Labor Market

Recall IS-LM model, there are several pitfalls:

• No labor market in IS-LM model (only goods market and financial market). Job Report from Dept. of Labor

• No too much discussion on general price level or inflation. Monthly Inflation

However, unemployment, wage and inflation play key roles in modern economy, especially for policy-makers. Wage vs Inflation

Labor Market

Let’s extend our analysis from short run to medium run, and start from labor market:

• Workers are typically paid a wage that exceeds their reservation wage, the wage that would make them indifferent between working or being unemployed.

• Wages typically depend on labor market conditions. The lower the unemployment rate, the higher the wages.

• Bargaining power:

• How much bargaining power a worker has depends first on the nature of the job. Unionize Amazon Workers

• How much bargaining power a worker has also depends on labor market condition.

  • When the unemployment rate is low, it is more difficult for firms to find qualified replacement workers. Labor Shortage

  • When the unemployment rate is high, finding another job is harder for workers.

• Economists call the theories that link productivity and efficiency of workers to the wage as efficiency wage theories.

  • Firms - such as high-tech firms - that see employee morale and commitment as essential to the quality of their work will pay more than firms in sectors where workers’ activities are more routine. Glassdoor