ANU Economic Topics Analysis and Impacts Questions
ANSWER
Laws governing minimum wage and the Nash Bargaining Model of Employment
According to the Nash Bargaining employment paradigm, wages and working conditions are negotiated between employers and employees. Both partners in this approach seek to maximize their usefulness. The “reservation wage” is the lowest compensation an employee will accept, and the company seeks to offer that amount to recruit and keep the worker.
These rules establish a salary floor that firms cannot pay their employees regarding minimum wage laws. There may be a situation where the supply of labor (number of employees wanting to work) is lower than the equilibrium wage established by the Nash Bargaining model if the minimum wage is set above that wage.
QUESTION
Description
According to the Nash Bargaining model of employment, what is the e?ect of min- imum wage laws on unemployment? [As always, you need to carefully explain your response. You will likely want to use graphs to aid in your explanation. You will want to use graphs in many other questions as well.]
Inflation in Australia is currently running at 7%, well above the target range of 2-3%. Suppose the government is considering increasing the inflation target to 7%. Explain potential pros and cons of increasing the inflation target in this way.
With the removal of cigarette’s from prisons, prisoners have begun using packet noodles for trade among themselves. Evaluate the following claim: These packet noddles cannot be considered to be money as they can be eaten by the prisoner which owns them at any time.
Initially emerging in November 2019, becoming prominent in 2020, and continuing to the present, the Covid crisis has had a very significant impact on the economy and society at large.
a) Suppose the Covid crisis and lockdowns caused a temporary 30% fall in the demand for labour in the economy. Suppose that the Supply of labour has not changed. As this shock is expected to be temporary, there is very strong down- ward wage rigidity in the economy. Using the Labour Market and Production Function model, argue why we expect output to fall, and to fall by less than 30%.
- b) Suppose we have the shock as in part (a) but the government enacts policies which eliminate downward wage rigidity. Show how the removal of downward wage rigidity can help increase aggregate output.
c) What kinds of policies might be employed by the Central Bank to help increase output? Why would these policies be e?ective?
- d) Assume the economy is as in part (b). That is, 30% drop in Demand for Labour, and no downward wage rigidity. Would higher inflation have an impact on real output? Explain your reasoning (as always).
e) Give possible reasons why the usual CPI measure may not be a good measure of the cost-of-living for consumers during Covid, especially the earlier years of Covid.
- f) Given your experience of Covid lockdown, would you expect inflation to be higher than expected during lockdowns, or lower than expected? Why do you think this?
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