WEBVTT 00:00:16.679 --> 00:00:20.519 Today we're going to look at the we're 00:00:18.280 --> 00:00:23.240 going to start looking into the labor 00:00:20.519 --> 00:00:25.199 market. Now the labor market 00:00:23.239 --> 00:00:26.879 is very interesting for a wide variety 00:00:25.199 --> 00:00:28.519 of reasons that we will not discuss in 00:00:26.879 --> 00:00:31.160 this course because it's not about labor 00:00:28.519 --> 00:00:33.479 economics, it's about macroeconomics. 00:00:31.160 --> 00:00:36.119 But there are at least two reasons 00:00:33.479 --> 00:00:38.879 why labor markets are very important in 00:00:36.119 --> 00:00:38.879 in macro. 00:00:39.079 --> 00:00:43.159 One is because things like an employment 00:00:42.119 --> 00:00:45.599 rate 00:00:43.159 --> 00:00:48.759 is an very important indicator of the 00:00:45.600 --> 00:00:51.280 macroeconomic health 00:00:48.759 --> 00:00:52.839 of a country or an an economy. 00:00:51.280 --> 00:00:55.160 And the second one 00:00:52.840 --> 00:00:57.240 which is quite relevant these days is 00:00:55.159 --> 00:00:58.759 that the inflation rate 00:00:57.240 --> 00:01:00.640 is 00:00:58.759 --> 00:01:03.759 one of the main drivers of the inflation 00:01:00.640 --> 00:01:06.079 rate is what is going on in the in the 00:01:03.759 --> 00:01:09.000 in the labor market. And and we will try 00:01:06.079 --> 00:01:12.319 to understand this this mechanism 00:01:09.000 --> 00:01:14.400 in the next couple of lectures. 00:01:12.319 --> 00:01:16.599 What you have there is the is the 00:01:14.400 --> 00:01:19.080 inflation rate in the US and I'm I'm 00:01:16.599 --> 00:01:20.359 showing you this picture several times. 00:01:19.079 --> 00:01:22.200 You know, after going through a long 00:01:20.359 --> 00:01:24.439 period in which the 00:01:22.200 --> 00:01:26.079 inflation rate hovered around 2%, you 00:01:24.439 --> 00:01:28.599 know, with cycles 00:01:26.079 --> 00:01:31.000 we are experiencing an episode of very 00:01:28.599 --> 00:01:32.079 high inflation. 00:01:31.000 --> 00:01:34.640 Things are coming down, but they're 00:01:32.079 --> 00:01:36.640 still at extremely high levels, 6% or 00:01:34.640 --> 00:01:40.200 so. And actually very recently these 00:01:36.640 --> 00:01:40.200 numbers have picked up again a little. 00:01:40.519 --> 00:01:43.879 So that's very high 00:01:41.840 --> 00:01:45.520 very high inflation rate, way too high 00:01:43.879 --> 00:01:49.159 for an economy like the US to feel 00:01:45.519 --> 00:01:51.959 comfortable with. And 00:01:49.159 --> 00:01:54.920 whenever you know 00:01:51.959 --> 00:01:57.879 some member of the FOMC comes out and 00:01:54.920 --> 00:02:00.240 explains why interest rates are so high 00:01:57.879 --> 00:02:01.839 at this moment it says and and and and 00:02:00.239 --> 00:02:03.879 explains why they are likely to remain 00:02:01.840 --> 00:02:06.799 high for quite a while. They say, "Well, 00:02:03.879 --> 00:02:09.280 look, inflation is uncomfortably 00:02:06.799 --> 00:02:12.759 uncomfortably high at the high levels 00:02:09.280 --> 00:02:14.640 and and labor market conditions are very 00:02:12.759 --> 00:02:17.599 tight." 00:02:14.639 --> 00:02:20.639 And that suggests that the inflation 00:02:17.599 --> 00:02:23.400 problem is not likely to go away in in 00:02:20.639 --> 00:02:24.599 in in the near future. Okay? So that's 00:02:23.400 --> 00:02:26.960 something we need to understand in 00:02:24.599 --> 00:02:29.560 macro. Why is it that the labor market 00:02:26.960 --> 00:02:31.719 being tight says anything about the 00:02:29.560 --> 00:02:32.879 inflation rate, for example. Okay? And 00:02:31.719 --> 00:02:34.000 that's the kind of things we're going to 00:02:32.879 --> 00:02:36.280 discuss 00:02:34.000 --> 00:02:37.439 in particular in the on on the Monday 00:02:36.280 --> 00:02:38.960 lecture. 00:02:37.439 --> 00:02:42.840 Now today we're going to start with sort 00:02:38.960 --> 00:02:45.360 of more basics of the of of of the 00:02:42.840 --> 00:02:47.200 of the labor market. 00:02:45.360 --> 00:02:48.520 And 00:02:47.199 --> 00:02:50.639 and at the same time we're going to 00:02:48.520 --> 00:02:52.120 begin a transition in the course in 00:02:50.639 --> 00:02:53.319 which we have been focusing on things 00:02:52.120 --> 00:02:55.360 that are 00:02:53.319 --> 00:02:58.400 in the very short run into things that 00:02:55.360 --> 00:02:59.520 take more time. Okay? Because many of 00:02:58.400 --> 00:03:01.560 the things that we we're going to 00:02:59.520 --> 00:03:04.280 discuss today are things that you're not 00:03:01.560 --> 00:03:06.000 likely to see in in every single 00:03:04.280 --> 00:03:09.280 quarter, but they are things that you're 00:03:06.000 --> 00:03:11.319 likely to see over averages over, you 00:03:09.280 --> 00:03:12.439 know, several quarters, several months. 00:03:11.319 --> 00:03:13.840 That's what we're going to look at 00:03:12.439 --> 00:03:16.520 today. 00:03:13.840 --> 00:03:20.200 So remember let me just recap a little 00:03:16.520 --> 00:03:20.200 bit what we have been doing up to now. 00:03:20.560 --> 00:03:25.120 We have been looking at this ISLM model 00:03:23.319 --> 00:03:28.919 which is a great model. 00:03:25.120 --> 00:03:28.920 It's it's a very good model 00:03:29.159 --> 00:03:33.840 to build on, but it's a very nice model 00:03:31.240 --> 00:03:37.000 starting point to understand what 00:03:33.840 --> 00:03:39.680 happens in a recession and what are the 00:03:37.000 --> 00:03:41.639 what are what are the likely 00:03:39.680 --> 00:03:43.040 what are the likely impact of the 00:03:41.639 --> 00:03:45.159 different macroeconomic policies, 00:03:43.039 --> 00:03:46.479 monetary policy, fiscal policy and so 00:03:45.159 --> 00:03:48.719 on. 00:03:46.479 --> 00:03:51.399 It is not such a great model 00:03:48.719 --> 00:03:51.400 once 00:03:51.479 --> 00:03:54.280 the aggregate supply side of the 00:03:52.919 --> 00:03:55.399 economy, something we have completely 00:03:54.280 --> 00:03:57.800 ignored 00:03:55.400 --> 00:04:00.080 starts becoming binding. 00:03:57.800 --> 00:04:02.600 Okay? Remember that till now in the ISLM 00:04:00.080 --> 00:04:05.280 model we had basically ISLM model we had 00:04:02.599 --> 00:04:07.199 two assumptions. 00:04:05.280 --> 00:04:10.400 Related assumptions. One, prices were 00:04:07.199 --> 00:04:14.280 fully sticky. They didn't move at all. 00:04:10.400 --> 00:04:15.840 Second, that output was aggregate demand 00:04:14.280 --> 00:04:17.000 determined. So whatever aggregate demand 00:04:15.840 --> 00:04:19.439 wanted 00:04:17.000 --> 00:04:22.160 producers found a way to produce it at 00:04:19.439 --> 00:04:23.959 some given price. 00:04:22.160 --> 00:04:27.600 That's that 00:04:23.959 --> 00:04:31.319 that combination is unlikely to happen 00:04:27.600 --> 00:04:33.080 when for example, when 00:04:31.319 --> 00:04:34.839 firms are finding trouble finding new 00:04:33.079 --> 00:04:36.199 workers because, you know, there may be 00:04:34.839 --> 00:04:38.799 more demand, more demand for these 00:04:36.199 --> 00:04:40.839 goods, but but the firm may find it hard 00:04:38.800 --> 00:04:42.520 to expand production. 00:04:40.839 --> 00:04:44.719 And it's also highly likely that in a 00:04:42.519 --> 00:04:46.799 situation like that firms are going to 00:04:44.720 --> 00:04:47.960 want to keep prices constant. At some 00:04:46.800 --> 00:04:49.759 point they will kill you. Look, you you 00:04:47.959 --> 00:04:51.359 want to have lots of meals in my 00:04:49.759 --> 00:04:53.199 restaurant. I cannot find people to work 00:04:51.360 --> 00:04:55.240 in my restaurant. I'll 00:04:53.199 --> 00:04:57.599 I'll I'll hide the prices so at least, 00:04:55.240 --> 00:04:59.120 you know, fewer tables and I can manage 00:04:57.600 --> 00:05:00.280 one way or the other. 00:04:59.120 --> 00:05:01.639 So 00:05:00.279 --> 00:05:02.519 we're going to start building a model 00:05:01.639 --> 00:05:04.120 that 00:05:02.519 --> 00:05:06.240 makes those takes those things into 00:05:04.120 --> 00:05:07.040 consideration. What what is the impact 00:05:06.240 --> 00:05:09.680 of 00:05:07.040 --> 00:05:13.080 of a tight supply side of the economy on 00:05:09.680 --> 00:05:16.160 on prices and and and how that starts 00:05:13.079 --> 00:05:19.039 affecting feeds back into equilibrium 00:05:16.160 --> 00:05:21.439 output eventually. 00:05:19.040 --> 00:05:23.360 So the main thing I would say we're 00:05:21.439 --> 00:05:25.879 going to do really 00:05:23.360 --> 00:05:27.759 relative to ISLM model in the next two 00:05:25.879 --> 00:05:30.040 three lectures is endogenize the 00:05:27.759 --> 00:05:31.319 inflation rate. Okay? We have kept 00:05:30.040 --> 00:05:34.240 prices fixed. 00:05:31.319 --> 00:05:36.800 But now we want to endogenize. 00:05:34.240 --> 00:05:37.439 And and the story of that endogenization 00:05:36.800 --> 00:05:40.079 of 00:05:37.439 --> 00:05:41.199 of of inflation starts from the labor 00:05:40.079 --> 00:05:42.599 market. And that's the reason we're 00:05:41.199 --> 00:05:44.719 going to start looking at the labor 00:05:42.600 --> 00:05:46.800 market today. Okay? 00:05:44.720 --> 00:05:48.600 Now let me remind you a few things that 00:05:46.800 --> 00:05:50.800 I think we discussed in the first 00:05:48.600 --> 00:05:53.280 lecture or so or maybe second, I don't 00:05:50.800 --> 00:05:53.280 remember. 00:05:54.720 --> 00:05:59.200 Let me give you a picture of the labor 00:05:56.560 --> 00:06:01.280 market and some variables 00:05:59.199 --> 00:06:02.240 important statistics of the labor market 00:06:01.279 --> 00:06:03.759 that are 00:06:02.240 --> 00:06:06.759 that that 00:06:03.759 --> 00:06:08.519 that that matter for for understanding 00:06:06.759 --> 00:06:10.839 inflation and so on. 00:06:08.519 --> 00:06:14.159 So this is a picture that's this is the 00:06:10.839 --> 00:06:16.279 one that you have in the book of 00:06:14.160 --> 00:06:17.600 the labor the the labor market. It's a 00:06:16.279 --> 00:06:20.719 picture of the labor market at some 00:06:17.600 --> 00:06:22.640 point in 2018. I don't know when. It's 00:06:20.720 --> 00:06:25.880 it's a picture at one point. 00:06:22.639 --> 00:06:28.439 And that's at the time the US had about 00:06:25.879 --> 00:06:30.800 330 million people. 00:06:28.439 --> 00:06:32.519 That the non-institutional civilian 00:06:30.800 --> 00:06:34.480 population, that is those people that in 00:06:32.519 --> 00:06:37.519 principle could work 00:06:34.480 --> 00:06:40.640 were about 260 million. 00:06:37.519 --> 00:06:42.799 That excludes people under 16 years old, 00:06:40.639 --> 00:06:45.759 people that are incarcerated, people 00:06:42.800 --> 00:06:47.639 that are in the in the armed forces. 