Dynamics of unemployment and real wages, Managerial Economics

Dynamics  of Unemployment and  Real  Wages through Productivity Shocks 

The model  that you  are  studying here  is  in  the  tradition of  the  real  business cycle theory that you have studied in earlier units. As you know,  this kind of a model works out the implications of  shocks to productivity. The model has  the following implications  to employment  and wages. 

1)  A temporary qverse shock to productivity decreases hiring (as it decreases the  marginal productivity  of  labour  and  hence  the  benefit  of  hiring  the marginal unit of labour) and  increases unemployment. As  the shock is,  by definition,  temporary, productivity  and  the  net marginal value  of  labour return  to  their original  level, but,  it can be  shown that  the unemployment rate only slowly returns to normal through increased hiring. Moreover, since it  is  cheaper for  the  firm  to  hire  when  there  are  more unemployed,  a productivity shock has greater effect on unemployment when it is high than when  it  is  low.  This is,  of  course,  implicit  in  the  non-linearity  of  the equation explaining u*, the natural rate of unemployment. 

2)  The model explains why fluctuations  in employment may be associated with smaller fluctuations in real wages. This will happen if 6,  the share obtained by workers, is constant, as is assumed  in the model, and small. Real wages vary  in the model with productivity and high rates of hiring are Associated with high real wages. The model thus explains the observed empirical fact of  a  pro-cyclical increase  in  real wages, but  to  a smaller extent  than  the increase  in employment, if the share obtained by workers is small in relation to that obtained by the hiring firms.  

Posted Date: 10/26/2012 6:28:27 AM | Location : United States

Related Discussions:- Dynamics of unemployment and real wages, Assignment Help, Ask Question on Dynamics of unemployment and real wages, Get Answer, Expert's Help, Dynamics of unemployment and real wages Discussions

Write discussion on Dynamics of unemployment and real wages
Your posts are moderated
Related Questions
Given a saving function of S = -25 + .2Yd, a $10 billion enhance in government spending will bring about how many dollars of change in consumption?

The services of a certified psychologist cost $110 per hour, and an extended health plan covers 50 percent of that cost. Under the plan, the clients covered used 625 hours of this

1.  According to an article in San Luis Obispo Tribune July 21, 2006 37% of the college freshman and 48% of the college seniors carry a credit balance from month to month. Suppose

Fandem Technology manufactures two products using a joint process. The cost of materials going into the joint process for a typical period is $55,000, while labour and overhead to

Using the discounting principle calculate the present value of an annuity of five years at Rs. 500 payments made at the end of each of the next five years at 10% interest. stion..

Discuss the importance of dividend decisions

Environmental issues of Managerial economics Managerial economics also includes some aspects of macroeconomics. These relate to political and social environment in that anin

Measurement of Inflation The rate of inflation is measured using the Retail Price Index.  A retail Price Index aims to measure the change in the average price of a basket of g

Management Decisions: An effective demand forecast assists the management to take suitable steps in factors which are relevant to decision making like plant capacity, raw-material

Q. Explain the Leibenstein model? Leibenstein (1966) sees a firm's norms or conventions, dependent on its history of management initiatives, labour relations and other  factors