Principios de Macroeconomı́a :

Lecture 7

Brian Tavares
Universidad Diego Portales

November 24, 2017

 Wage Equation

• Collective bargaining is a negotiation between firms and unions,

usually about salary.

• There are several forces that impact the determination of wages:

- Workers require a wage above their reservation wage . The
reservation wage is the wage above which workers choose
employment over unemployment.
- The unemployment rate affects wages since it determines how
easily workers can find employment elsewhere. (Higher
unemployment rate means less opportunities for workers and
therefore lower wages)
 Wage Equation

• The negotiation power of workers depends on 2 things:

1. Costs of substitutes (from the point of view of firms)

2. Difficulty of finding employment (from the point of view of
workers)
 Wage Equation

• We can therefore write the nominal wage function as follows:

- W = P e F (u(−), z(+))

• P e : The expected price level

• u: The unemployment rate
• z: A residual term (Contains all other factors determining nominal
wages)
 Wage Equation

• W = P e F (u(−), z(+))

• The nominal wage (W) is decreasing in u and increasing in z

- An increase in u reduces workers bargaining power
- An increase in z increases workers bargaining power
• Example of increase in z: An increase in unemployment benefits
 Wage Equation

• Both firms and workers only care about the real wage W/P

• Due to imperfect information, however, in general P e determines the

nominal wage
- Advanced models take into account how P e is determined

• The real wage (W/P) determines how many goods workers are paid for
their services (Remember agents ultimately care about goods not
nominal money)
 Wage Equation

• We will assume for this section that wages depend on the actual price
level (P) instead of the expected wage (P e )

• Since P = P e by assumption
W=PF(u,z)
⇒ W/P = F(u,z)

• We call this the Wage Equation

 7-2 La determinación de los salarios
Slide
(continuación)
7.19

Figura 7.9 La protección del empleo en los países europeos, 1995

Fuente: base de datos CESifo DICE; basada en datos de la Comisión Europea y de MISSOC 2009.

Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
 Price Equation

• The production function is a relation between factors of production and

the quantity of production
• General form: Y = Af (K , N) where K is capital and N is labour
• We will assume that labour is the only factor of production
• Y = AN
- Y: Production/Output
- N: Employment
- A: Productivity of labour
 Price Equation

• For simplicity we will assume that A=1

• This means: Y = N
 Price Equation

• We will assume that firms fix their price according to a constant markup
µ

• The mark-up represents how much firms price the product over cost W
(since the only factor of production is labour)

• P = (1 + µ)W
- (If all markets were perfectly competitive: µ = 0 and P = W )
 Price Equation

• The equation for prices is:

P = (1 + µ)W
⇒ P = (1 + µ)W
⇒ P/W = (1 + µ)
 The Natural Rate of Unemployment

• We can eliminate W/P from both equations. This gives the natural rate
of unemployment uN

• Recall: This is the rate of unemployment when the economy is in

neither a recession nor boom

• F (uN , z) = 1/(1 + µ)
 7-4 La tasa natural de desempleo
(continuación)
Slide
7.25 La ecuación de salarios

La tasa natural de
desempleo es la tasa
de desempleo tal que
el salario real elegido
en la fijación de los
salarios es igual al
salario real que
implica la fijación de
los precios

Figura 7.12 Los salarios, los precios y la tasa natural de desempleo

Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
 The Natural Rate of Unemployment

• The position of the curves depend on both z and µ

• An increase in unemployment benefits (which increases z) causes an
increase in the real wage (W/P) (for fixed u)
• Since the real wage (W/P) is fixed at 1/(1 + µ) the unemployment rate
must increase
 7-4 La tasa natural de desempleo
(continuación)
Slide
7.30 El nivel de equilibrio de los salarios reales y el desempleo

Figura 7.13 Las prestaciones por desempleo y la tasa natural de desempleo

Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
 The Natural Rate of Unemployment

• Legislation that makes the market less competitive (e.g creates

monopolies) allows firms to icrease their prices relative to the wage.
• This increases µ and increases the natural rate of unemployment
 7-4 La tasa natural de desempleo
(continuación)
Slide
7.31 El nivel de equilibrio de los salarios reales y el desempleo

Los márgenes y la tasa natural de desempleo

Figura 7.14
Un aumento del margen reduce el salario real y provoca un aumento de la tasa
natural de desempleo.
Blanchard, Amighini and Giavazzi, Macroeconomics: A European Perspective, 1st Edition, © Pearson Education Limited 2010
 The Natural Rate of Unemployment

• With our assumptions, we can write the natural amount of employment

(NN ) as a function of the natural rate of unemployment (uN )
• Let L denote the active population and N the employment rate

u=U/L=(L-N)/N=1-N/L
Using N=L(1-u)
NN = L(1 − uN )