Question

1. Some economists blame the "labor-market rigidities" when they explain European unemployment rate. NEED short essay that explains

(a) the meaning of "generous system of unemployment insurance" and "high degree of employment protection" and

(b) how they affect wage-setting relation [W/P=F (u, z)], price-setting relation [W/P=1/(1+m)] and therefore unemployment rate (u)?

Answer 1

a) generous system of unemployment insurance is referred to as insuring by selling bond and purchasing them in order in case of unemployment crisis during lifetime of a worker at nominal rate. high degree of emloyment protection refers to employment protection for all peaple who are unemployed in form of subsidies or transfer unemployment benefits .

b)high degree of employment protection and generous system of unemployment insurance will increase the wage as bargaining power of labour will increase as there is opportunity cost of labour in terms of unemployment benefits.

price setting relation imples that markup will fall due to unemployment benefits as bargaining power of worker will increase and therefore mark up will decrease since price setting relation wage rate is negatively related to markup

and due to increase in wages unemployment will fall as demand for labour will fall as firm will find less profitable to hire more labour.