00:06:45.759 --> 00:06:49.000 Those are excluded from 00:06:47.639 --> 00:06:50.519 that's the difference. That's the reason 00:06:49.000 --> 00:06:52.199 you have such a big gap between these 00:06:50.519 --> 00:06:54.639 two numbers. Okay? 00:06:52.199 --> 00:06:57.479 Now out of these people that potentially 00:06:54.639 --> 00:06:59.439 could work some of them 00:06:57.480 --> 00:07:01.480 want to work and that's what we call the 00:06:59.439 --> 00:07:03.439 civilian labor force 00:07:01.480 --> 00:07:04.840 and then some of them are out of the 00:07:03.439 --> 00:07:06.480 labor force. 00:07:04.839 --> 00:07:07.839 Again, at one point in time doesn't mean 00:07:06.480 --> 00:07:09.439 that these people are permanently out of 00:07:07.839 --> 00:07:11.319 the labor force. They may be temporarily 00:07:09.439 --> 00:07:14.040 out of the labor force and so on. 00:07:11.319 --> 00:07:16.800 But but about, you know, we started with 00:07:14.040 --> 00:07:18.360 about 330 million and by the time that 00:07:16.800 --> 00:07:19.600 we look at the people that really want 00:07:18.360 --> 00:07:21.840 to work 00:07:19.600 --> 00:07:25.760 at that point when the picture was taken 00:07:21.839 --> 00:07:27.279 was about half of that, 162 million 00:07:25.759 --> 00:07:30.240 people. Okay? 00:07:27.279 --> 00:07:32.759 Now these 162 million people 00:07:30.240 --> 00:07:35.280 the the great majority of them are 00:07:32.759 --> 00:07:36.240 typically employed. They have a job. 00:07:35.279 --> 00:07:38.479 Okay? 00:07:36.240 --> 00:07:40.160 And then there's a group of people that 00:07:38.480 --> 00:07:41.400 would want to have a job. That's the 00:07:40.160 --> 00:07:43.800 reason they're part of the civilian 00:07:41.399 --> 00:07:45.959 labor force, but do not have one. 00:07:43.800 --> 00:07:48.120 And that's about 6 million in that 00:07:45.959 --> 00:07:51.120 picture there. Okay? 00:07:48.120 --> 00:07:54.199 So when you hear unemployment or the 00:07:51.120 --> 00:07:56.120 unemployment rate you're really talking 00:07:54.199 --> 00:07:58.240 about these people here. And when you 00:07:56.120 --> 00:08:00.040 talk hear about the unemployment rate is 00:07:58.240 --> 00:08:01.680 these people not divided over total 00:08:00.040 --> 00:08:04.280 population, but it's these people 00:08:01.680 --> 00:08:06.199 divided by the civilian labor force. 00:08:04.279 --> 00:08:08.519 Okay? So that's the picture. 00:08:06.199 --> 00:08:08.519 The US. 00:08:08.639 --> 00:08:14.039 The most recent numbers we have about 00:08:10.439 --> 00:08:14.040 that kind of statistics is 00:08:14.199 --> 00:08:17.639 here you have them. I mean, the 00:08:15.759 --> 00:08:20.480 unemployment rate in the US today is 00:08:17.639 --> 00:08:21.639 about 3.4%. That's very low. I'll show 00:08:20.480 --> 00:08:23.520 you 00:08:21.639 --> 00:08:26.360 historical data in a minute and I have 00:08:23.519 --> 00:08:30.319 shown you historical data in the recent 00:08:26.360 --> 00:08:31.920 past. But this number is very very low. 00:08:30.319 --> 00:08:34.479 And 00:08:31.920 --> 00:08:36.918 the change in the employment level 00:08:34.479 --> 00:08:39.080 in in this is for January 00:08:36.918 --> 00:08:42.519 was a reduction. This is this is not 00:08:39.080 --> 00:08:45.480 rate. It's number of people that are 00:08:42.519 --> 00:08:46.559 that are that were no it's not number of 00:08:45.480 --> 00:08:48.320 people that were employed that are no 00:08:46.559 --> 00:08:50.279 longer so. You look at the total stock 00:08:48.320 --> 00:08:52.720 of unemployed in December and then you 00:08:50.279 --> 00:08:55.159 look at the total stock of unemployed in 00:08:52.720 --> 00:08:59.519 January 2023. The difference between 00:08:55.159 --> 00:09:01.439 these two is 28,000 workers. So 28,000 00:08:59.519 --> 00:09:03.199 less workers are in the unemployment 00:09:01.440 --> 00:09:05.200 pool. 00:09:03.200 --> 00:09:07.320 Now notice that how this number is made. 00:09:05.200 --> 00:09:10.879 It's it's not it's not that that, you 00:09:07.320 --> 00:09:13.280 know, 25 28,000 people just gained a 00:09:10.879 --> 00:09:14.799 job. That's not what happened. 00:09:13.279 --> 00:09:16.000 What happens is 00:09:14.799 --> 00:09:18.879 first 00:09:16.000 --> 00:09:22.000 employment 895,000 00:09:18.879 --> 00:09:23.679 and 84,000 people got a job. 00:09:22.000 --> 00:09:26.399 Much bigger number. 00:09:23.679 --> 00:09:28.759 But also the civilian labor force went 00:09:26.399 --> 00:09:30.519 up by 866 00:09:28.759 --> 00:09:31.840 and 00:09:30.519 --> 00:09:34.919 and 00:09:31.840 --> 00:09:35.800 thousand people. Okay? So if you go back 00:09:34.919 --> 00:09:37.879 to 00:09:35.799 --> 00:09:39.159 this picture, what you have in in 00:09:37.879 --> 00:09:40.679 January 00:09:39.159 --> 00:09:42.639 or the numbers reported in January, I do 00:09:40.679 --> 00:09:47.399 not know which month they correspond to 00:09:42.639 --> 00:09:50.159 exactly is that yes, this this decline 00:09:47.399 --> 00:09:53.000 but that decline was made of 00:09:50.159 --> 00:09:54.199 a big increase in employment 00:09:53.000 --> 00:09:56.360 together with a big increase in the 00:09:54.200 --> 00:09:58.040 civilian labor force. Okay? 00:09:56.360 --> 00:09:59.960 So that must have been mostly movement 00:09:58.039 --> 00:10:01.679 out of the labor force and probably had 00:09:59.960 --> 00:10:05.080 that something to Well, I'm not going to 00:10:01.679 --> 00:10:05.079 get into that here, but 00:10:06.120 --> 00:10:09.360 All these numbers are seasonally 00:10:07.559 --> 00:10:11.359 adjusted, so they're corrected relative 00:10:09.360 --> 00:10:12.440 to what happens normally in January and 00:10:11.360 --> 00:10:15.759 so on. 00:10:12.440 --> 00:10:16.800 And COVID and weather can sort of derail 00:10:15.759 --> 00:10:18.120 a lot 00:10:16.799 --> 00:10:20.399 what happens in January, February. 00:10:18.120 --> 00:10:21.639 Numbers tend to be very noisy. Since 00:10:20.399 --> 00:10:23.959 COVID, they have been very noisy because 00:10:21.639 --> 00:10:26.199 the seasonal adjustments are different. 00:10:23.960 --> 00:10:27.560 And and also weather matters a lot in 00:10:26.200 --> 00:10:28.960 January, February and so on. So, you can 00:10:27.559 --> 00:10:30.599 get pretty large fluctuations which are 00:10:28.960 --> 00:10:32.560 really not that interesting to 00:10:30.600 --> 00:10:34.240 macroeconomists, but anyways, those are 00:10:32.559 --> 00:10:35.839 the numbers. 00:10:34.240 --> 00:10:38.360 You look at the civilian labor force 00:10:35.840 --> 00:10:40.080 participation, then it was about 62%, 00:10:38.360 --> 00:10:42.800 62.5%. 00:10:40.080 --> 00:10:44.720 And the employment population ratio is 00:10:42.799 --> 00:10:47.399 of the order of 60%, okay? So, the 00:10:44.720 --> 00:10:48.440 employment population ratio is is just 00:10:47.399 --> 00:10:53.000 this 00:10:48.440 --> 00:10:53.000 uh divided by total population, okay? 00:10:53.440 --> 00:10:58.080 Um 00:10:55.799 --> 00:11:00.479 Those are the averages. The number of 00:10:58.080 --> 00:11:03.200 unemployed in 2022, about 6 million 00:11:00.480 --> 00:11:04.440 people. That's that's unemployed. 00:11:03.200 --> 00:11:06.160 Okay. 00:11:04.440 --> 00:11:08.200 So, there you have the unemployment 00:11:06.159 --> 00:11:09.959 rate, you know, and it moves as you 00:11:08.200 --> 00:11:12.000 would expect it. It typically goes up in 00:11:09.960 --> 00:11:13.800 recessions. Uh 00:11:12.000 --> 00:11:15.200 the last sort of large recession we had 00:11:13.799 --> 00:11:17.359 big swings. 00:11:15.200 --> 00:11:19.000 Uh one thing that was interesting and we 00:11:17.360 --> 00:11:21.320 couldn't quite understand what was going 00:11:19.000 --> 00:11:22.519 on is as you notice right before COVID, 00:11:21.320 --> 00:11:24.680 the unemployment rate had already 00:11:22.519 --> 00:11:26.240 declined to very low levels. 00:11:24.679 --> 00:11:27.439 And so, people were wondering whether 00:11:26.240 --> 00:11:29.320 something we're going to talk about 00:11:27.440 --> 00:11:31.360 later in the this lecture, whether the 00:11:29.320 --> 00:11:34.080 natural rate of unemployment had changed 00:11:31.360 --> 00:11:34.080 for some reason. 00:11:34.279 --> 00:11:39.519 We'll come back to that. Then we got we 00:11:37.200 --> 00:11:41.520 got COVID, obviously a very 00:11:39.519 --> 00:11:43.559 recessionary shock initially, massive 00:11:41.519 --> 00:11:45.439 unemployment and so on. 00:11:43.559 --> 00:11:47.759 But then it came back very quickly and 00:11:45.440 --> 00:11:49.200 today we have record low levels of 00:11:47.759 --> 00:11:51.639 unemployment. We hadn't seen numbers 00:11:49.200 --> 00:11:53.280 like this since, you know, the '60s, 00:11:51.639 --> 00:11:55.919 uh really. Very low levels of 00:11:53.279 --> 00:11:57.838 unemployment. So, when when uh one of 00:11:55.919 --> 00:11:59.919 the things that that 00:11:57.839 --> 00:12:02.800 when you hear the FOMC members talking 00:11:59.919 --> 00:12:03.959 about the labor market being very tight, 00:12:02.799 --> 00:12:05.319 well, one of the things they're looking 00:12:03.960 --> 00:12:07.440 at is this. One, there are other 00:12:05.320 --> 00:12:08.800 statistics I'll show you, but but but 00:12:07.440 --> 00:12:12.120 this is one of them. The unemployment 00:12:08.799 --> 00:12:12.120 rate is really, really low. 00:12:12.960 --> 00:12:17.440 Sometimes again, especially post-COVID 00:12:15.440 --> 00:12:20.200 because of movements in and out of the 00:12:17.440 --> 00:12:21.760 labor force, uh 00:12:20.200 --> 00:12:24.160 the unemployment rate is not such a 00:12:21.759 --> 00:12:25.960 great statistic, not as reliable because 00:12:24.159 --> 00:12:27.838 many people left the labor force. So, 00:12:25.960 --> 00:12:31.040 people look a lot at the 00:12:27.839 --> 00:12:33.680 employment rate, uh which is this is 00:12:31.039 --> 00:12:35.120 this is um this is 00:12:33.679 --> 00:12:38.679 not the employment population ratio, 00:12:35.120 --> 00:12:39.240 it's employment rate. So, employed over 00:12:38.679 --> 00:12:41.559 uh 00:12:39.240 --> 00:12:44.240 uh the non-civilian 00:12:41.559 --> 00:12:44.239 population, no? 00:12:45.120 --> 00:12:49.839 And that number, you can see we have 00:12:48.039 --> 00:12:51.360 discussed this before, 00:12:49.839 --> 00:12:52.800 was trending up here because of the 00:12:51.360 --> 00:12:55.039 increase in the labor participation of 00:12:52.799 --> 00:12:56.399 women, then it came down, had a lot to 00:12:55.039 --> 00:12:58.879 do with the students and things like 00:12:56.399 --> 00:13:01.399 that, uh systematically, but then it was 00:12:58.879 --> 00:13:04.120 climbing up enormously, it collapsed 00:13:01.399 --> 00:13:07.000 during COVID. That's mostly unemployment 00:13:04.120 --> 00:13:08.560 and and and and and people out of the 00:13:07.000 --> 00:13:09.480 labor force. 