00:43:12,079 --> 00:43:15,759
there you solve the natural rate of

1251
00:43:13,280 --> 00:43:17,120
unemployment.

1252
00:43:15,760 --> 00:43:21,320
What do you think happens to the natural

1253
00:43:17,119 --> 00:43:21,319
rate of unemployment if Z goes up?

1254
00:43:23,599 --> 00:43:28,239
Let's just be very mechanical at this

1255
00:43:25,239 --> 00:43:30,000
point. Just math.

1256
00:43:28,239 --> 00:43:33,559
If Z goes up

1257
00:43:30,000 --> 00:43:33,559
what what happens to F?

1258
00:43:36,719 --> 00:43:42,079
Goes up, no? If Z was positive.

1259
00:43:40,119 --> 00:43:43,759
Well, the right hand side hasn't gone

1260
00:43:42,079 --> 00:43:46,360
up.

1261
00:43:43,760 --> 00:43:48,280
So, this went up.

1262
00:43:46,360 --> 00:43:50,000
Something has to give, so F comes back

1263
00:43:48,280 --> 00:43:51,680
down.

1264
00:43:50,000 --> 00:43:53,639
And the only thing that can give, the

1265
00:43:51,679 --> 00:43:54,519
only thing is endogenous in that picture

1266
00:43:53,639 --> 00:43:56,039
there is the natural rate of

1267
00:43:54,519 --> 00:43:58,199
unemployment.

1268
00:43:56,039 --> 00:44:00,119
So, if Z goes up, F goes up. Well, I

1269
00:43:58,199 --> 00:44:03,679
need to bring F back down because the

1270
00:44:00,119 --> 00:44:03,679
right hand side hasn't given an inch.

1271
00:44:03,920 --> 00:44:10,000
So, what do I have to do to natural rate

1272
00:44:06,000 --> 00:44:10,000
of unemployment for F to come back down?

1273
00:44:10,079 --> 00:44:13,559
Price, no? Because that's what will

1274
00:44:11,760 --> 00:44:15,640
weaken bargaining power.

1275
00:44:13,559 --> 00:44:17,239
Workers bargaining power got stronger

1276
00:44:15,639 --> 00:44:18,839
because increasing Z, well, I have to

1277
00:44:17,239 --> 00:44:21,039
weaken it some. I don't have to

1278
00:44:18,840 --> 00:44:22,960
Equilibrium will weaken it somehow

1279
00:44:21,039 --> 00:44:24,800
so that we end up in the same situation

1280
00:44:22,960 --> 00:44:26,960
with the same real wage that we had

1281
00:44:24,800 --> 00:44:28,120
before, which was equal to 1 over 1 plus

1282
00:44:26,960 --> 00:44:31,440
M.

1283
00:44:28,119 --> 00:44:34,319
What happens if M goes up?

1284
00:44:31,440 --> 00:44:37,079
Well, if M goes up markups go up. That

1285
00:44:34,320 --> 00:44:37,680
means firms real wage

1286
00:44:37,079 --> 00:44:41,599
uh

1287
00:44:37,679 --> 00:44:44,159
the real wage firms offer drops.

1288
00:44:41,599 --> 00:44:46,079
So, I need If this right hand side

1289
00:44:44,159 --> 00:44:48,358
drops, then I need the left hand side to

1290
00:44:46,079 --> 00:44:49,799
drop drop as well.

1291
00:44:48,358 --> 00:44:50,880
And the only thing that is endogenous

1292
00:44:49,800 --> 00:44:52,880
here is the natural rate of

1293
00:44:50,880 --> 00:44:55,519
unemployment.

1294
00:44:52,880 --> 00:44:59,200
So, I know that I need to but to drop F,

1295
00:44:55,519 --> 00:44:59,199
what do I need to do to UN?

1296
00:44:59,320 --> 00:45:04,280
So, I need to bring F down. And the only

1297
00:45:02,358 --> 00:45:06,159
tool you have, it's not a tool, but in

1298
00:45:04,280 --> 00:45:08,880
equilibrium everything that will

1299
00:45:06,159 --> 00:45:10,960
can change here is UN.

1300
00:45:08,880 --> 00:45:12,680
It will

1301
00:45:10,960 --> 00:45:14,119
It will increase UN.

1302
00:45:12,679 --> 00:45:15,559
Because that will reduce bargaining

1303
00:45:14,119 --> 00:45:17,440
power of workers and that will reduce

1304
00:45:15,559 --> 00:45:18,960
their their real wage demand and

1305
00:45:17,440 --> 00:45:19,800
therefore you restore equilibrium that

1306
00:45:18,960 --> 00:45:21,320
way.

1307
00:45:19,800 --> 00:45:23,800
So, this environment is a very nasty

1308
00:45:21,320 --> 00:45:24,920
environment for workers in a sense, no?

1309
00:45:23,800 --> 00:45:27,840
Because

1310
00:45:24,920 --> 00:45:30,320
it's always the the scapegoat is is the

1311
00:45:27,840 --> 00:45:32,280
natural rate of unemployment.

