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CHAPTER 6

Noninstitutional civilian population - number of potentially available for civil


ian employment
Civilian labor force - sum of those either working or looking for work
Participation rate - ratio of the labor force to the noninstitutional civilian p
opulation
Unemployment rate - ratio of the unemployed to the labor force\
Current Population Survey (CPS) - monthly survey conducted in US; source of stat
istics for labor force, employment, participation and earnings in the US; determ
ines the movement of workers & meaning of unemployment rate
Duration of unemployment - length of time people spend unemployed; inverse of pr
oportion leaving unemployment
Non-employment rate - Population - employed/Population (some economists use this
to measure unemployment)
Reservation wage - wage that will make them indifferent for being employed or un
employed
Proportion of leaving unemployment
(People being employed + People leaving labor force)/Unemployed people
Meaning of unemployment rate for workers
- ACTIVE LABOR MARKET: many separations and hires; many workers are entering and
exiting unemployment
- SCLEROTIC LABOR MARKET: few separations and hires; stagnant (not moving) unemp
loyment pool
Weakness ng umemployment rate:
- Hindi nade-determine kung ano ba talaga ang difference ng "working" sa hindi.
Example of these e yung mga katulong. Technically, nagta-trabaho sila pero hindi
sila considered as employed (based on national statistics)
- Discouraged workers: sila yung mga taong hindi naman talaga naghahanap ng trab
aho pero tumatanggap sila ng trabaho kapag meron
- Nasasama rin sa unemployed yung mga taong hindi willing na magtrabaho na dapat
e hindi sinasama in the first place because it technically means na hindi rin s
ila naghahanap ng trabaho
Meaning behind separations
- QUITS: workers leaving jobs for better alternatives
- LAYOFFS: changes in employment levels across firms (ex. recessions)
* increased demand = increased employment & vice versa
- higher unemployment = higher separations
- separations = quits + layoffs
- if separations go up even though the quits decreased means that layoffs increa
sed so much that it leaded into a higher unemployment rate
Data ng employment in US
- Flows of workers in and out are very large
- Many separations
- Flows in and out of unemployment are large; relative to the number of unemploy
ed
- Flows in and out of labor force are large
* People who move back & forth between participation and nonparticipation means
that they want a job but not seriously looking for a job
* CONCLUSION: US has an active labor market
How does aggregate unemployment rate affect individual workers
- Welfare
- Wage

When firms decrease demand, they decrease employment


- hire fewer workers
- umaasa sa quits
- kapag masyadong konti quits, magle-layoff
* fewer hires means fewer job opportunities for the
applicants but because of this, higher unemployment
* higher layoffs means that more risks for employed
nemployment
* CONCLUSION: higher unemployment = lower chance for
d & higher risk for an employed to be unemployed

by (WELFARE)

unemployed. e maraming job


to lose jobs, thus higher u
an umemployed to be employe

How is wage determined (WAGE)


- COLLECTIVE BARGAINING: bargaining between unions and firms
- set by employers
- bargain between employer and employee
- higher skills = more bargaining
- they are paid more than the reservation wage that they prefer being employed
- depends on labor market conditions: lower unemployment = higher wages
- even without collective bargaining, employees have bargaining power
- firms do want to pay more than the reservation wage
- higher wage = decreases turnover, more productivity (financially attractive) EFFICIENCY WAGE THEORIES
How is bargaining power determined:
- nature of the job; how much cost would be for him to be replaced
- labor market conditions; how easy for a person to find another job
* lower unemployment rate = harder to find replacement, easier to find jobs due
to job opportunities
* lower unemployment rate = more bargaining power = more wage
Efficiency Wage Theories - link between productivity and wage
- nature of the job; firms that focus more on employee morale & commitment = hig
her wage than firms with routinal works
- labor market conditions;
* lower unemployment rate = more quits; financially attractive transactions for
the workers to stay
* lower unemployment rate = more wage = more productivity
Wages, Prices & Unemployment: W = PF(u,z)
Price Level
- hindi talaga iniisip ng tao kung gaano karami yung sinusweldo niya. mas iniisi
p niya technically kung marami ba siyang mabibili or mapapala sa sweldo niya; th
us, they care for w/p
- for firms, hindi nila iniisip kung gaano karami yung binibigay nila. mas iniis
ip nila kung magkano yung binibigay relative to the price ng mga binebenta nila;
thus, they also care for w/p
- in short, an increase in the price level = increase in nominal wage proportion
ally
Unemployment Rate
- high unemployment rate = low wages
- mas weak ang bargaining power at less quits opportunity for workers thus mabab
a ang wage