00:13:08.559 --> 00:13:11.919 Uh 00:13:09.480 --> 00:13:14.200 and then recovery, but the recovery has 00:13:11.919 --> 00:13:15.759 not picked up to back to the trend. See, 00:13:14.200 --> 00:13:18.600 we are back to sort of more or less the 00:13:15.759 --> 00:13:20.480 levels we had before COVID, but we're 00:13:18.600 --> 00:13:21.879 certainly off the trend. 00:13:20.480 --> 00:13:23.440 And one of the reasons the labor markets 00:13:21.879 --> 00:13:26.200 are very tight is that is that we 00:13:23.440 --> 00:13:28.880 haven't recovered sort of uh 00:13:26.200 --> 00:13:31.720 the employment uh um 00:13:28.879 --> 00:13:33.559 rate that that we used to have, okay? 00:13:31.720 --> 00:13:36.160 This has to do with migration flows, 00:13:33.559 --> 00:13:38.679 with a variety of things, uh but that's 00:13:36.159 --> 00:13:41.319 that's the issue. 00:13:38.679 --> 00:13:42.919 Okay. So, that's that's sort of 00:13:41.320 --> 00:13:44.480 those are very static pictures of the 00:13:42.919 --> 00:13:46.159 labor market. What is the stock of 00:13:44.480 --> 00:13:47.639 unemployment at one point? What is the 00:13:46.159 --> 00:13:48.719 unemployment rate and so on and so 00:13:47.639 --> 00:13:50.879 forth? 00:13:48.720 --> 00:13:53.080 But the truth is that labor markets are 00:13:50.879 --> 00:13:55.919 very dynamic, 00:13:53.080 --> 00:13:58.440 especially in an economy like the US. 00:13:55.919 --> 00:14:00.079 The flows are very large. So, what I 00:13:58.440 --> 00:14:02.280 have there, and I don't know for which 00:14:00.080 --> 00:14:04.120 date, this is in the book, but the 00:14:02.279 --> 00:14:06.039 pictures look more or less the same for 00:14:04.120 --> 00:14:08.839 the point I want to make. 00:14:06.039 --> 00:14:09.519 This is monthly labor flow flows. And 00:14:08.839 --> 00:14:11.000 this 00:14:09.519 --> 00:14:13.879 this happened in some month, I don't 00:14:11.000 --> 00:14:16.200 care, 2018 at some point. 00:14:13.879 --> 00:14:17.559 Look at what happened there. 00:14:16.200 --> 00:14:20.079 You have this is we were talking about 00:14:17.559 --> 00:14:22.399 the stocks recently. So, employment in 00:14:20.078 --> 00:14:25.679 that month was of the order of 132 00:14:22.399 --> 00:14:27.159 million uh dollars, 132 million people, 00:14:25.679 --> 00:14:29.519 okay? 00:14:27.159 --> 00:14:32.399 Out of the labor force, about 79 million 00:14:29.519 --> 00:14:33.879 people. Unemployed, about 8.6 million. 00:14:32.399 --> 00:14:35.319 That's those were the stocks. Those were 00:14:33.879 --> 00:14:37.720 the type of numbers I was showing you 00:14:35.320 --> 00:14:40.000 before, okay? 00:14:37.720 --> 00:14:42.360 But look at these arrows. 00:14:40.000 --> 00:14:45.159 These are flows. So, in every single 00:14:42.360 --> 00:14:46.639 month, you see in the US about 3 million 00:14:45.159 --> 00:14:50.120 people that move from one job to 00:14:46.639 --> 00:14:52.879 another. So, employment to employment. 00:14:50.120 --> 00:14:55.919 You see about 1.8 million that move from 00:14:52.879 --> 00:14:58.679 employment to unemployment. 00:14:55.919 --> 00:15:01.078 And about 2 million people that move 00:14:58.679 --> 00:15:02.719 from unemployment to employment. Large 00:15:01.078 --> 00:15:04.399 flows. 00:15:02.720 --> 00:15:05.959 Not only so, not everything goes from 00:15:04.399 --> 00:15:07.559 unemployment to employment. There are 00:15:05.958 --> 00:15:09.519 people that are also moving out of the 00:15:07.559 --> 00:15:12.439 labor force and into the labor force, 00:15:09.519 --> 00:15:14.919 into unemployment, into employment. Here 00:15:12.440 --> 00:15:16.520 in this particular case, out the flow 00:15:14.919 --> 00:15:18.919 out of the labor force into employment 00:15:16.519 --> 00:15:21.279 is 3.4 million. 00:15:18.919 --> 00:15:22.759 Flows from employment without going 00:15:21.279 --> 00:15:25.360 through unemployment to out of the labor 00:15:22.759 --> 00:15:27.519 force, 3.7 million. 00:15:25.360 --> 00:15:29.639 Okay. During COVID, there was a this 00:15:27.519 --> 00:15:31.720 must have been a very thick arrow. 00:15:29.639 --> 00:15:34.720 Lots of people move out from employment 00:15:31.720 --> 00:15:36.440 to out of the labor force, okay? 00:15:34.720 --> 00:15:38.079 And and one of the problems the economy 00:15:36.440 --> 00:15:40.520 has had in the recovery on the on the 00:15:38.078 --> 00:15:42.559 labor market side is that this arrow 00:15:40.519 --> 00:15:43.639 hasn't been as strong as we would want 00:15:42.559 --> 00:15:44.359 it. 00:15:43.639 --> 00:15:46.120 Okay. 00:15:44.360 --> 00:15:48.120 This arrow, or this arrow for that 00:15:46.120 --> 00:15:49.519 matter of fact, people coming coming out 00:15:48.120 --> 00:15:51.039 of the labor force into unemployment, 00:15:49.519 --> 00:15:52.559 that's also big flow. 00:15:51.039 --> 00:15:53.759 Sometimes people are not working and 00:15:52.559 --> 00:15:55.359 then they decide that, you know, they 00:15:53.759 --> 00:15:56.958 run out of unemployment insurance or 00:15:55.360 --> 00:15:58.600 something like that, and so they decide 00:15:56.958 --> 00:15:59.559 to start looking, you know, and they 00:15:58.600 --> 00:16:01.879 move 00:15:59.559 --> 00:16:02.559 into unemployment here, 00:16:01.879 --> 00:16:05.120 okay? 00:16:02.559 --> 00:16:07.039 Or or they run out of savings and and 00:16:05.120 --> 00:16:08.639 they have to come back and they may not 00:16:07.039 --> 00:16:09.879 find a job initially. They have to go 00:16:08.639 --> 00:16:11.000 through unemployment, 00:16:09.879 --> 00:16:13.439 okay? 00:16:11.000 --> 00:16:14.799 So, the point is that these flows are 00:16:13.440 --> 00:16:17.040 very large. 00:16:14.799 --> 00:16:19.399 And and the 00:16:17.039 --> 00:16:20.319 and these flows matter a lot 00:16:19.399 --> 00:16:21.759 uh 00:16:20.320 --> 00:16:24.400 for for the kind of things we want to 00:16:21.759 --> 00:16:26.078 talk about in in this course. 00:16:24.399 --> 00:16:26.838 Look at what we have here. 00:16:26.078 --> 00:16:28.799 Uh 00:16:26.839 --> 00:16:32.079 the red line is the unemployment rate 00:16:28.799 --> 00:16:34.679 and it's measured on the left axis. 00:16:32.078 --> 00:16:37.159 And what we have here in the blue line 00:16:34.679 --> 00:16:39.719 is measured in a in an inverse scale. 00:16:37.159 --> 00:16:41.319 Look at this this goes up 00:16:39.720 --> 00:16:43.399 as you go down. 00:16:41.320 --> 00:16:45.240 Is is the 00:16:43.399 --> 00:16:47.559 percentage of employed unemployed 00:16:45.240 --> 00:16:49.000 workers becoming employed. 00:16:47.559 --> 00:16:50.399 Okay. 00:16:49.000 --> 00:16:51.958 So, it's the job finding rate from 00:16:50.399 --> 00:16:53.039 unemployment. So, you have unemployed 00:16:51.958 --> 00:16:55.279 people 00:16:53.039 --> 00:16:56.559 and they will be finding jobs. They will 00:16:55.279 --> 00:16:58.120 be looking for jobs and they will be 00:16:56.559 --> 00:17:00.319 finding jobs. 00:16:58.120 --> 00:17:01.519 This number here, this blue line here, 00:17:00.320 --> 00:17:03.839 shows you 00:17:01.519 --> 00:17:05.319 uh the likelihood that they'll find a 00:17:03.839 --> 00:17:06.959 job 00:17:05.319 --> 00:17:08.720 in inverted scale, 00:17:06.959 --> 00:17:10.120 okay? So, 00:17:08.720 --> 00:17:12.759 what do you what correlation do you 00:17:10.119 --> 00:17:12.759 notice there? 00:17:19.439 --> 00:17:24.240 It's very tight. 00:17:21.720 --> 00:17:26.838 Yeah. As the percent of people 00:17:24.240 --> 00:17:29.079 um that get a job each month is smaller, 00:17:26.838 --> 00:17:31.039 there's more people without a job. 00:17:29.079 --> 00:17:33.960 Exactly. That means when the 00:17:31.039 --> 00:17:35.759 unemployment rate is high, 00:17:33.960 --> 00:17:37.600 it is harder for unemployed workers to 00:17:35.759 --> 00:17:40.039 find a job. 00:17:37.599 --> 00:17:41.599 Or another way of an direct implication 00:17:40.039 --> 00:17:43.039 of that is that a typical unemployed 00:17:41.599 --> 00:17:44.678 worker will spend more time in 00:17:43.039 --> 00:17:46.599 unemployment because they're going to be 00:17:44.679 --> 00:17:48.000 looking for jobs and it's more 00:17:46.599 --> 00:17:49.319 it's harder to get a job, so you're 00:17:48.000 --> 00:17:51.319 going to be looking for a job for a 00:17:49.319 --> 00:17:53.678 longer period of time. 00:17:51.319 --> 00:17:54.678 Why are we talking about these things? 00:17:53.679 --> 00:17:56.560 Well, 00:17:54.679 --> 00:17:57.120 because of this type of 00:17:56.559 --> 00:17:59.319 uh 00:17:57.119 --> 00:18:02.319 reasons. Well, this means that when 00:17:59.319 --> 00:18:04.960 unemployment is high, workers are worse 00:18:02.319 --> 00:18:06.159 off in at least two ways. 00:18:04.960 --> 00:18:08.559 And there are two ways that are going to 00:18:06.160 --> 00:18:09.920 be important for what I'll say next. 00:18:08.559 --> 00:18:11.319 One 00:18:09.920 --> 00:18:12.679 is that the employed workers face a 00:18:11.319 --> 00:18:14.240 higher probability of losing a job. 00:18:12.679 --> 00:18:15.880 That's what happens when unemployment is 00:18:14.240 --> 00:18:17.160 the reason unemployment gets to be high 00:18:15.880 --> 00:18:19.520 is because 00:18:17.160 --> 00:18:22.960 firms are firing workers and so on and 00:18:19.519 --> 00:18:25.519 so forth, no? And so 00:18:22.960 --> 00:18:27.720 so so when unemployment is high, the 00:18:25.519 --> 00:18:30.039 first thing the workers know is that 00:18:27.720 --> 00:18:33.679 it's very likely they'll lose their job, 00:18:30.039 --> 00:18:35.079 more likely that they'll lose their job. 00:18:33.679 --> 00:18:37.519 But the second channel, which is what 00:18:35.079 --> 00:18:39.000 this picture highlights here, is that is 00:18:37.519 --> 00:18:40.679 that if you fall on employment, it's 00:18:39.000 --> 00:18:42.720 going to take a it's going to be a lot 00:18:40.679 --> 00:18:44.960 harder to get out of unemployment, 00:18:42.720 --> 00:18:46.640 okay? So, when unemployment is high is 00:18:44.960 --> 00:18:49.120 high, it's scary for workers for two 00:18:46.640 --> 00:18:50.560 reasons. Once, you're more likely to 00:18:49.119 --> 00:18:52.119 lose a job because it's capturing 00:18:50.559 --> 00:18:54.319 recessionary conditions and so on in the 00:18:52.119 --> 00:18:55.479 economy, but second, if you end up in 00:18:54.319 --> 00:18:57.720 unemployment, it's going to be hard to 00:18:55.480 --> 00:18:59.559 get out of it, 00:18:57.720 --> 00:19:02.559 okay? 00:18:59.559 --> 00:19:05.799 And and later on this unemployment rate 00:19:02.559 --> 00:19:07.319 is going to show up in wage bargaining 00:19:05.799 --> 00:19:09.918 and the main reason it's going to show 00:19:07.319 --> 00:19:12.000 up is of this kind. 00:19:09.919 --> 00:19:14.960 And also think about the other side. 00:19:12.000 --> 00:19:16.839 When there's bargaining, there's two 00:19:14.960 --> 00:19:18.720 There's going to be firm and workers. 