Scot Wick Blog

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 20 of 21 … Henry Ford introduced modern techniques of production to the automobile industry. Ford, rather than building expensive cars for the rich with small teams of skilled craftsmen, he built inexpensive cars for everyone on assembly lines with unskilled workers who performed repetitive simple tasks. The output of this assembly process was the Model T Ford. … In 1914, Ford introduced another innovation, the $5 workday. It was about twice the going wage for unskilled workers, far above the equilibrium wage. When the daily $5 wage was announced there were long lines of job seekers outside the Ford factories. The number of workers willing to work at this wage far exceeded the amount of workers Ford needed. Ford's high-wage policy had the effects predicted by efficiency-wage theory, absenteeism fell, turnover fell, and productivity r...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 18 of 21 … Here we consider four aspects of efficiency wage theory, each suggests a different explanation for why firms may want to pay above-equilibrium wages -1- worker health -2- worker turnover -3- worker quality -4- worker effort … -3- Worker Quality Firms want talented workers but because firms cannot perfectly gauge applicants’ quality hiring is somewhat random. When a firm offers a high wage it attracts better workers to apply for its jobs thereby increasing the quality of its workforce. If the firm offers an equilibrium level wage the most competent applicants may choose not to apply because they are more likely to have better opportunities than less talented applicants. If this influence of the wage on worker quality is strong enough it may be profitable for the firm to pay a wage above the equilibrium level. … -4- Worker...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 18 of 21 ... Here we consider four aspects of efficiency wage theory. Each suggests a different explanation for why firms may want to pay above-equilibrium wages. -1- worker health -2- worker turnover -3 - worker quality -4- worker effort … -1- Worker Health Better paid workers eat a more nutritious diet so are healthier and more productive. A firm may find it more profitable to pay high wages and have healthy, productive workers. The worker health aspect of efficiency wage theory helps explain some unemployment in less developed countries where inadequate nutrition can be a problem. In these countries firms may worry paying low wages would adversely influence their workers' health and productivity so they pay higher wages to workers. But this higher wage payment causes a surplus of labor and unemployment because firms employ a few...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 17 of 21 ... In this chapter we discuss four explanations for long-run unemployment -1- frictional unemployment -2- minimum wage laws -3 - unions and collective bargaining -4- efficiency wages … -4- Efficiency Wages The theory of efficiency wages holds firms can operate more efficiently and profitably if they pay wages above equilibrium level. The unemployment that arises from efficiency wages is similar to that arising from minimum-wage laws and unions. Unemployment results from paying wages above the level that balances the quantity of labor supplied and the quantity of labor demanded. An important difference is efficiency wages are set at the discretion of the firm, while minimum-wage laws and union wages are forced on the firm. … Efficiency wage theory holds government and union forced wage levels are unnecessary, because firms...

Why Do Corporations Care About Their Stock Prices? Mostly summarized from Investopedia: Corporations receive investment money only when they first sell stock shares (ownership shares of the corporation) to the public, the initial public offering (IPO). In the subsequent trading of these shares on the stock market the buyers and sellers of the shares directly gain/suffer the monetary benefits/losses from the fluctuating share price, the corporation does not. … Note, stock options are referred to below, to clarify in advance here’s an example: Corporation A current stock price is $100. A new executive is hired and is given 10,000 shares of stock options at target price of $120. Terms are the new executive cannot cash in (sell) the stock options until the stock price reaches $120. When the stock price reaches $120 the executive can sell the options for total $1,200,000, or can wait and hope to sell later at a bigger gain. … Why does the management of a corporation care about its stock sha...

