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