00:19:16.839 --> 00:19:20.519 From the firm point of view, 00:19:18.720 --> 00:19:23.240 if there's a lot of unemployment, do you 00:19:20.519 --> 00:19:24.720 think it's hard or or or or or easy to 00:19:23.240 --> 00:19:26.919 find a worker? 00:19:24.720 --> 00:19:30.000 If you replace a worker that decides to 00:19:26.919 --> 00:19:30.000 leave for whatever reason, 00:19:30.079 --> 00:19:35.279 Easy, no? You have lots of people to 00:19:31.720 --> 00:19:37.679 choose from, so it becomes easy. So, 00:19:35.279 --> 00:19:39.079 unemployment is high, workers are more 00:19:37.679 --> 00:19:41.840 scared. 00:19:39.079 --> 00:19:43.319 If they get out, it it is they're scared 00:19:41.839 --> 00:19:46.158 of losing their job. If they get out, 00:19:43.319 --> 00:19:47.799 it's it it's it's hard to get a job. And 00:19:46.159 --> 00:19:49.560 on the other side, the firms for the 00:19:47.799 --> 00:19:51.158 firms, it's not that they're scared to 00:19:49.559 --> 00:19:53.639 lose a worker because it's pretty fairly 00:19:51.159 --> 00:19:55.960 easy to replace that worker. 00:19:53.640 --> 00:19:57.520 Today, firms are very worried about 00:19:55.960 --> 00:19:59.160 losing their workers. In some sectors, 00:19:57.519 --> 00:20:01.200 no, in some sectors are getting rid of 00:19:59.160 --> 00:20:03.440 workers, but but if you run a 00:20:01.200 --> 00:20:05.880 restaurant, you're very scared of losing 00:20:03.440 --> 00:20:07.160 your your your workers, you know, 00:20:05.880 --> 00:20:09.680 because it's going to be very difficult 00:20:07.160 --> 00:20:12.519 to find a replacement for that worker. 00:20:09.680 --> 00:20:16.560 So, surprise, surprise, wages in that 00:20:12.519 --> 00:20:18.039 industry are going up a lot, okay? 00:20:16.559 --> 00:20:20.799 We're going to get there. 00:20:18.039 --> 00:20:22.599 So, that's what comes in wage 00:20:20.799 --> 00:20:24.159 determination. Look at the what I'm what 00:20:22.599 --> 00:20:25.839 I'm trying to build here. I'm starting 00:20:24.160 --> 00:20:27.920 from telling you stories about the labor 00:20:25.839 --> 00:20:29.679 market, what things are important for 00:20:27.920 --> 00:20:30.960 workers, and so on. 00:20:29.680 --> 00:20:33.240 Now, I'm going to get into wage 00:20:30.960 --> 00:20:34.960 determination, and obviously this 00:20:33.240 --> 00:20:37.079 variables I talked about are going to be 00:20:34.960 --> 00:20:38.680 important in this wage determination, 00:20:37.079 --> 00:20:41.199 but my ultimate goal is to talk about 00:20:38.680 --> 00:20:42.320 inflation. So, the next step, so I'm 00:20:41.200 --> 00:20:44.039 going to talk about wage determination 00:20:42.319 --> 00:20:46.279 here, and then we're going to talk about 00:20:44.039 --> 00:20:49.000 prices, and there we're going to be one 00:20:46.279 --> 00:20:50.519 step closer to talking about inflation, 00:20:49.000 --> 00:20:54.359 okay? So, let's go through the 00:20:50.519 --> 00:20:55.639 intermediate step, wage determination. 00:20:54.359 --> 00:20:57.399 Uh 00:20:55.640 --> 00:21:00.360 So, just to give you a little 00:20:57.400 --> 00:21:02.000 background, you know, sometimes 00:21:00.359 --> 00:21:04.159 uh wages are set by collective 00:21:02.000 --> 00:21:05.279 bargaining, unions 00:21:04.160 --> 00:21:07.400 in particular. 00:21:05.279 --> 00:21:08.279 Now, in the US, unions are not a big 00:21:07.400 --> 00:21:09.759 thing. 00:21:08.279 --> 00:21:10.960 Okay? They were a much bigger thing many 00:21:09.759 --> 00:21:13.039 years back. 00:21:10.960 --> 00:21:14.319 They aren't today. 00:21:13.039 --> 00:21:16.039 Um 00:21:14.319 --> 00:21:20.319 in other economies, they are a big 00:21:16.039 --> 00:21:21.440 thing, okay? Japan, in Europe. 00:21:20.319 --> 00:21:23.079 Uh 00:21:21.440 --> 00:21:24.600 and the unions can happen at different 00:21:23.079 --> 00:21:26.960 levels of aggregation, at the level of 00:21:24.599 --> 00:21:29.199 the firm, at the level of the sector, 00:21:26.960 --> 00:21:31.680 and and and and 00:21:29.200 --> 00:21:33.920 and you name it. 00:21:31.680 --> 00:21:35.920 In general, regardless of the level you 00:21:33.920 --> 00:21:38.320 of unionization you have 00:21:35.920 --> 00:21:40.080 uh in a country or in a sector, 00:21:38.319 --> 00:21:41.559 the higher the skill needed to a job, 00:21:40.079 --> 00:21:43.839 the more likely this other bargaining 00:21:41.559 --> 00:21:46.639 takes place between an individual 00:21:43.839 --> 00:21:48.279 between an employer and an individual 00:21:46.640 --> 00:21:50.600 rather than a union, okay? Because it's 00:21:48.279 --> 00:21:52.799 sort of much more idiosyncratic 00:21:50.599 --> 00:21:54.919 and customized, and so on. 00:21:52.799 --> 00:21:58.639 But, either way, regardless of whether 00:21:54.920 --> 00:22:00.120 uh whether uh uh wages are set 00:21:58.640 --> 00:22:01.679 at a collective level or at at the 00:22:00.119 --> 00:22:04.959 individual level, 00:22:01.679 --> 00:22:08.880 the main macroeconomic drivers 00:22:04.960 --> 00:22:09.840 of uh wages are similar across both of 00:22:08.880 --> 00:22:11.040 them. 00:22:09.839 --> 00:22:13.119 Of course, the particulars are going to 00:22:11.039 --> 00:22:15.639 be different, even the dynamics can be 00:22:13.119 --> 00:22:18.199 different, and so on. But, the big 00:22:15.640 --> 00:22:19.720 drivers, the big macro drivers 00:22:18.200 --> 00:22:21.319 are similar, regardless of the 00:22:19.720 --> 00:22:23.039 bargaining mode you have at the level at 00:22:21.319 --> 00:22:24.839 which it happens, and so on. And those 00:22:23.039 --> 00:22:27.240 are the things we're going to highlight 00:22:24.839 --> 00:22:27.240 here. 00:22:28.640 --> 00:22:33.280 So, 00:22:29.799 --> 00:22:36.839 a fact of life is that workers' wages 00:22:33.279 --> 00:22:38.319 typically exceed the reservation wage. 00:22:36.839 --> 00:22:40.879 Now, what does it mean the reservation 00:22:38.319 --> 00:22:42.279 wage? The reservation wage is a wage 00:22:40.880 --> 00:22:43.840 that would leave you indifferent between 00:22:42.279 --> 00:22:48.000 employed or unemployed. Doesn't mean 00:22:43.839 --> 00:22:49.399 there's a nice wage, anything. But, 00:22:48.000 --> 00:22:50.519 I mean, that's and certainly doesn't 00:22:49.400 --> 00:22:52.040 mean that you wouldn't prefer to have to 00:22:50.519 --> 00:22:54.000 have a higher wage. 00:22:52.039 --> 00:22:55.480 But, it tells you that, look, at that 00:22:54.000 --> 00:22:57.279 wage, you'd rather be employed than 00:22:55.480 --> 00:22:59.519 unemployed. 00:22:57.279 --> 00:23:00.960 Okay? And there's a wait long list of 00:22:59.519 --> 00:23:03.119 reasons why 00:23:00.960 --> 00:23:04.480 that ends up being the equilibrium type 00:23:03.119 --> 00:23:05.439 wage, and I'm not going to discuss them 00:23:04.480 --> 00:23:06.360 here, 00:23:05.440 --> 00:23:08.360 but 00:23:06.359 --> 00:23:10.359 take it as a fact for now. 00:23:08.359 --> 00:23:12.199 Okay? So, that is 00:23:10.359 --> 00:23:13.479 workers prefer to be employed. 00:23:12.200 --> 00:23:15.279 They may take the risk of becoming 00:23:13.480 --> 00:23:18.519 unemployed, but they typically prefer to 00:23:15.279 --> 00:23:18.519 be employed. 00:23:18.559 --> 00:23:22.519 Um 00:23:20.480 --> 00:23:23.679 Now, wages, and this is where it becomes 00:23:22.519 --> 00:23:25.799 uh 00:23:23.679 --> 00:23:27.800 uh important for interesting for us in 00:23:25.799 --> 00:23:32.159 macro, is 00:23:27.799 --> 00:23:34.559 the wages that are finally set depend 00:23:32.160 --> 00:23:36.920 on labor market conditions. 00:23:34.559 --> 00:23:39.759 So, very clearly, the lower is the 00:23:36.920 --> 00:23:41.759 unemployment rate, the higher the wages 00:23:39.759 --> 00:23:43.559 will tend to be. Okay? And you're seeing 00:23:41.759 --> 00:23:45.839 it now. The unemployment rate is very 00:23:43.559 --> 00:23:46.919 low, wages are rising a lot. 00:23:45.839 --> 00:23:50.000 Okay? 00:23:46.920 --> 00:23:52.080 And workers' bargaining power depends on 00:23:50.000 --> 00:23:53.640 this again. There's a huge literature on 00:23:52.079 --> 00:23:55.919 these things, I'm just compressing it 00:23:53.640 --> 00:23:58.400 into 00:23:55.920 --> 00:24:00.360 as the very minimums. 00:23:58.400 --> 00:24:02.240 Uh the bargaining power of a worker is a 00:24:00.359 --> 00:24:03.799 thing that we already discussed. 00:24:02.240 --> 00:24:05.920 Well, it depends on how costly for the 00:24:03.799 --> 00:24:07.359 firm to find a worker. So, obviously, if 00:24:05.920 --> 00:24:08.960 unemployment is very high, it's very 00:24:07.359 --> 00:24:10.639 easy for firms to buy a work find a 00:24:08.960 --> 00:24:12.240 worker. That's not good for the 00:24:10.640 --> 00:24:13.960 bargaining for of a work If you want to 00:24:12.240 --> 00:24:15.679 bargain with your employer, 00:24:13.960 --> 00:24:16.799 and there's lots of people like you out 00:24:15.679 --> 00:24:18.280 there, 00:24:16.799 --> 00:24:20.159 uh you're not going to have a lot of 00:24:18.279 --> 00:24:21.279 bargaining power. So, it's unlikely that 00:24:20.160 --> 00:24:22.960 you're going to come up with a very high 00:24:21.279 --> 00:24:23.839 wage, okay? 00:24:22.960 --> 00:24:25.440 Uh 00:24:23.839 --> 00:24:26.879 and it's also the other side of it is 00:24:25.440 --> 00:24:28.720 how hard it is for workers to find 00:24:26.880 --> 00:24:29.840 another job if they were to leave the 00:24:28.720 --> 00:24:31.160 firms. I mean, if you know that there 00:24:29.839 --> 00:24:34.279 are lots of jobs like the one you 00:24:31.160 --> 00:24:37.360 currently have out there which are not 00:24:34.279 --> 00:24:38.279 occupied, so there's empty vacant jobs, 00:24:37.359 --> 00:24:40.159 then you're probably going to have a 00:24:38.279 --> 00:24:41.559 much stronger hand with your employer 00:24:40.160 --> 00:24:43.120 because you can say, "Okay, if you don't 00:24:41.559 --> 00:24:44.759 pay me what I want, I move to the next 00:24:43.119 --> 00:24:46.199 door." Okay? 00:24:44.759 --> 00:24:47.879 And in terms of the macroeconomic 00:24:46.200 --> 00:24:49.720 variables we care about, 00:24:47.880 --> 00:24:52.720 a situation like that is very likely to 00:24:49.720 --> 00:24:53.640 happen when unemployment is very low. 00:24:52.720 --> 00:24:55.880 Okay? 00:24:53.640 --> 00:24:57.080 Because that means that other 00:24:55.880 --> 00:24:59.240 jobs 00:24:57.079 --> 00:25:00.399 are are unlikely to be filled 00:24:59.240 --> 00:25:01.679 because, you know, there there are lots 00:25:00.400 --> 00:25:03.759 of people looking for things, but it's 00:25:01.679 --> 00:25:06.280 difficult for the firms to find 00:25:03.759 --> 00:25:08.279 the workers, and therefore 00:25:06.279 --> 00:25:09.639 you're going to be a lot more attractive 00:25:08.279 --> 00:25:11.440 to that 00:25:09.640 --> 00:25:13.480 labor market. 