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 16 of 21 ... Economists disagree about whether unions are good or bad for the economy. Critics of unions argue unions are a type of cartel. When unions raise wages above the level equilibrium level of competitive markets · the quantity of labor demanded is reduced · some workers become unemployed · wages in the rest of the economy are reduced, because of increased supply of nonunion workers The resulting allocation of labor is both inefficient and inequitable. Inefficient because high union wages reduce employment in unionized firms below the efficient and competitive level. Inequitable because some union workers benefit at the expense of other non-union workers. ... Union advocates contend unions are a necessary to counter-balance market power of firms. Excessive market power of a company most common causes are · the company town where ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 15 of 21 ... The role of unions partially depends on laws that govern union organization and collective bargaining. Normally, overt agreements among a group creating a cartel are illegal. If firms selling similar products agree to set high prices or set low wage levels the agreement is considered a conspiracy to restrain trade. The government prosecutes the firms for violating antitrust laws. ... However, unions are exempt from price-setting laws. Policymakers generally believe workers need greater market power when they bargain with employers. Some laws are designed to encourage union formation. The Wagner Act of 1935 prevents employers from interfering when workers attempt to organize unions. It requires employers to then bargain in good faith with unions. The National Labor Relations Board is the federal government agency that e...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 14 of 21 ...   In this chapter we discuss four explanations for long-run unemployment -1- frictional unemployment -2- minimum wage laws -3 - unions and collective bargaining -4- efficiency wages … -3 - Unions and Collective Bargaining A union is a workers association which as a group bargains with employers regarding wages, benefits, and working conditions. Today, in 2007, only 12 percent of U.S. workers belong to unions. (In 2025 it was 10 percent). At the peak in the 1950s, about a third of the U.S. labor force was unionized. ... In many European countries unions continue to play a larger role. In Belgium, Norway, and Sweden more than half of workers belong to unions. In France and Germany a majority of workers by law have wages set by collective bargaining effecting both union members and non-members. ... For unioni...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 13 of 21 … In 2006, the Department of Labor released a study of what workers reported earnings at or below the federally-mandated minimum wage, which in 2006 was $5.15 per hour. A wage below the minimum is possible because · some workers are exempt from the statute · enforcement is imperfect · some workers round down to $5.00 when reporting their wages Of workers paid hourly wages, about 2% of men and 3% of women reported wages at or below the federal minimum wage. A summary of the findings follows. ... Minimum-wage workers are largely the young. About half of all hourly paid workers earning the minimum wage or less were under age 25, and about one-fourth were age 16-19. Among employed teenagers 8% earned $5.15 or less compared with 1% of workers age 25 and older. ... Minimum-wage workers tend to be less educated. Among hourly paid...

  U.S. Trade Deficits Are Good Not Bad “The gain from foreign trade is what we import. What we export is a cost of getting those imports. The proper objective of a nation, Adam Smith said, is ‘to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.’” - Milton Friedman … Should Americans worry when we import more products than we export? Isn’t our GDP smaller when we import more than we export? Aren’t we sending jobs overseas? Most economists believe · because the U.S. trade deficit is offset by foreign investment in the U.S. there is no negative effect of a trade deficit on U.S. GDP and employment · foreign investments in the U.S. more than make up for the effects of a trade deficit The stability and security of the U.S. and strength of the U.S. economy and dollar make investments in U.S. production facilities attractive to foreigners. … Figure 1 Balance of payments must always be in balance at $0. In this example a -$10 tr...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 9 The Real Economy in the Long Run Chapter 28 of 36 Unemployment Section 12 of 21 ... Figure 4 - Unemployment from a Wage above the Equilibrium Level In this labor market the wage where supply and demand balance is WE At this equilibrium wage quantity of labor supplied and demanded meet at equilibrium point E. If the wage is forced by a minimum wage law above the equilibrium level WE · quantity of labor supplied rises to LS · quantity of labor demanded falls to LD The resulting surplus of labor, LS - LD is unemployment. … In this chapter we discuss four explanations for long-run unemployment: -1- frictional unemployment -2- minimum wage laws -3 - unions and collective bargaining -4- efficiency wages … -2- Minimum Wage Laws In this section we begin to examine how structural unemployment results when the number of jobs is insufficient for the number of workers wanting jobs. ... Analysis of minimum wages ...