The Wage setting model of unemployment - Essay Example

Wage setters cannot factually set the actual wage. In fact, the real wage weighs the purchasing power of those earning wages and is thus equivalent to the cash wage divided by the level of consumer prices. Wage setters can therefore set the money in their firm or in their economic sector. These wage setters set cash wage as per their expectation of the price level of consumers. Consequently, they set an expected actual wage in relation to the level of unemployment. Using the wage setting model of unemployment to explain and discuss the following statements: a).

Competition between the employed and the unemployed is critical in Maintaining a low natural rate of unemployment A natural rate of employment refers to the unemployment rate when the labour market is at its equilibrium. NRU can also be the difference between people who would wish to get a job at the present wage rate and the people who are willing and at the same time, able to take a job. It is caused by supply side factors as opposed to demand side factors. In connection to the wage setting model, it can be argued that, competition between the employed and the unemployed is critical in maintain a low natural rate of unemployment because it enables the wage negotiations to be more decentralized.

This takes place at a smaller economic unit level. The lower the specified unit, the more competition it faces, which makes the labour demand more flexible (Blanchard & Katz 1970). To maintain law natural rate of unemployment, there must be competition of the unemployed and unemployed so that there can be at one end, an individual’s level and infinite elasticity on the other. Since an employed person fears the risk of being replaced with another person who is ready and willing to take up the job, thus lowering the equilibrium wage.

If the centralization level of wage bargains goes up and if trade unions are inclusive, then an economy that is highly unionized can attain low unemployment rates. Nations with very decentralized wage-setting obtain a low rate of employment because of competition in the labour market. In an economy without competition the employed and unemployed, there might be a two-tier society, having a class of unstable workers who may be forced to wonder between poor-waged jobs and unemployment. As far as this is concerned, the bottle tends to be half full/half empty.

While the labour market is actually dual when one looks solely at the jobs, one should also look at the unemployed individuals. At one extreme, this may imply that only specific people would always hold specific jobs, but on the other hand, the unemployed may have better skills and ready to work but with no opportunity to do so. Competition is therefore important in maintaining low natural rates of unemployment because it gives firms an opportunity to effectively screen and pick employees, an option that is vital in determining the amount of wages to be allocated in accordance to the work experience and skills, thus ensuring that there is a balance between the employed and unemployed (Burda & Wyplosz, 2013).

It is also important to note that competition is crucial for the reason that, the employed personnel working on contract terms may wield pressure on the benefit systems of the unemployed, in case they are eligible to do so. The increase in job turnover may adversely raise the number of qualified claimants and place wage pressure on the unemployment benefit administration.