1312
00:45:30,320 --> 00:45:34,519
So, here you have what I just said in in

1313
00:45:32,280 --> 00:45:36,359
pictures. So, that's the example of Z

1314
00:45:34,519 --> 00:45:38,559
going up.

1315
00:45:36,358 --> 00:45:39,960
Bargaining power of workers going up.

1316
00:45:38,559 --> 00:45:42,079
So, suppose you start at an at an

1317
00:45:39,960 --> 00:45:45,199
equilibrium like this.

1318
00:45:42,079 --> 00:45:47,599
And now and now Z goes up.

1319
00:45:45,199 --> 00:45:50,319
Well, that means that workers for any

1320
00:45:47,599 --> 00:45:52,599
given level of unemployment natural rate

1321
00:45:50,320 --> 00:45:55,280
of unemployment want a higher wage.

1322
00:45:52,599 --> 00:45:57,480
Because they have more bargaining power.

1323
00:45:55,280 --> 00:46:00,240
Well, that higher wage is inconsistent

1324
00:45:57,480 --> 00:46:01,639
with the wage that firms want to pay.

1325
00:46:00,239 --> 00:46:02,919
What restores equilibrium is

1326
00:46:01,639 --> 00:46:05,279
unemployment the natural rate of

1327
00:46:02,920 --> 00:46:08,000
unemployment goes up

1328
00:46:05,280 --> 00:46:10,400
enough so that the wage demand sort of

1329
00:46:08,000 --> 00:46:12,320
comes down to the same original level

1330
00:46:10,400 --> 00:46:13,840
because this this price setting equation

1331
00:46:12,320 --> 00:46:14,640
is completely flat.

1332
00:46:13,840 --> 00:46:16,640
Okay?

1333
00:46:14,639 --> 00:46:19,039
So, there you have a a situation where

1334
00:46:16,639 --> 00:46:21,199
bargaining power of workers went up.

1335
00:46:19,039 --> 00:46:23,400
And all that ended up happening is is

1336
00:46:21,199 --> 00:46:25,439
that in the medium run at least

1337
00:46:23,400 --> 00:46:27,079
that the natural rate of unemployment

1338
00:46:25,440 --> 00:46:29,159
went up.

1339
00:46:27,079 --> 00:46:30,480
That's very much the story of Europe, by

1340
00:46:29,159 --> 00:46:32,480
the way.

1341
00:46:30,480 --> 00:46:34,039
In the '80s, France in particular. In

1342
00:46:32,480 --> 00:46:35,240
France they sort of made your labor

1343
00:46:34,039 --> 00:46:38,159
reforms

1344
00:46:35,239 --> 00:46:39,439
Z boosting, if you will, in the 1980s.

1345
00:46:38,159 --> 00:46:41,399
Initially it was a great deal for

1346
00:46:39,440 --> 00:46:42,720
workers. Real wages went up and so on.

1347
00:46:41,400 --> 00:46:44,320
It was wonderful.

1348
00:46:42,719 --> 00:46:46,439
But eventually with the passage of time

1349
00:46:44,320 --> 00:46:48,039
they end up just with a much higher real

1350
00:46:46,440 --> 00:46:49,440
not a much higher real wage, but a much

1351
00:46:48,039 --> 00:46:52,639
higher real

1352
00:46:49,440 --> 00:46:55,280
unemployment rate. Okay? They went from

1353
00:46:52,639 --> 00:46:57,719
uh single digit lows in the digits to,

1354
00:46:55,280 --> 00:46:59,480
you know, 15% unemployment rates and

1355
00:46:57,719 --> 00:47:00,639
things like that. And since then they

1356
00:46:59,480 --> 00:47:02,519
have been sort of

1357
00:47:00,639 --> 00:47:03,920
reforming the labor market to fix some

1358
00:47:02,519 --> 00:47:06,079
of that. But

1359
00:47:03,920 --> 00:47:08,358
but that's that's that was very much

1360
00:47:06,079 --> 00:47:10,719
what happened in continental Europe

1361
00:47:08,358 --> 00:47:12,719
in the '80s.

1362
00:47:10,719 --> 00:47:15,358
This is the case of a markup increase.

1363
00:47:12,719 --> 00:47:18,399
It's the other one I described, no? So,

1364
00:47:15,358 --> 00:47:20,079
uh if if markups go up

1365
00:47:18,400 --> 00:47:22,519
then initially that means firms in

1366
00:47:20,079 --> 00:47:24,639
equilibrium are not willing to pay real

1367
00:47:22,519 --> 00:47:27,280
wages uh

1368
00:47:24,639 --> 00:47:28,679
they they want to pay a lower real wage.

1369
00:47:27,280 --> 00:47:30,519
Well, at this level of unemployment

1370
00:47:28,679 --> 00:47:31,480
workers are not going to take it.

