price setting and wage setting

[aditi5000]

As long as productivity does not affect the bargaining process between workers and firms, technological progress will not affect the natural rate of unemployment.

Ans - False

But, I think this should be true because in case the price setting and wage setting equations change by the same amount, the natural rate should remain same... so in case bargaining process of wage setting does not interfere with this system, u_n should be same... or does tech progress always change the natural rate of unemployment.. someone please clarify...

[anon_econ]

y would the wage setting and price setting relations change at all? i dont know. i cant focus 2day :\

[ritu]

hi aditi....can we aonsider this....that if there is tech progress that means that our Y shud increase and if Y rises then employment shud rise which wud in turn reduce natural rate of unemt...???????

[anon_econ]

using blanchard's notation the wage setting relation is W=Pe*F(u,z) and the price setting relation is W=(1+mu)P. what is changing here when labour productivity changes?

[anon_econ]

the level of output associated with the natural rate of unemployment will change

[ritu]

if u ask abt labor productivity then i will say "z" changes coz if they are more productive, they can ask for higher wages....?????

[ritu]

ok but then their bargaining power doesnt change still

[aditi5000]

See technological progress makes output increase.. so natural rate of employment shouldn't get affected naa? for all we know it could be better capital employment with labour productivity being same..

[AJ]

Can it be like,

when productivity increases, markup decreases (since each worker produces more, this enables firms to charge less per unit of output).

So, Price setting moves upward.

Now, productivity doesn't affect bargaining means it doesn't affect wage setting relation.

By combining these two, natural rate decreases.

[AJ]

And by, MPL=real wage, also we know that when MPL increases.. L increases till new MPL= real wage.

So, employment increases.. unemployment reduces!

[aditi5000]

Yes price setting moves up.. and so long as productivity of labour doesn't change due to the tech. change, wage setting remains same and bargaining power remains same..  so natural rate reduces and we have moved up on the same wage setting curve and real wages fall...
so indeed the answer is false.

I guess the only time natural rate stays same is when the tech progress cause mpl to rise and hence wage setting also moves up by the same extent as price setting.

agreed ?

[anon_econ]

MPL is not equal to real wage. if u r assuming that there is a positive markup then u r giving up the assumption of a competitive setup. in fact MPL=1 and real wage=1/(1+mu)<1.

[AJ]

@vasudha..

"if u r assuming that there is a positive markup" .... Don't we always have a positive markup.. how does this means giving up competitive setup..??? I mean we are not taking a positive markup over marginal cost. we are just taking a positive markup over wages.

I am really confused right now...!!!!

And, while calculating real wage, u just took +ve markup, right?

And, why MPL is not equal to real wage?? if it's more than real wage, why don't we employ more labour??

[AJ]

How did u calculate, MPL=1 ....?????

[anon_econ]

See the book assumes that Y=N. so marginal cost is equal to nominal wage. the markup is over marginal cost, which happens to be the wage. when labor productivity increases, Y becomes AN where A>1. marginal cost becomes W/A. and u will hv P=(1+mu)(W/A). W/P=A/(1+mu). So yes the price setting relation does change :P :P

[anon_econ]

MPL=1 in the case that the book assumes, that is when Y=N

[AJ]

Ohhh.. okay, I wasn't taking it for Y=N , I was doing for a general production function.

[AJ]

Heyyyy... even then... "real wage=1/(1+mu)<1" ... mu should be zero as you said... so real wage=1

so, MPL=real wage should hold..???

please explain this one too...

[anon_econ]

yea i'm sticking completely to blanchard's analysis..m dead sure every book would hv something different to offer :P

[anon_econ]

no i dint say that mu shud be 0. mu is positive! it's an assumption.