Page 78 - ASEAN-EU Dialogue 2018: Regional and Inter-Regional Economic Cooperation: Identifying Priorities for ASEAN and the EU
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where a is a constant. The demand of labour could be considered as a “derived” demand in
which the firm’s output is proportional to labour demand in the firm. In this sense, the output
function can be used for the employment function in the firm (ni). In this employment function,
the price (p) is replaced with the wage (w) in the output function. It means that the employment
function can be expressed as;
n (m w ) a (w ) w (13.2)
i
i
This employment function may be simplified by assuming that employment and wage level is
the same in all firms. In this simplified version, the level of employment at time t can be
expressed as;
n m w (13.3)
t
t
t
where nt is the employment level at time t, mt is the level of money supply at time t and wt is
the wage level at time t. The level of employment would be determined by the difference
between the level of money supply and level of wage rate. In the case that the increase in money
supply is greater than the increase in wage level, this would cause a positive effect on the
employment level. By contrast, in the reverse case that the increase in wage level is greater
than the increase in money supply, this would cause a negative effect on the employment level.
Under the insider model of employment, the insider in the firm would have a maximum
e
bargaining power to ensure that the expected level of employment (n ) is equal to the level of
employment at time of the negotiation ( n 1 t ). It would mean that the bargaining parameter (β)
is equal to unity under this insider model of employment. In the case that the insider’s
bargaining power is less than the maximum value, the expected level of employment could be
less than the level of employment at time of the negotiation. The employment function can be
reformulated as:
n (n ) (m m e ) (13.4)
t t 1 t t
where β is a bargaining parameter that would measure the level of strength of insider in the
firm. This employment formula indicates that some insiders could lose their employment
during an economic recession if β is less than one. More importantly, if the bargaining
parameter is less than unity, the monetary shock will disappear in the long-run. It means that a
monetary shock would have a transitory impact on the employment. In this case, the
unemployment rates would follow a stationary process. In other words, a higher-than-normal
unemployment rate would revert to an equilibrium level. However, if the bargaining parameter
is equal to unity, a monetary shock would not disappear. In this case, the unemployment rates
would follow a unit root process (Furuoka 2012; Furuoka, 2017a; Furuoka, 2017b).
In a nutshell, the main point of this theoretical framework on the employment model is that the
strength of the insider in the firm will determine the labour market dynamics. In other words,
the insider power could be the main element which determines whether unemployment rate
would follow the stationary process. It means that the unemployment rate could follow a unit
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