1371
00:47:30,519 --> 00:47:32,880
The only thing that will restore

1372
00:47:31,480 --> 00:47:35,400
equilibrium is that the natural rate of

1373
00:47:32,880 --> 00:47:37,000
unemployment goes up. That weakens

1374
00:47:35,400 --> 00:47:38,720
the hand of workers.

1375
00:47:37,000 --> 00:47:40,519
And you end up

1376
00:47:38,719 --> 00:47:42,000
uh with this. And again, there's nothing

1377
00:47:40,519 --> 00:47:44,039
natural about this. I'm not saying this

1378
00:47:42,000 --> 00:47:46,440
is good, bad. I have no idea why the

1379
00:47:44,039 --> 00:47:48,199
markups went up. If it is just imperfect

1380
00:47:46,440 --> 00:47:49,400
competition going up, that's clearly not

1381
00:47:48,199 --> 00:47:51,039
a good thing.

1382
00:47:49,400 --> 00:47:52,800
Uh but it may have been something else.

1383
00:47:51,039 --> 00:47:55,159
The price of oil went up a lot. I don't

1384
00:47:52,800 --> 00:47:57,039
know. Uh was a war somewhere and then

1385
00:47:55,159 --> 00:47:58,559
productivity came down. So, something of

1386
00:47:57,039 --> 00:48:00,440
that kind.

1387
00:47:58,559 --> 00:48:01,799
So, I don't know what did it. But but

1388
00:48:00,440 --> 00:48:03,599
the only thing I'm describing here is

1389
00:48:01,800 --> 00:48:05,840
the mechanics.

1390
00:48:03,599 --> 00:48:05,839
Okay?

1391
00:48:06,320 --> 00:48:09,400
Good.

1392
00:48:08,039 --> 00:48:10,039
So,

1393
00:48:09,400 --> 00:48:11,760
uh

1394
00:48:10,039 --> 00:48:14,440
the quiz is up to here.

1395
00:48:11,760 --> 00:48:15,720
Right? So, the the quiz ends here.

1396
00:48:14,440 --> 00:48:17,320
Okay?

1397
00:48:15,719 --> 00:48:19,319
Uh in the next lecture we're going to

1398
00:48:17,320 --> 00:48:21,320
learn I'm going to start the Phillips

1399
00:48:19,320 --> 00:48:22,640
curve, which is now

1400
00:48:21,320 --> 00:48:24,440
using this model, but looking at

1401
00:48:22,639 --> 00:48:26,440
deviations, situations where the price

1402
00:48:24,440 --> 00:48:28,880
is not equal to expected price or

1403
00:48:26,440 --> 00:48:31,000
expected price is not equal to to

1404
00:48:28,880 --> 00:48:33,079
to the actual price. And and that's

1405
00:48:31,000 --> 00:48:33,960
going to lead to interesting situations.

1406
00:48:33,079 --> 00:48:35,039
Uh

1407
00:48:33,960 --> 00:48:36,599
and there we're going to be talking

1408
00:48:35,039 --> 00:48:38,358
about inflation. Here this is not a

1409
00:48:36,599 --> 00:48:39,679
model to talk about inflation. I'm

1410
00:48:38,358 --> 00:48:42,039
talking about what happens in the medium

1411
00:48:39,679 --> 00:48:43,759
run. I haven't told you whether

1412
00:48:42,039 --> 00:48:45,880
adjustment happens through the nominal

1413
00:48:43,760 --> 00:48:47,920
wage, through the prices, or what. I

1414
00:48:45,880 --> 00:48:50,320
mean, there are many ways of

1415
00:48:47,920 --> 00:48:51,920
reaching the same real wage.

1416
00:48:50,320 --> 00:48:54,000
You know, you could have it

1417
00:48:51,920 --> 00:48:55,920
uh you could you could lower real real

1418
00:48:54,000 --> 00:48:59,960
wages by increasing

1419
00:48:55,920 --> 00:49:00,760
wages by 50% and prices by 60, say.

1420
00:48:59,960 --> 00:49:02,358
No?

1421
00:49:00,760 --> 00:49:04,720
Or you could do it by, you know,

1422
00:49:02,358 --> 00:49:06,319
lowering nominal wages by 10 and not

1423
00:49:04,719 --> 00:49:07,439
moving prices. So, there are many ways

1424
00:49:06,320 --> 00:49:08,760
of doing it. The Phillips curve doesn't

1425
00:49:07,440 --> 00:49:10,358
allow us to

1426
00:49:08,760 --> 00:49:12,480
to get into that part. But it's not

1427
00:49:10,358 --> 00:49:14,239
going to be part of your quiz. The quiz

1428
00:49:12,480 --> 00:49:15,840
that's going to be part of of the second

1429
00:49:14,239 --> 00:49:16,959
quiz. So, in the next lecture we're

1430
00:49:15,840 --> 00:49:19,240
going to talk about the Phillips curve

1431
00:49:16,960 --> 00:49:22,800
and then on Wednesday a review and

1432
00:49:19,239 --> 00:49:22,799
and then you have your quiz. Okay?