by (WELFARE)
Other Factors
- catchall variables (all factors given the price level and unemployment rate)
- UNEMPLOYMENT INSURANCE - dahil binibigyan ng incentives ang mga unemployed, ma
s nagiging less hassle ang unemployment (lumalaki ang indifference ng tao betwee
n employed and unemployed) kaya mas tumataas ang sweldo to reduce separations
- others: increased minimum wage, increased employee protection
Price Determination: Y = AN
- let's take A = 1 kasi we all know that when workers do increase, output also i
ncreases (labor productivity), ignoring capital, technology and other factors of
production
- new equation: Y = N
- marginal cost is the wage. in a perfect competition, MR = MC. MC = P. W = P. B
ut it is not perfect therefore;
- P = (1 + m)W; wherein m is markup
The Natural Rate of Unemployment
The Wage Setting Relation
- w = PF(u,z) magiging W/P = F(u,z)
- Therefore, higher unemployment rate will give a much more decrease in the real
wage
The Price Setting Relation
- P = (1 + m)W
- P/W = (1 + m)
- w/P = 1/(1 + m)
- Ang price setting ang magdedetermine ng real wage na binibigay ng firms
- Thus, kapag tumaas ang price at same ang nominal wage, bumababa ang value ng r
eal wage.
- Kaya isang line lang ang price-setting relation because it is not affected by
the unemployment rate ajeje
Equilibrium Real Wages and Unemployment
- F(un,z) = 1/(1 + m)
- un: natural rate of unemployment - depends on z an m
- an increase in z = increase of real wage; thus, shifting the wage-setting curv
e up and moves along price setting & vice versa
- an increase in m = decrease of real wage; thus, shifting the price-setting dow
n and moves along the wage setting curve & vice versa
- Equilibrium rate of unemployment can also be called as structural rate of empl
oyment kasi yung z at m e nagdedefine din ng structure ng economy na meron ang i
sang bansa
From Unemployment to Employment
- NATURAL LEVEL OF EMPLOYMENT - nangyayari when unemployment is equal to its nat
ural rate
- u = U/L
- u = L/L - N/L
- u = 1 - N/L
- Nn = L(1 - un)
From Employment
- NATURAL LEVEL
natural rate
- Yn = Nn = L(1
- F(1 - Yn/L,z)
to Output
OF OUTPUT - level of production kapag employment is equal to its
- un)
= 1/(1 + u)
IN SUMMARY:
- real wage = decreasing function of unemployment rate
- real wage = constant price setting
- equilibrium in labor market: wage setting = price setting
- it means equilibrium labor market
- which is also a natural rate of unemployment which will give natural rate of e
mployment and natural rate of unemployment
CHAPTER 8
Inflation, Expected Inflation and Unemployment
- P = Pe(1 + m)F(u, z)
- F(u, z) = 1 - alpha(u) + z (alpha: strength ng unemployment sa wage)
- replacing it: P = Pe(1 + m)(1 - alpha(u) + z
- e dahil a change in price is equal to inflation, ganito: pi = pi^e(m + z) - al
pha(u)
* increase in expected inflation = increase in actual inflation
* increase in m or z = increase in inflation (given that expected inflation)
* increase in unemployment = decrease in inflation (given that expected inflatio
n)
The Phillips Curve
- pi = (m + z) - alpha(u)
- lower unemployment leads to higher inflation. naging 0 kasi yung expected infl
ation dahil nga sa patuloy na pagkaroon ng deflation before. dahil sa low unempl
oyment, nominal wage increases thus increasing the price level
- Wage-Price Spiral - ito yung endless cycle na kapag nagtaas ang price, magtata
as ang nominal wage
Mutation of Phillips Curve
- there are cases na tumataas ang inflation at a given unemployment rate; that i
s yung price-setting level. kapag nagbago ang m, which is independent to unemplo
yment, tumataas ang wage = price = inflation
- kailangan na nilang isipin ang presence and persistence of inflation. hindi ib
ig sabihin na consistently positive means you will expect a zero inflation for t
he next year
- kaya naman, nagkaroon na ng "expected inflation" because of that :)
- when theta (effect of last year's inflation rate) is zero, original Phillips c
urve
- when theta is positive, yung normal
- when theta is one = inflation - last year's inflation = (m + z) - alpha(u)
* rather, it does not affect the inflation rate but the change in the inflation
rate
- modified meaning: lower unemployment leads to increasing inflation
* lower unemployment = positive decrease in inflation
* higher unemployment = negative decrease in inflation
Natural Rate of Unemployment
- sa original Phillips curve, there is no such thing as natural rate of unemploy
ment because ang sabi, inflation is only in a relationship with unemployment. bu
t hello, inflation is not only determined by wages but also with prices, so get?