00:25:11.440 --> 00:25:15.759 So, in summary, 00:25:13.480 --> 00:25:19.200 at the aggregate level, 00:25:15.759 --> 00:25:20.920 we can write a wage-setting equation 00:25:19.200 --> 00:25:22.440 of this form. 00:25:20.920 --> 00:25:23.800 So, the wage, and this is the nominal 00:25:22.440 --> 00:25:24.480 wage, 00:25:23.799 --> 00:25:26.879 uh 00:25:24.480 --> 00:25:30.079 can be written as an increasing function 00:25:26.880 --> 00:25:32.760 of expected price. 00:25:30.079 --> 00:25:34.159 Meaning, wages are not set in most 00:25:32.759 --> 00:25:35.799 professions, they're not set second 00:25:34.160 --> 00:25:37.240 second by second. You set them you know, 00:25:35.799 --> 00:25:40.159 you bargain for a wage, and so on, and 00:25:37.240 --> 00:25:41.559 that thing it sticks for a year or so, 00:25:40.160 --> 00:25:43.080 at least. 00:25:41.559 --> 00:25:45.799 Some Okay? 00:25:43.079 --> 00:25:47.960 Well, obviously, if you expect this 00:25:45.799 --> 00:25:49.879 inflation is zero, 00:25:47.960 --> 00:25:51.679 you know, you're going to demand a wage 00:25:49.880 --> 00:25:54.240 that is more or less 00:25:51.679 --> 00:25:56.720 what you need today. 00:25:54.240 --> 00:25:58.440 If inflation is 10%, 00:25:56.720 --> 00:26:00.839 you you say, "Well, I'm going to have to 00:25:58.440 --> 00:26:02.440 demand a higher wage because I have to 00:26:00.839 --> 00:26:04.480 live with this wage for a year, and 00:26:02.440 --> 00:26:07.080 prices are going to be rising while 00:26:04.480 --> 00:26:08.559 while I have this wage." And so so, if 00:26:07.079 --> 00:26:11.199 they expect lots of inflation, if they 00:26:08.559 --> 00:26:12.279 expect prices to be high in the future, 00:26:11.200 --> 00:26:14.640 they're going to ask for a higher 00:26:12.279 --> 00:26:16.720 nominal wage today because I'm going to 00:26:14.640 --> 00:26:18.480 have to live with that wage on average 00:26:16.720 --> 00:26:21.480 for the next uh 00:26:18.480 --> 00:26:22.559 year or so, okay? So, that's the first 00:26:21.480 --> 00:26:24.240 thing, and it's going to play an 00:26:22.559 --> 00:26:26.759 important role. It says wages are an 00:26:24.240 --> 00:26:28.880 increasing function on the price level 00:26:26.759 --> 00:26:30.879 workers expect. They expect a high price 00:26:28.880 --> 00:26:32.640 level in the future or during the life 00:26:30.880 --> 00:26:35.000 of the wage contract, then they 00:26:32.640 --> 00:26:36.480 obviously going to demand a higher wage. 00:26:35.000 --> 00:26:38.400 Other things equal. 00:26:36.480 --> 00:26:40.759 What are other things? Well, the the 00:26:38.400 --> 00:26:42.880 arguments of this function here. 00:26:40.759 --> 00:26:45.000 Unemployment. 00:26:42.880 --> 00:26:47.640 If I'm employed for any given expected 00:26:45.000 --> 00:26:49.079 price, if the unemployment rate is high, 00:26:47.640 --> 00:26:50.120 workers are going to demand a lower 00:26:49.079 --> 00:26:52.759 wage. 00:26:50.119 --> 00:26:52.759 Why is that? 00:26:57.480 --> 00:27:00.720 Because it's going to be um harder for 00:26:59.279 --> 00:27:02.200 them to find a job, so they have less 00:27:00.720 --> 00:27:04.440 bargaining power. They have less 00:27:02.200 --> 00:27:06.000 bargaining power, exactly, okay? 00:27:04.440 --> 00:27:07.920 Um so, they're going to like they're 00:27:06.000 --> 00:27:10.400 going to demand a lower wage. 00:27:07.920 --> 00:27:13.279 This variable Z here 00:27:10.400 --> 00:27:15.440 is a catch-all variable for 00:27:13.279 --> 00:27:17.559 a a strength workers' strength in the 00:27:15.440 --> 00:27:19.480 bargaining position situation, something 00:27:17.559 --> 00:27:20.039 like that. So, 00:27:19.480 --> 00:27:22.480 uh 00:27:20.039 --> 00:27:25.000 for example, uh 00:27:22.480 --> 00:27:26.920 this is things like uh employment 00:27:25.000 --> 00:27:28.160 protection laws. 00:27:26.920 --> 00:27:30.160 Okay? 00:27:28.160 --> 00:27:33.400 Firing costs. If it is difficult to fire 00:27:30.160 --> 00:27:35.679 someone, the Z will tend to be high. So, 00:27:33.400 --> 00:27:38.200 this only tells you that given the level 00:27:35.679 --> 00:27:40.800 of unemployment, if it is very hard to 00:27:38.200 --> 00:27:43.160 fire someone, wages workers are going to 00:27:40.799 --> 00:27:45.240 be willing to they're going to they're 00:27:43.160 --> 00:27:46.480 very likely to demand a higher wage. No, 00:27:45.240 --> 00:27:48.319 it's hard 00:27:46.480 --> 00:27:51.200 it's hard for you to fire me, 00:27:48.319 --> 00:27:53.599 I'm going to bargain harder for my wage, 00:27:51.200 --> 00:27:56.360 and this type of institutions 00:27:53.599 --> 00:27:59.039 institutional factors play a huge role 00:27:56.359 --> 00:28:01.279 in Europe, much more than in the US. 00:27:59.039 --> 00:28:01.279 Okay? 00:28:01.599 --> 00:28:04.359 Good. 00:28:02.319 --> 00:28:05.519 But, as a matter of a definition, we're 00:28:04.359 --> 00:28:07.959 going to say 00:28:05.519 --> 00:28:09.960 an increase in Z is Z is something that 00:28:07.960 --> 00:28:11.679 increases the bargaining power of 00:28:09.960 --> 00:28:13.600 workers. Okay? 00:28:11.679 --> 00:28:15.600 And therefore, for any given level of 00:28:13.599 --> 00:28:17.000 unemployment and expected prices, 00:28:15.599 --> 00:28:19.039 they're going to lead to a higher wage 00:28:17.000 --> 00:28:21.119 demand. This is the wage This is the 00:28:19.039 --> 00:28:22.599 workers' demand in a wage. 00:28:21.119 --> 00:28:24.119 We have to figure out what happens in 00:28:22.599 --> 00:28:28.000 equilibrium, but this is what the 00:28:24.119 --> 00:28:28.000 workers are demanding. Okay? 00:28:29.000 --> 00:28:33.519 Is it clear what we have here? 00:28:31.359 --> 00:28:33.519 Good. 00:28:36.200 --> 00:28:40.319 So, let's now move to the other side. 00:28:38.640 --> 00:28:42.440 Okay? So, that's one side of the 00:28:40.319 --> 00:28:44.079 scissor. We have the workers, and they 00:28:42.440 --> 00:28:45.679 given certain 00:28:44.079 --> 00:28:47.480 macroeconomic conditions summarized by 00:28:45.679 --> 00:28:50.159 the unemployment rate and expected 00:28:47.480 --> 00:28:51.919 prices, they demand certain wages. 00:28:50.159 --> 00:28:53.760 Now, we can't find equilibrium wage 00:28:51.919 --> 00:28:56.000 until we don't see the other side, what 00:28:53.759 --> 00:28:58.559 firms are willing to pay, and so on. So, 00:28:56.000 --> 00:29:00.400 we need to explore this other side. 00:28:58.559 --> 00:29:01.839 And the starting point of that other 00:29:00.400 --> 00:29:04.600 side 00:29:01.839 --> 00:29:05.839 is the production function, meaning 00:29:04.599 --> 00:29:07.439 you know, 00:29:05.839 --> 00:29:09.119 uh 00:29:07.440 --> 00:29:10.440 firms are going to end up setting prices 00:29:09.119 --> 00:29:12.839 for goods, 00:29:10.440 --> 00:29:14.000 but producing those goods will take 00:29:12.839 --> 00:29:16.119 factors of production. They're going to 00:29:14.000 --> 00:29:17.919 have to use something 00:29:16.119 --> 00:29:19.399 uh to produce that. 00:29:17.919 --> 00:29:20.960 And the cost of that something will 00:29:19.400 --> 00:29:23.200 determine, importantly, what is the 00:29:20.960 --> 00:29:25.759 price they end up charging. 00:29:23.200 --> 00:29:27.360 I'm going to simplify things a lot here. 00:29:25.759 --> 00:29:30.000 Uh I'm going to assume the production 00:29:27.359 --> 00:29:31.559 function is first linear and linear only 00:29:30.000 --> 00:29:32.679 on labor, so no other factors of 00:29:31.559 --> 00:29:33.599 production. 00:29:32.679 --> 00:29:36.080 Meaning, 00:29:33.599 --> 00:29:38.158 this says that to produce one unit of 00:29:36.079 --> 00:29:38.839 the aggregate good, 00:29:38.159 --> 00:29:41.440 uh 00:29:38.839 --> 00:29:43.359 you need well, 00:29:41.440 --> 00:29:44.919 this says that if you have if you add an 00:29:43.359 --> 00:29:46.559 extra worker 00:29:44.919 --> 00:29:48.200 uh uh, 00:29:46.559 --> 00:29:49.399 to the big production function of the 00:29:48.200 --> 00:29:51.440 economy, 00:29:49.400 --> 00:29:52.800 then you're going to get a more units of 00:29:51.440 --> 00:29:53.600 output. 00:29:52.799 --> 00:29:55.319 Okay? 00:29:53.599 --> 00:29:57.879 That's what this says. 00:29:55.319 --> 00:29:59.439 So, Y is output, the output we've been 00:29:57.880 --> 00:30:01.560 talking about, measured in the way we 00:29:59.440 --> 00:30:04.080 have been talking about and so on. 00:30:01.559 --> 00:30:05.759 N is employment, and A is labor 00:30:04.079 --> 00:30:06.759 productivity. That is the output per 00:30:05.759 --> 00:30:07.640 worker. 00:30:06.759 --> 00:30:08.879 Okay? 00:30:07.640 --> 00:30:10.120 I want to make things very simple. We're 00:30:08.880 --> 00:30:11.160 going to talk a lot about in the next 00:30:10.119 --> 00:30:13.519 part of the course, in the part of 00:30:11.160 --> 00:30:15.640 growth, about this A, what moves this A 00:30:13.519 --> 00:30:17.240 over time, what it does, and so on. 00:30:15.640 --> 00:30:19.280 But, but, 00:30:17.240 --> 00:30:22.079 I'm going to simplify things a lot here 00:30:19.279 --> 00:30:23.039 for now, and I'm going to set A equal to 00:30:22.079 --> 00:30:25.119 1. 00:30:23.039 --> 00:30:26.359 So, it doesn't get any simpler than this 00:30:25.119 --> 00:30:28.279 as a production function. This 00:30:26.359 --> 00:30:30.759 production function says, you want to 00:30:28.279 --> 00:30:33.200 produce one more good, you need one more 00:30:30.759 --> 00:30:33.200 worker. 00:30:33.279 --> 00:30:35.799 Okay? 00:30:34.359 --> 00:30:37.199 This is what this says. 00:30:35.799 --> 00:30:38.759 If you have 10 workers, you produce 10 00:30:37.200 --> 00:30:40.440 units of good. 00:30:38.759 --> 00:30:42.359 If you have 11 workers, you produce 11 00:30:40.440 --> 00:30:44.519 units of goods. Okay, so to produce one 00:30:42.359 --> 00:30:45.519 more unit of good, you need 00:30:44.519 --> 00:30:48.319 one 00:30:45.519 --> 00:30:48.319 worker more. 00:30:49.000 --> 00:30:53.839 Now, why do you think I'm 00:30:51.960 --> 00:30:56.039 I'm simplifying it so much and I'm right 00:30:53.839 --> 00:31:00.000 I'm even repeating this idea that one 00:30:56.039 --> 00:31:00.000 more worker, one more unit of good. 00:31:00.039 --> 00:31:04.480 That tells you that how much does it 00:31:01.880 --> 00:31:05.800 cost to the firm 00:31:04.480 --> 00:31:07.240 to the firm that has this production 00:31:05.799 --> 00:31:08.519 function 00:31:07.240 --> 00:31:12.079 to produce 00:31:08.519 --> 00:31:14.720 one extra unit of workers or 00:31:12.079 --> 00:31:15.720 one extra unit of goods? 