Labor Market Analysis and Economic Growth
How much labor do firms want to use?
Assumptions Hold capital stock fixed—short-run analysis. Workers are all alike, the labor market is competitive, and firms maximize profits. Analysis at the margin: costs and benefits of hiring one extra worker. If real wage (w) > marginal product of labor (MPN), profit rises if the number of workers declines. If w < MPN, profit rises if the number of workers increases. Firms’ profits are highest when w = MPN
What are the substitution effect and the income effect? What would happen if they worked together?
Substitution effect: Higher real wage encourages work since the reward for working is higher.
Income effect: Higher real wage increases income for the same amount of work time, so a person can afford more leisure, so will supply less labor. The reward to working is greater: a substitution effect toward more work. But with a higher wage, a person doesn’t need to work as much: an income effect toward less work. The longer the high wage is expected to last, the stronger the income effect; thus, labor supply will increase by less or decrease by more than for a temporary reduction in the real wage.
How long are people unemployed?
Most unemployment spells are of short duration. Unemployment spell = period of time an individual is continuously unemployed. Duration = length of the unemployment spell. Most unemployed people on a given date are experiencing unemployment spells of long duration.
Why there are always unemployed people?
-Structural unemployment
-Chronically unemployed: workers who are unemployed a large part of the time
-Structural unemployment: the long-term and chronic unemployment that exists even when the economy is not in a recession
-Lack of skills prevents some workers from finding long-term employment
-Reallocation of workers out of shrinking industries or depressed regions; matching takes a long time
What is happening atm with the supply chain in the world?
Shortage of people, shortage of resources… we cannot produce the desired number of outputs.
Do consumer sentiment indexes help economists forecast consumer spending?
Data do not seem to give much warning before recessions. Data on consumer spending are correlated with data on consumer confidence
Why is investment important?
Investment fluctuates sharply over the business cycle, so we need to understand the investment to understand the business cycle. Investment plays a crucial role in economic growth.
Application: the post-1973 slowdown in productivity growth. What caused the decline in productivity?
-Measurement—inadequate accounting for quality improvements
-The legal and human for pollution control and worker safety, crime, and declines in educational quality
-Oil prices—huge increase in oil prices reduced productivity of capital and labor, especially in basic industries
-New industrial revolution—earning process for information technology from 1973 to 1990 meant slower growth
Why did ICT growth contribute to U.S. productivity growth, but not in other countries?
Government regulations, Lack of competitive pressure, Available labor force, and the Ability to adapt quickly.
Why was there such a lag between investment in ICT and growth in productivity?
Intangible capital, R&D, Firm reorganization, Worker training
What’s the relationship between the long-run standard of living and the saving rate, population growth rate, and rate of technical progress?
In the long term, a higher saving rate will generally lead to higher levels of economic output, up to a point. When individuals save a portion of their income, those savings are generally loaned to businesses to finance new investments. The standard of living increases when economic growth exceeds (falls below) the population growth rate. Technology increases productivity which means more of the goods and services that increase peoples’ standards of living.
Should a policy goal be to raise the saving rate? Not necessarily, since the cost is lower consumption in the short run. There is a trade-off between present and future consumption
Should a policy goal be to reduce population growth?
Doing so will raise consumption per worker. But it will reduce total output and consumption, affecting a nation’s ability to defend itself or influence world events
How does the use of a fixed-exchange-rate system affect an economy and macroeconomic policy?
Fixed exchange rates can work well if countries in the system have similar macroeconomic goals and can coordinate changes in monetary policy. But the failure to cooperate can lead to severe problems.
How does economic growth change over time? Will it speed up, slow down, or stabilize?
The key factor in economic growth is productivity improvement since it raises output per worker for a given level of the capital-labor ratio.
Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.
Which is the better system, flexible or fixed exchange rates?
To determine which system is better may depend on the circumstances.
If large benefits can be gained from increased trade and integration, and when countries can coordinate their monetary policies closely, then fixed exchange rates may be desirable
Countries that value having independent monetary policies, either because they face different macroeconomic shocks or hold different views about the costs of unemployment and inflation than other countries, should have a floating exchange rate.
Why did money demand shift erratically?
New assets were invented in the 1970s, liquid assets that paid interest.
People switched wealth from M1 to these assets, reducing M1 demand.
MMMFs.
Overnight repurchase agreements.
New assets in the 1980s, interest-bearing checking accounts; their use brought wealth into M1, raising money demand.
Recall that money serves three functions in the economy. What are those functions? How does inflation affect the ability of money to serve each of these functions?
The three functions that money serves in the economy are serving as a:
-unit of account; measurement of the value of goods and services
-medium of exchange; money is expected for purchasing G&S
-store of value; keeps value overtime.
Inflation affects the ability of money to serve each of these functions because in case of the first function mention, people are no longer certain of its right measurement ability since it is changing a lot during short periods, money’s value decreases in the exchange process and inflation highlights the purchasing power of money so it´s not attractive anymore as a store of value.
Portfolio & asset demands
Trade-off among expected return, risk, liquidity, and time to maturity. Assets with low risk and high liquidity, like checking accounts, have low expected returns. Investors consider diversification: spreading out investments in different assets to reduce risk. The amount a wealth holder wants of an asset is his or her demand for that asset. The sum of asset demands equals total wealth.
Why do countries allow money supplies to grow quickly if they know it will cause inflation?
They sometimes find that printing money is the only way to finance government expenditures This is especially true for very poor countries, or countries in political crisis.
What factors determine expected inflation?
If people expect an increase in money growth, they will then expect a commensurate increase in the inflation rate.The expected inflation rate would equal the current inflation rate if money growth and income growth were stable. Expectations can’t be observed directly. They can be measured roughly by surveys, if real interest rates are stable, expected inflation can be inferred from nominal interest rates, policy actions that cause expected inflation to rise should cause nominal interest rates to rise.
How do we find out people’s expectations of inflation?
We could look at surveys,but a better way is to observe implicit expectations from bond interest rates.
Are there economic forces that will allow poorer countries to catch up to richer countries?
The catch-up effect is a theory that developing economies will catch up to more developed economies in terms of per capita income.
It is based on the law of diminishing marginal returns, applied to investment at the national level, and the empirical observation that growth rates tend to slow as an economy matures.
Developing nations can enhance their catch-up effect by opening up their economy to free trade and developing ‘social capabilities,’ or the ability to absorb new technology, attract capital, and participate in global markets.