- at isa pa, kapag naniwala ka na zero ang expected inflation mo, magkakaron ng
time na magbabago ito.
- the actual unemployment rate must not be sustained below the natural unemploym
ent rate
- kapag may natural rate of unemployment, because equal ang expected at actual p
rice, obviously e equal rin ang expected at actual inflation
- after chubaneska shitssss, ito ang mangyayari
- actual price - actual price last year = -alpha(unemployment rate - natural une
mployment rate)
- THEREFORE, the change in inflation rate depends on the difference between the
actual and natural employment rate. if mas mataas ang actual, inflation decrease
s. kapag mas mataas ang natural, inflation increases.
- aggregate supply relation is the relation between the change of inflation and
deviation of unemployment rate from the natural unemployment rate
Variations in Natural Rate Across Countries
- Per country e iba iba ang natural rate of unemployment kasi iba iba rin ang ma
rkup (m), wage setting factors (m) at strength ng unemployment sa inflation (alp
ha) ng mga firms sa iba't ibang bansa
Variations in Natural Rate over time
- Syempre, nagbabago rin ang markup at wage setting factors over time. But it is
quite hard to measure because economist typically measures the actual unemploym
ent rate and not really the natural one.
High inflation and the Phillips Curve
- underestimated inflation: lower standards of living
- overestimated inflation: bankruptcy
- kapag mas mataas ang inflation, mas nagiging variable siya. mahirap siyang i-d
etermine exactly. kaya naman mahirap din mag-estimate ng nominal wage. therefore
, firms set nominal wages for a short period of time or wage indexation.
- terms of wage agreement change with the level of inflation
- WAGE INDEXATION: automatic increase of wage with inflation
- wage indexation increases the effect of unemployment on inflation
- if lambra is equal to 0, nasa expected inflation ang effect
- if lambra is positive, nasa actual inflation ang effect
- if lambra is near to 1, small changes in unemployment may bring very large cha
nges in inflation; large changes in inflation may bring almost no change at unem
ployment
Deflation and the Phillips Curve
- a very high unemployment may also give a very high deflation
- kapag may deflation or 0% inflation, nawawalan ng saysay or nagwi-weaken ang P
hillips Curve. In the first place, sino ba namang tao ang maga-accept na pababai
n ang sweldo niya.
- but this can also be a technique for a good economy. example: Japan
CHAPTER 9
Okun's Law
- the change in the output rate is equal to the negative of the growth rate of o
utput
- before, we assumed that A = 1. But that's not the case.
- (type equation in here, masyadong mahirap)
- if growth rate is higher than the normal growth rate, decrese in unemployment
rate
- if growth rate is lower than the normal growth rate, increase in unemployment
rate
- if growth rate is equal to the normal growth rate, zero change in unemployment
rate
- THUS, dapat ang growth rate is at least the normal growth rate to avoid the ri
sing of unemployment rate
- FOR A CONSTANT UNEMPLOYMENT RATE:
* employment rate must grow at the same rate as the labor force
* output growth must be equal to sum of labor force growth and labor productivi
ty growth
- BAKIT HINDI ONE-TO-ONE ANG CHANGES NG EMPLOYMENT RATE SA:
* OUTPUT GROWTH: hindi naman porket gusto mong paramihin ang output mo e gusto
mo na ring paramihin ang workers mo. uso ang overtime