00:31:14.720 --> 00:31:18.240 Well, you have to ask the question, 00:31:15.720 --> 00:31:19.160 well, what will the firm have to do? 00:31:18.240 --> 00:31:20.920 Well, 00:31:19.160 --> 00:31:22.960 the first So, suppose a firm wants to 00:31:20.920 --> 00:31:25.759 produce one more units of goods. What is 00:31:22.960 --> 00:31:25.759 it that it needs to do? 00:31:27.160 --> 00:31:32.200 It needs to hire another worker. How 00:31:28.920 --> 00:31:32.200 much will that cost? 00:31:36.720 --> 00:31:41.279 The wage. The wage. Exactly, no? So, now 00:31:39.400 --> 00:31:43.519 we're beginning to So, so this is the 00:31:41.279 --> 00:31:45.559 wage in this case is the cost per unit 00:31:43.519 --> 00:31:47.599 of production for this guy. So, 00:31:45.559 --> 00:31:49.599 the marginal cost of production for this 00:31:47.599 --> 00:31:51.639 firm is the wage. 00:31:49.599 --> 00:31:53.678 All the rest, intermediate inputs, is 00:31:51.640 --> 00:31:56.320 all summarized. This is value added. 00:31:53.679 --> 00:31:58.000 Built on something else. 00:31:56.319 --> 00:31:59.399 So, this production function, as simple 00:31:58.000 --> 00:32:01.599 as it is, says exactly that. The 00:31:59.400 --> 00:32:03.519 marginal cost of production is equal to 00:32:01.599 --> 00:32:05.000 the wage. 00:32:03.519 --> 00:32:06.799 So, assume that the wage that I'm going 00:32:05.000 --> 00:32:08.920 to So, now I'm going to come up with a 00:32:06.799 --> 00:32:11.440 pricing model, a price setting rule. So, 00:32:08.920 --> 00:32:13.240 firms that understand how much more it 00:32:11.440 --> 00:32:15.160 costs to produce an 00:32:13.240 --> 00:32:17.400 an extra unit of good, now have to 00:32:15.160 --> 00:32:20.720 decide the price they want to charge for 00:32:17.400 --> 00:32:20.720 that extra unit of the good. 00:32:20.799 --> 00:32:24.879 There's a lot that that comes into in 00:32:23.039 --> 00:32:27.480 that decision, but but we're going to 00:32:24.880 --> 00:32:28.760 summarize it with a markup. Very simple. 00:32:27.480 --> 00:32:30.440 We're going to say, "Look, 00:32:28.759 --> 00:32:33.599 the the firm will do the following. 00:32:30.440 --> 00:32:35.759 We'll say, "It cost me one worker to 00:32:33.599 --> 00:32:39.119 produce one one unit of 00:32:35.759 --> 00:32:41.759 extra of good. A worker cost me W, so my 00:32:39.119 --> 00:32:43.879 the price I want to charge is 1 + M, M 00:32:41.759 --> 00:32:46.559 is a positive number, times W." 00:32:43.880 --> 00:32:48.840 Okay? So, M is a number like 0.2. 00:32:46.559 --> 00:32:51.399 So, you pay 100 in in in the in the 00:32:48.839 --> 00:32:53.799 wage, then you're going to charge the 00:32:51.400 --> 00:32:56.080 And suppose the wage is 100, 00:32:53.799 --> 00:32:59.159 uh, if the markup is 20%, you're going 00:32:56.079 --> 00:33:01.599 to set a price of 120. 00:32:59.160 --> 00:33:05.040 Okay? That's the price setting rule 00:33:01.599 --> 00:33:07.759 that we're going to adopt, and again, 00:33:05.039 --> 00:33:10.159 it's not that crazy. 00:33:07.759 --> 00:33:12.559 Simple, but not that crazy. 00:33:10.160 --> 00:33:14.200 So, that's we call this the price 00:33:12.559 --> 00:33:16.240 setting equation. 00:33:14.200 --> 00:33:18.279 The firm takes the wage, because that's 00:33:16.240 --> 00:33:20.000 the marginal cost of production, 00:33:18.279 --> 00:33:22.160 and and then, 00:33:20.000 --> 00:33:24.200 uh, adds a markup, and that's the final 00:33:22.160 --> 00:33:25.840 price. 00:33:24.200 --> 00:33:28.799 Now, we can 00:33:25.839 --> 00:33:30.799 rewrite this price setting equation 00:33:28.799 --> 00:33:32.399 as a as a wage equation in the following 00:33:30.799 --> 00:33:34.799 sense. It's still a price setting 00:33:32.400 --> 00:33:37.759 equation, but this All that I've done 00:33:34.799 --> 00:33:41.559 here, no, is I divided by P and by one 00:33:37.759 --> 00:33:43.720 by P and 1 + M, and I get that the wage 00:33:41.559 --> 00:33:45.000 the the real wage the firm is willing to 00:33:43.720 --> 00:33:47.440 pay 00:33:45.000 --> 00:33:48.960 is equal to 1 over 1 + the markup. 00:33:47.440 --> 00:33:50.759 That's another way of saying it. It's 00:33:48.960 --> 00:33:53.240 the same, huh? I took this price setting 00:33:50.759 --> 00:33:55.279 equation, and I just rewrote it. 00:33:53.240 --> 00:33:56.759 I rewrote it this way because then, you 00:33:55.279 --> 00:33:59.160 know, I had when I look at the wage 00:33:56.759 --> 00:34:01.720 setting equation, I also wrote it that 00:33:59.160 --> 00:34:03.519 that way, W over something. I want to 00:34:01.720 --> 00:34:06.200 write the price setting equation in the 00:34:03.519 --> 00:34:08.039 same sort of units as as my wage setting 00:34:06.200 --> 00:34:10.800 equation, so then I can use that one 00:34:08.039 --> 00:34:12.878 diagram, put them together easily, 00:34:10.800 --> 00:34:15.480 and and find an 00:34:12.878 --> 00:34:16.440 an equilibrium of something. 00:34:15.480 --> 00:34:18.679 Okay? 00:34:16.440 --> 00:34:21.800 So, what you see here is, for example, 00:34:18.679 --> 00:34:23.440 is that the higher is the markup, 00:34:21.800 --> 00:34:25.800 the lower is the real wage the firm is 00:34:23.440 --> 00:34:26.878 willing to offer. 00:34:25.800 --> 00:34:28.240 You see that? 00:34:26.878 --> 00:34:29.759 They have And this is an equilibrium at 00:34:28.239 --> 00:34:31.839 the level of the economy. It's not you 00:34:29.760 --> 00:34:33.040 individually, but on average, that's 00:34:31.840 --> 00:34:35.720 what ends up happening. If firms on 00:34:33.039 --> 00:34:37.358 average end up charging a higher markup, 00:34:35.719 --> 00:34:39.759 it has to be the case 00:34:37.358 --> 00:34:42.960 that in equilibrium, the real wage 00:34:39.760 --> 00:34:44.720 offered by the firms is lower. 00:34:42.960 --> 00:34:45.960 That's what this says. 00:34:44.719 --> 00:34:47.678 Okay? 00:34:45.960 --> 00:34:49.398 So, if we're in a situation where the 00:34:47.679 --> 00:34:51.639 markup was zero, 00:34:49.398 --> 00:34:53.719 and now all of the sudden, because of 00:34:51.639 --> 00:34:56.039 imperfect competition or perhaps the 00:34:53.719 --> 00:34:57.679 some price of a key input went up and 00:34:56.039 --> 00:34:58.639 it's not really measuring value added or 00:34:57.679 --> 00:34:59.480 whatever, 00:34:58.639 --> 00:35:00.358 uh, 00:34:59.480 --> 00:35:03.719 uh, 00:35:00.358 --> 00:35:05.440 if the markup goes to to to one, 00:35:03.719 --> 00:35:06.679 then the real wage in equilibrium will 00:35:05.440 --> 00:35:09.079 fall 00:35:06.679 --> 00:35:10.960 to half what it used to be. 00:35:09.079 --> 00:35:13.159 That's what this question That's what 00:35:10.960 --> 00:35:14.400 the firms will offer. 00:35:13.159 --> 00:35:15.599 Whether that's an equilibrium or not, we 00:35:14.400 --> 00:35:17.039 shall see. 00:35:15.599 --> 00:35:18.679 Or how do we get to that to be an 00:35:17.039 --> 00:35:20.000 equilibrium, we shall see. 00:35:18.679 --> 00:35:21.440 But that's what the firms will offer. 00:35:20.000 --> 00:35:22.239 That's what the price setting equation 00:35:21.440 --> 00:35:23.280 says. 00:35:22.239 --> 00:35:25.159 In fact, 00:35:23.280 --> 00:35:27.560 you already know from this equation that 00:35:25.159 --> 00:35:29.199 that's what the real wage will be, 00:35:27.559 --> 00:35:31.599 because there's no variable here that 00:35:29.199 --> 00:35:32.879 can adjust to that. 00:35:31.599 --> 00:35:34.799 What happens is something else will have 00:35:32.880 --> 00:35:37.440 to give in the economy, so this ends up 00:35:34.800 --> 00:35:39.400 being the equilibrium wage. Okay? But 00:35:37.440 --> 00:35:40.880 you'll understand that a little later. 00:35:39.400 --> 00:35:43.200 Or you'll understand it better a little 00:35:40.880 --> 00:35:43.200 later. 00:35:43.519 --> 00:35:49.199 Okay. So, now we're almost ready to come 00:35:47.039 --> 00:35:52.440 up with to discuss a very important 00:35:49.199 --> 00:35:54.079 concept in macroeconomics. 00:35:52.440 --> 00:35:56.920 And that's the concept of the natural 00:35:54.079 --> 00:35:59.079 rate of unemployment. 00:35:56.920 --> 00:36:01.200 Now, the first warning is that there's 00:35:59.079 --> 00:36:03.719 nothing natural about the natural rate 00:36:01.199 --> 00:36:05.439 of unemployment. It's not sort of, you 00:36:03.719 --> 00:36:06.559 know, something that God gave us or 00:36:05.440 --> 00:36:07.960 anything like that. 00:36:06.559 --> 00:36:10.480 Okay? 00:36:07.960 --> 00:36:12.960 I'll say, for us, 00:36:10.480 --> 00:36:15.000 and and what typically means the natural 00:36:12.960 --> 00:36:18.000 rate of unemployment, 00:36:15.000 --> 00:36:20.039 simply means what I wrote there, 00:36:18.000 --> 00:36:22.079 which is that employment that takes 00:36:20.039 --> 00:36:24.279 place when the 00:36:22.079 --> 00:36:26.239 expected price is equal to actual 00:36:24.280 --> 00:36:27.160 prices. 00:36:26.239 --> 00:36:29.639 Okay? 00:36:27.159 --> 00:36:31.879 That's what we'll define for this 00:36:29.639 --> 00:36:33.400 class, for this course, we'll define the 00:36:31.880 --> 00:36:35.440 natural rate of unemployment. The 00:36:33.400 --> 00:36:37.880 natural rate of unemployment is when the 00:36:35.440 --> 00:36:39.639 expected price is equal to P. 00:36:37.880 --> 00:36:40.599 That's what we mean. If I we ask you any 00:36:39.639 --> 00:36:41.759 question about the natural rate of 00:36:40.599 --> 00:36:43.719 unemployment, 00:36:41.760 --> 00:36:44.920 we don't mean that that's what is good, 00:36:43.719 --> 00:36:47.199 that that's what is bad, that that's 00:36:44.920 --> 00:36:49.960 what God decided or someone else decided 00:36:47.199 --> 00:36:51.559 or whatever. This is all that it means 00:36:49.960 --> 00:36:53.960 is that in any equation where you have 00:36:51.559 --> 00:36:55.960 P, you can stick in P, and then solve 00:36:53.960 --> 00:36:57.679 for equilibrium, and that the employment 00:36:55.960 --> 00:37:00.559 rate that comes from that is what we 00:36:57.679 --> 00:37:03.599 call the natural rate of unemployment. 