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

* UNEMPLOYMEN RATE: kasi, kapag nag-increase ng employment, hindi naman lahat u


nemployed lang ang may opportunity na magkatrabaho. siyempre, yung mga nasa out
of the labor force din. thus, tumataas ang participation rate!
Phillips Curve
- if actual unemployment is lower than natural unemployment, increase in inflati
on
- if actual unemployment is higher than natural unemployment, decrease in inflat
ion
Aggregate Demand Relation
- if nominal money is higher than inflation, real money growth is positive (expa
nsionary monetary policy), higher output growth
- if nominal money is lower than inflation, real money growth is negative (contr
actionary monetary policy), lower output growth
* a relation in the IS-LM curve
WHO AFFECTS WHO (short run)
- Nominal money growth & Inflation -Aggregate Demand> Output growth -Okun's Law>
Unemployment -Phillips Curve> Inflation
The Medium Run
- By Okun's Law: output growth rate = normal growth rate (in order to achieve co
nstant unemployment)
- By Aggregate Demand: Inflation = adjusted nominal money growth (nominal money
growth - normal output growth)
- By Phillips Curve: unemployment rate = natural unemployment rate
- REMEMBER: Output growth rate & unemployment is UNAFFECTED by the nominal money
growth (indirectly affected due to inflation)
- Nominal money growth has a one-on-one relation in the changes of inflation
- THEREFORE, in the medium run, only the nominal money growth determines the cha
nges of inflation UNLESS other factors may lead to higher nominal money growth
The Short Run
- in a contractionary monetary policy:
- kapag bumaba ang nominal money growth, real money growth will decrease; hence
a decrease in output growth
- if the output growth is lower than its normal output growth, unemployment rate
will increase
- if unemployment is higher than its natural rate, inflation will decrease
- SA SHORT RUN LANG YAN. Kasi, sa medium run, babalik din sa normal and natural
ang output growth at unemployment. However, there will be a decrease in nominal
money growth and inflation. Therefore, a temporary increase in unemployment lead
s to permanent decrease in inflation.
Disinflation
- Decrease in inflation
- Mahirap na gawin lang to within one year because a sudden change in inflation
will increase unemployment and many will become poor; then output will increase
and many firms will reach bankruptcy
- Kaya naman years ang binibilang dito.
- The number of point years of excess unemployment = decrease of inflation
- However, the government can only control the distribution of excess, but not t
he total number of point-years of excess
- SACRFICE RATIO: point-years of excess unemployment/decrease in inflation
- LUCAS CRITIQUE: sinabi niya na you can decrease inflation without affecting ot
her factors. for example, if you decrease your expected inflation, then your act
ual inflation will also decrease, without affecting unemployment
- other words, nominal money growth, expected inflation and inflation could be r

educed without having a recession


- CREDIBILITY OF MONETARY POLICY: the only thing that can change the expectation
of wage setters; central bank should have fast disinflation
Nominal Rigidities and Contracts
- HINDI KO SIYA MAINTINDIHAN =))))))
- ang sabi, dapat i-announce early ng government na magkakaron sila ng deflation
. hindi kasi pwedeng biglaan dahil masyadong tataas ang unemployment. therefore,
hindi totoo na pwedeng hindi mag-increase ang unemployment if you do deflation.
BUT, a very small increase in unemployment will happen, if you do deflation slo
wly. kaya ang ginagawa nila, sa una e matagal ang pagpapatupad nito. after some
time, bababa rin ito kaagad, achieving the desired deflation because the wage ag
reements' effect has been evident