00:37:00.559 --> 00:37:06.279 Because of this, you can also think of 00:37:03.599 --> 00:37:07.719 that unemployment rate as a sort of 00:37:06.280 --> 00:37:09.480 as a good 00:37:07.719 --> 00:37:11.839 proxy for what is likely to be the 00:37:09.480 --> 00:37:14.880 average rate of unemployment of an 00:37:11.840 --> 00:37:16.680 economy over a longer period of time. 00:37:14.880 --> 00:37:17.960 You know, because people are unlikely to 00:37:16.679 --> 00:37:19.358 be fooled all the time in the same 00:37:17.960 --> 00:37:20.760 direction. So, sometimes they're going 00:37:19.358 --> 00:37:22.559 to expect a higher price than it is, 00:37:20.760 --> 00:37:24.680 sometimes it's a lower, and so on. On 00:37:22.559 --> 00:37:26.199 average, unless there's something very 00:37:24.679 --> 00:37:28.239 weird going on, they're going to get it 00:37:26.199 --> 00:37:29.559 right. But because you know what more or 00:37:28.239 --> 00:37:31.199 less what the level of inflation of the 00:37:29.559 --> 00:37:32.599 economy is, sometimes you'll miss up, 00:37:31.199 --> 00:37:34.519 sometimes you'll miss down, but on 00:37:32.599 --> 00:37:35.719 average, you're going to be right if you 00:37:34.519 --> 00:37:36.960 if you take an average over a long 00:37:35.719 --> 00:37:38.039 period of time. 00:37:36.960 --> 00:37:39.840 So, for that reason, you can also 00:37:38.039 --> 00:37:42.000 interpret this natural rate of 00:37:39.840 --> 00:37:43.640 unemployment as an employment rate of 00:37:42.000 --> 00:37:45.599 the medium run, if you will. So, when 00:37:43.639 --> 00:37:46.839 you have collected enough data, 00:37:45.599 --> 00:37:48.519 positive errors are balanced with 00:37:46.840 --> 00:37:50.039 negative errors, and so on. 00:37:48.519 --> 00:37:51.119 Okay? 00:37:50.039 --> 00:37:53.400 But that's all that we mean by the 00:37:51.119 --> 00:37:54.358 natural rate of unemployment. 00:37:53.400 --> 00:37:57.000 Okay? 00:37:54.358 --> 00:37:59.400 Now, notice that with this assumption 00:37:57.000 --> 00:38:02.039 that PE is equal to P, I can go back to 00:37:59.400 --> 00:38:05.000 my wage setting equation, which was W 00:38:02.039 --> 00:38:06.960 over PE equal to F dot. I think it I 00:38:05.000 --> 00:38:08.599 don't remember where I divided by P, but 00:38:06.960 --> 00:38:11.079 I had PE there. 00:38:08.599 --> 00:38:13.759 I'm going to divide by P both sides, 00:38:11.079 --> 00:38:15.519 and then I'm going to set PE equal to P, 00:38:13.760 --> 00:38:18.320 and now I have that my wage setting 00:38:15.519 --> 00:38:20.000 equation can be written this way, and 00:38:18.320 --> 00:38:21.400 notice that that employment rate I put 00:38:20.000 --> 00:38:22.599 here is the N. 00:38:21.400 --> 00:38:24.559 And it's the natural rate of 00:38:22.599 --> 00:38:26.799 unemployment. 00:38:24.559 --> 00:38:28.599 Because once I get in a model in which 00:38:26.800 --> 00:38:29.960 you assume that P is equal to P, that 00:38:28.599 --> 00:38:32.799 employment rate that comes out of that 00:38:29.960 --> 00:38:34.358 is a natural rate of unemployment. 00:38:32.800 --> 00:38:36.000 Okay? That's That's all that it just 00:38:34.358 --> 00:38:38.199 means. It says, "Okay, 00:38:36.000 --> 00:38:39.800 you allow me to to replace PE by P, 00:38:38.199 --> 00:38:41.279 well, then I can call my unemployment 00:38:39.800 --> 00:38:43.880 rate here the natural rate of 00:38:41.280 --> 00:38:43.880 unemployment." 00:38:46.920 --> 00:38:50.240 And it has lots of names. It's the 00:38:48.599 --> 00:38:53.400 natural rate, the structural rate of 00:38:50.239 --> 00:38:53.399 unemployment, and so on. 00:38:54.679 --> 00:38:58.559 Now, what this tells you, 00:38:56.960 --> 00:39:00.800 I mean, you can see the slope of this 00:38:58.559 --> 00:39:02.320 function. 00:39:00.800 --> 00:39:04.920 If the natural rate of unemployment is 00:39:02.320 --> 00:39:07.080 higher in this economy, 00:39:04.920 --> 00:39:09.480 what is the real wage that comes from 00:39:07.079 --> 00:39:11.679 the wage setting equation? 00:39:09.480 --> 00:39:13.639 Lower. 00:39:11.679 --> 00:39:15.399 curve in the space of wages to real 00:39:13.639 --> 00:39:17.159 wages to unemployment. 00:39:15.400 --> 00:39:18.840 to the natural rate of unemployment. 00:39:17.159 --> 00:39:20.399 It's a downward sloping curve for the 00:39:18.840 --> 00:39:22.880 reasons we discussed before, bargaining 00:39:20.400 --> 00:39:25.519 power, and so on. Okay? 00:39:22.880 --> 00:39:28.160 So, I can put together, remember the the 00:39:25.519 --> 00:39:30.199 price setting equation led me to also an 00:39:28.159 --> 00:39:32.000 equation of the real wage, which was not 00:39:30.199 --> 00:39:33.239 a function of anything. It was only a 00:39:32.000 --> 00:39:34.800 function of parameters. So, that's a 00:39:33.239 --> 00:39:36.839 horizontal 00:39:34.800 --> 00:39:38.039 curve in the space of real wages and 00:39:36.840 --> 00:39:40.240 unemployment, natural rate of 00:39:38.039 --> 00:39:41.679 unemployment. Here, we have a downward 00:39:40.239 --> 00:39:44.359 sloping curve, 00:39:41.679 --> 00:39:46.480 and the intersection of these two curves 00:39:44.360 --> 00:39:47.400 is the natural rate of unemployment. 00:39:46.480 --> 00:39:49.719 Okay? 00:39:47.400 --> 00:39:52.400 So, this was the price setting relation. 00:39:49.719 --> 00:39:56.159 Remember, it's 1 over 1 plus M. 00:39:52.400 --> 00:39:56.960 This is the wage setting equation. 00:39:56.159 --> 00:39:58.920 Uh 00:39:56.960 --> 00:40:00.720 with the assumption that PE is equal to 00:39:58.920 --> 00:40:03.320 P. 00:40:00.719 --> 00:40:04.719 And that's the natural rate of 00:40:03.320 --> 00:40:05.800 unemployment. 00:40:04.719 --> 00:40:07.159 And here you can understand what I said 00:40:05.800 --> 00:40:09.039 before is that 00:40:07.159 --> 00:40:11.519 you see, in this economy 00:40:09.039 --> 00:40:13.480 the real wage, because this price 00:40:11.519 --> 00:40:15.800 setting equation is flat in the simple 00:40:13.480 --> 00:40:17.440 economy, the real wage is pinned down by 00:40:15.800 --> 00:40:19.760 the firm. 00:40:17.440 --> 00:40:23.559 By the firms collectively. 00:40:19.760 --> 00:40:25.080 And not collectively in an oligopolistic 00:40:23.559 --> 00:40:26.360 way. It's, you know, it's what happens 00:40:25.079 --> 00:40:27.039 in equilibrium. 00:40:26.360 --> 00:40:29.400 Uh 00:40:27.039 --> 00:40:30.480 it's set by that, but the equilibrium 00:40:29.400 --> 00:40:32.440 unemployment natural rate of 00:40:30.480 --> 00:40:34.679 unemployment is intersection of that 00:40:32.440 --> 00:40:39.000 real wage set by the firms 00:40:34.679 --> 00:40:39.000 and the wage setting relationship. 00:40:40.400 --> 00:40:43.320 So, what happens 00:40:43.360 --> 00:40:48.720 in a to a point say to the right? 00:40:46.719 --> 00:40:51.839 What happens in this point here? 00:40:48.719 --> 00:40:51.839 What is the situation we have? 00:40:57.599 --> 00:41:00.920 Well, 00:40:58.519 --> 00:41:03.159 at that high level of unemployment 00:41:00.920 --> 00:41:04.680 workers are willing to work for much 00:41:03.159 --> 00:41:07.000 lower real wages than the firms are 00:41:04.679 --> 00:41:07.000 offering. 00:41:07.159 --> 00:41:10.079 Okay? 00:41:08.559 --> 00:41:11.360 This is what workers at this level of 00:41:10.079 --> 00:41:12.480 unemployment, very high level of 00:41:11.360 --> 00:41:14.640 unemployment 00:41:12.480 --> 00:41:17.519 workers would be fine with this. 00:41:14.639 --> 00:41:18.639 Firms are paying that. 00:41:17.519 --> 00:41:19.960 Okay? 00:41:18.639 --> 00:41:21.279 So, 00:41:19.960 --> 00:41:23.159 unemployment is very likely to be 00:41:21.280 --> 00:41:25.200 falling because workers are not 00:41:23.159 --> 00:41:26.399 demanding a lot and and and firms, you 00:41:25.199 --> 00:41:28.319 know, are going to hire all these 00:41:26.400 --> 00:41:30.559 workers back. 00:41:28.320 --> 00:41:32.720 The opposite here. 00:41:30.559 --> 00:41:34.360 If here workers are demanding a wage 00:41:32.719 --> 00:41:36.359 that is much higher than firms are 00:41:34.360 --> 00:41:37.680 willing to pay. 00:41:36.360 --> 00:41:39.000 Well, that's likely to lead to more 00:41:37.679 --> 00:41:41.039 unemployment because firms are going to 00:41:39.000 --> 00:41:43.280 be very reluctant to hire 00:41:41.039 --> 00:41:45.000 uh these very expensive workers. 00:41:43.280 --> 00:41:47.920 Okay? So, that's going to build 00:41:45.000 --> 00:41:49.840 unemployment in this direction. 00:41:47.920 --> 00:41:51.159 Good. So, that's 00:41:49.840 --> 00:41:52.720 that's the natural rate of unemployment. 00:41:51.159 --> 00:41:54.079 Again, nothing natural about it. It's 00:41:52.719 --> 00:41:56.000 the equilibrium when you assume the 00:41:54.079 --> 00:41:58.239 expected price is equal to 00:41:56.000 --> 00:42:00.440 uh price. So, there are some important 00:41:58.239 --> 00:42:02.439 parameters in this diagram here. 00:42:00.440 --> 00:42:04.000 One is this M. 00:42:02.440 --> 00:42:06.639 The markup. That's a parameter, very 00:42:04.000 --> 00:42:09.000 important markup here. To So, see, 00:42:06.639 --> 00:42:11.799 if the markup changes the natural rate 00:42:09.000 --> 00:42:13.320 of unemployment will change. 00:42:11.800 --> 00:42:14.640 There's another set of parameters here 00:42:13.320 --> 00:42:17.200 which is 00:42:14.639 --> 00:42:18.319 Z. We took as given the institution that 00:42:17.199 --> 00:42:19.799 protect 00:42:18.320 --> 00:42:22.880 the bargaining power of workers 00:42:19.800 --> 00:42:25.240 institutions, supporting institutions. 00:42:22.880 --> 00:42:26.599 The Z. That's a parameter here. If that 00:42:25.239 --> 00:42:28.799 changes, the natural rate of 00:42:26.599 --> 00:42:31.159 unemployment will change. 00:42:28.800 --> 00:42:32.240 Which is again something that confirms 00:42:31.159 --> 00:42:34.759 there's nothing natural about the 00:42:32.239 --> 00:42:36.719 natural rate of unemployment. 00:42:34.760 --> 00:42:39.160 So, let me just do it in equations very 00:42:36.719 --> 00:42:39.759 quickly and then and then 00:42:39.159 --> 00:42:41.279 uh 00:42:39.760 --> 00:42:43.520 I'll do a 00:42:41.280 --> 00:42:45.840 a couple of important shifts. 00:42:43.519 --> 00:42:47.920 Uh so, in terms of equation, all that I 00:42:45.840 --> 00:42:49.680 did is say, "Look, the wage wage setting 00:42:47.920 --> 00:42:51.039 equation the price setting equation 00:42:49.679 --> 00:42:53.480 gives us that. 00:42:51.039 --> 00:42:55.320 The wage setting equation gives us that. 00:42:53.480 --> 00:42:56.800 Therefore, that equal to that. That's 00:42:55.320 --> 00:42:58.800 the point we found. That's the natural 00:42:56.800 --> 00:43:00.680 rate of unemployment." Okay? 00:42:58.800 --> 00:43:02.400 So, from here 00:43:00.679 --> 00:43:03.759 that's when the two are equal. This is 00:43:02.400 --> 00:43:05.800 what's the flat curve. This is what's 00:43:03.760 --> 00:43:07.400 the downward sloping curve. Well, these 00:43:05.800 --> 00:43:08.560 two are equal 00:43:07.400 --> 00:43:11.079 uh 00:43:08.559 --> 00:43:12.079 when these two things are equal. Okay? 00:43:11.079 --> 00:43:13.279 And that's where you get there. So, from 00:43:12.079 --> 00:43:15.759 there you solve the natural rate of 00:43:13.280 --> 00:43:17.120 unemployment. 00:43:15.760 --> 00:43:21.320 What do you think happens to the natural 00:43:17.119 --> 00:43:21.319 rate of unemployment if Z goes up? 00:43:23.599 --> 00:43:28.239 Let's just be very mechanical at this 00:43:25.239 --> 00:43:30.000 point. Just math. 00:43:28.239 --> 00:43:33.559 If Z goes up 00:43:30.000 --> 00:43:33.559 what what happens to F? 00:43:36.719 --> 00:43:42.079 Goes up, no? If Z was positive. 00:43:40.119 --> 00:43:43.759 Well, the right hand side hasn't gone 00:43:42.079 --> 00:43:46.360 up. 00:43:43.760 --> 00:43:48.280 So, this went up. 00:43:46.360 --> 00:43:50.000 Something has to give, so F comes back 00:43:48.280 --> 00:43:51.680 down. 00:43:50.000 --> 00:43:53.639 And the only thing that can give, the 00:43:51.679 --> 00:43:54.519 only thing is endogenous in that picture 00:43:53.639 --> 00:43:56.039 there is the natural rate of 00:43:54.519 --> 00:43:58.199 unemployment. 00:43:56.039 --> 00:44:00.119 So, if Z goes up, F goes up. Well, I 00:43:58.199 --> 00:44:03.679 need to bring F back down because the 00:44:00.119 --> 00:44:03.679 right hand side hasn't given an inch. 00:44:03.920 --> 00:44:10.000 So, what do I have to do to natural rate 00:44:06.000 --> 00:44:10.000 of unemployment for F to come back down? 00:44:10.079 --> 00:44:13.559 Price, no? Because that's what will 00:44:11.760 --> 00:44:15.640 weaken bargaining power. 00:44:13.559 --> 00:44:17.239 Workers bargaining power got stronger 00:44:15.639 --> 00:44:18.839 because increasing Z, well, I have to 00:44:17.239 --> 00:44:21.039 weaken it some. I don't have to 00:44:18.840 --> 00:44:22.960 Equilibrium will weaken it somehow 00:44:21.039 --> 00:44:24.800 so that we end up in the same situation 00:44:22.960 --> 00:44:26.960 with the same real wage that we had 00:44:24.800 --> 00:44:28.120 before, which was equal to 1 over 1 plus 00:44:26.960 --> 00:44:31.440 M. 00:44:28.119 --> 00:44:34.319 What happens if M goes up? 00:44:31.440 --> 00:44:37.079 Well, if M goes up markups go up. That 00:44:34.320 --> 00:44:37.680 means firms real wage 00:44:37.079 --> 00:44:41.599 uh 00:44:37.679 --> 00:44:44.159 the real wage firms offer drops. 00:44:41.599 --> 00:44:46.079 So, I need If this right hand side 00:44:44.159 --> 00:44:48.358 drops, then I need the left hand side to 00:44:46.079 --> 00:44:49.799 drop drop as well. 00:44:48.358 --> 00:44:50.880 And the only thing that is endogenous 00:44:49.800 --> 00:44:52.880 here is the natural rate of 00:44:50.880 --> 00:44:55.519 unemployment. 00:44:52.880 --> 00:44:59.200 So, I know that I need to but to drop F, 00:44:55.519 --> 00:44:59.199 what do I need to do to UN? 00:44:59.320 --> 00:45:04.280 So, I need to bring F down. And the only 00:45:02.358 --> 00:45:06.159 tool you have, it's not a tool, but in 00:45:04.280 --> 00:45:08.880 equilibrium everything that will 00:45:06.159 --> 00:45:10.960 can change here is UN. 00:45:08.880 --> 00:45:12.680 It will 00:45:10.960 --> 00:45:14.119 It will increase UN. 00:45:12.679 --> 00:45:15.559 Because that will reduce bargaining 00:45:14.119 --> 00:45:17.440 power of workers and that will reduce 00:45:15.559 --> 00:45:18.960 their their real wage demand and 00:45:17.440 --> 00:45:19.800 therefore you restore equilibrium that 00:45:18.960 --> 00:45:21.320 way. 00:45:19.800 --> 00:45:23.800 So, this environment is a very nasty 00:45:21.320 --> 00:45:24.920 environment for workers in a sense, no? 00:45:23.800 --> 00:45:27.840 Because 00:45:24.920 --> 00:45:30.320 it's always the the scapegoat is is the 00:45:27.840 --> 00:45:32.280 natural rate of unemployment. 00:45:30.320 --> 00:45:34.519 So, here you have what I just said in in 00:45:32.280 --> 00:45:36.359 pictures. So, that's the example of Z 00:45:34.519 --> 00:45:38.559 going up. 00:45:36.358 --> 00:45:39.960 Bargaining power of workers going up. 00:45:38.559 --> 00:45:42.079 So, suppose you start at an at an 00:45:39.960 --> 00:45:45.199 equilibrium like this. 00:45:42.079 --> 00:45:47.599 And now and now Z goes up. 00:45:45.199 --> 00:45:50.319 Well, that means that workers for any 00:45:47.599 --> 00:45:52.599 given level of unemployment natural rate 00:45:50.320 --> 00:45:55.280 of unemployment want a higher wage. 00:45:52.599 --> 00:45:57.480 Because they have more bargaining power. 00:45:55.280 --> 00:46:00.240 Well, that higher wage is inconsistent 00:45:57.480 --> 00:46:01.639 with the wage that firms want to pay. 00:46:00.239 --> 00:46:02.919 What restores equilibrium is 00:46:01.639 --> 00:46:05.279 unemployment the natural rate of 00:46:02.920 --> 00:46:08.000 unemployment goes up 00:46:05.280 --> 00:46:10.400 enough so that the wage demand sort of 00:46:08.000 --> 00:46:12.320 comes down to the same original level 00:46:10.400 --> 00:46:13.840 because this this price setting equation 00:46:12.320 --> 00:46:14.640 is completely flat. 00:46:13.840 --> 00:46:16.640 Okay? 00:46:14.639 --> 00:46:19.039 So, there you have a a situation where 00:46:16.639 --> 00:46:21.199 bargaining power of workers went up. 00:46:19.039 --> 00:46:23.400 And all that ended up happening is is 00:46:21.199 --> 00:46:25.439 that in the medium run at least 00:46:23.400 --> 00:46:27.079 that the natural rate of unemployment 00:46:25.440 --> 00:46:29.159 went up. 00:46:27.079 --> 00:46:30.480 That's very much the story of Europe, by 00:46:29.159 --> 00:46:32.480 the way. 00:46:30.480 --> 00:46:34.039 In the '80s, France in particular. In 00:46:32.480 --> 00:46:35.240 France they sort of made your labor 00:46:34.039 --> 00:46:38.159 reforms 00:46:35.239 --> 00:46:39.439 Z boosting, if you will, in the 1980s. 00:46:38.159 --> 00:46:41.399 Initially it was a great deal for 00:46:39.440 --> 00:46:42.720 workers. Real wages went up and so on. 00:46:41.400 --> 00:46:44.320 It was wonderful. 00:46:42.719 --> 00:46:46.439 But eventually with the passage of time 00:46:44.320 --> 00:46:48.039 they end up just with a much higher real 00:46:46.440 --> 00:46:49.440 not a much higher real wage, but a much 00:46:48.039 --> 00:46:52.639 higher real 00:46:49.440 --> 00:46:55.280 unemployment rate. Okay? They went from 00:46:52.639 --> 00:46:57.719 uh single digit lows in the digits to, 00:46:55.280 --> 00:46:59.480 you know, 15% unemployment rates and 00:46:57.719 --> 00:47:00.639 things like that. And since then they 00:46:59.480 --> 00:47:02.519 have been sort of 00:47:00.639 --> 00:47:03.920 reforming the labor market to fix some 00:47:02.519 --> 00:47:06.079 of that. But 00:47:03.920 --> 00:47:08.358 but that's that's that was very much 00:47:06.079 --> 00:47:10.719 what happened in continental Europe 00:47:08.358 --> 00:47:12.719 in the '80s. 00:47:10.719 --> 00:47:15.358 This is the case of a markup increase. 00:47:12.719 --> 00:47:18.399 It's the other one I described, no? So, 00:47:15.358 --> 00:47:20.079 uh if if markups go up 00:47:18.400 --> 00:47:22.519 then initially that means firms in 00:47:20.079 --> 00:47:24.639 equilibrium are not willing to pay real 00:47:22.519 --> 00:47:27.280 wages uh 00:47:24.639 --> 00:47:28.679 they they want to pay a lower real wage. 00:47:27.280 --> 00:47:30.519 Well, at this level of unemployment 00:47:28.679 --> 00:47:31.480 workers are not going to take it. 00:47:30.519 --> 00:47:32.880 The only thing that will restore 00:47:31.480 --> 00:47:35.400 equilibrium is that the natural rate of 00:47:32.880 --> 00:47:37.000 unemployment goes up. That weakens 00:47:35.400 --> 00:47:38.720 the hand of workers. 00:47:37.000 --> 00:47:40.519 And you end up 00:47:38.719 --> 00:47:42.000 uh with this. And again, there's nothing 00:47:40.519 --> 00:47:44.039 natural about this. I'm not saying this 00:47:42.000 --> 00:47:46.440 is good, bad. I have no idea why the 00:47:44.039 --> 00:47:48.199 markups went up. If it is just imperfect 00:47:46.440 --> 00:47:49.400 competition going up, that's clearly not 00:47:48.199 --> 00:47:51.039 a good thing. 00:47:49.400 --> 00:47:52.800 Uh but it may have been something else. 00:47:51.039 --> 00:47:55.159 The price of oil went up a lot. I don't 00:47:52.800 --> 00:47:57.039 know. Uh was a war somewhere and then 00:47:55.159 --> 00:47:58.559 productivity came down. So, something of 00:47:57.039 --> 00:48:00.440 that kind. 00:47:58.559 --> 00:48:01.799 So, I don't know what did it. But but 00:48:00.440 --> 00:48:03.599 the only thing I'm describing here is 00:48:01.800 --> 00:48:05.840 the mechanics. 00:48:03.599 --> 00:48:05.839 Okay? 00:48:06.320 --> 00:48:09.400 Good. 00:48:08.039 --> 00:48:10.039 So, 00:48:09.400 --> 00:48:11.760 uh 00:48:10.039 --> 00:48:14.440 the quiz is up to here. 00:48:11.760 --> 00:48:15.720 Right? So, the the quiz ends here. 00:48:14.440 --> 00:48:17.320 Okay? 00:48:15.719 --> 00:48:19.319 Uh in the next lecture we're going to 00:48:17.320 --> 00:48:21.320 learn I'm going to start the Phillips 00:48:19.320 --> 00:48:22.640 curve, which is now 00:48:21.320 --> 00:48:24.440 using this model, but looking at 00:48:22.639 --> 00:48:26.440 deviations, situations where the price 00:48:24.440 --> 00:48:28.880 is not equal to expected price or 00:48:26.440 --> 00:48:31.000 expected price is not equal to to 00:48:28.880 --> 00:48:33.079 to the actual price. And and that's 00:48:31.000 --> 00:48:33.960 going to lead to interesting situations. 00:48:33.079 --> 00:48:35.039 Uh 00:48:33.960 --> 00:48:36.599 and there we're going to be talking 00:48:35.039 --> 00:48:38.358 about inflation. Here this is not a 00:48:36.599 --> 00:48:39.679 model to talk about inflation. I'm 00:48:38.358 --> 00:48:42.039 talking about what happens in the medium 00:48:39.679 --> 00:48:43.759 run. I haven't told you whether 00:48:42.039 --> 00:48:45.880 adjustment happens through the nominal 00:48:43.760 --> 00:48:47.920 wage, through the prices, or what. I 00:48:45.880 --> 00:48:50.320 mean, there are many ways of 00:48:47.920 --> 00:48:51.920 reaching the same real wage. 00:48:50.320 --> 00:48:54.000 You know, you could have it 00:48:51.920 --> 00:48:55.920 uh you could you could lower real real 00:48:54.000 --> 00:48:59.960 wages by increasing 00:48:55.920 --> 00:49:00.760 wages by 50% and prices by 60, say. 00:48:59.960 --> 00:49:02.358 No? 00:49:00.760 --> 00:49:04.720 Or you could do it by, you know, 00:49:02.358 --> 00:49:06.319 lowering nominal wages by 10 and not 00:49:04.719 --> 00:49:07.439 moving prices. So, there are many ways 00:49:06.320 --> 00:49:08.760 of doing it. The Phillips curve doesn't 00:49:07.440 --> 00:49:10.358 allow us to 00:49:08.760 --> 00:49:12.480 to get into that part. But it's not 00:49:10.358 --> 00:49:14.239 going to be part of your quiz. The quiz 00:49:12.480 --> 00:49:15.840 that's going to be part of of the second 00:49:14.239 --> 00:49:16.959 quiz. So, in the next lecture we're 00:49:15.840 --> 00:49:19.240 going to talk about the Phillips curve 00:49:16.960 --> 00:49:22.800 and then on Wednesday a review and 00:49:19.239 --> 00:49:22.799 and then you have your quiz. Okay?