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employed Any person 16 years old or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay.
Measuring Unemployment
unemployed A person 16 years old or older who is not working, is available for work, and has made specific efforts to find work during the previous 4 weeks.
If you are interested in learningmore about the economic history of American women, read the book Understanding the Gender Gap: An Economic History of American Women by Harvard University economist Claudia Goldin.
discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.
frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.
structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.
natural rate of unemployment The unemployment that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment and structural unemployment.
cyclical unemployment The increase in unemployment that occurs during recessions and depressions.
In addition to economic hardship, prolonged unemployment may also bring with it social and personal ills: anxiety, depression, deterioration of physical and psychological health, drug abuse (including alcoholism), and suicide.
– S> I = RECESSION– S<I = INFLATION– Savings is discourage during recession (Figure of Planned and Savings vs Income)– Effect: Increase S, same I, decrease Y, reduce AE, Increase Unemployment– Investment is discourage during inflation– Read “Paradox of Thrift”
3. C + S + T = C + I + G (leakages = Injections) with Govt InterventionY = AEY = Yd
Since Yd = Y – TY = C + SY = C + S + TAE = C + I + G
Therefore AE = YC + S + T = C + I + GS + T = I + G
RELATIONSHIP OF CHANGES IN MONEY AND GOODS MARKET TO UNEMPLOYMENT
• Change in goods market affects money market, and change in money market affects investment. • Change in investment leads to crowding out effect that limits the effects of change in government spending.• Any changes of the Y would affect the IS – LM model/• IS (investment-saving) and LM model indicates the relationship beetwen interest rate and Y when goods market is at
equilibrium. LM shows the relationship between interest rate and Y when money market is at equilibrium.• IS and LM model affects Aggregate Demand and Aggregate Supply.• Any change in AD and AS affects Price (inflation)• Inflation of price change negatively affects unemployment rate (Phillips Curve)• This is what we call the natural rate of inflation
Classical economists believe that the labor market always clears. If the demand for labor shifts from D0 to D1, the equilibrium wage will fall from W0 to W1. Anyone who wants a job at W1 will have one.
The Classical Labor Market and the Aggregate Supply Curve
The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes. This means that the AS curve is vertical.
When the AS curve is vertical, monetary and fiscal policy cannot affect the level of output and employment in the economy.
sticky wages The downward rigidity of wages as an explanation for the existence of unemployment.
If wages “stick” at W0 instead of falling to the new equilibrium wage of W* following a shift of demand from D0 to D1, the result will be unemployment equal to L0 - L1.
social, or implicit, contracts Unspoken agreements between workers and firms that firms will not cut wages.
Social, or Implicit, Contracts
relative-wage explanation of unemployment An explanation for sticky wages (and therefore unemployment): If workers are concerned about their wages relative to other workers in other firms and industries, they may be unwilling to accept a wage cut unless they know that all other workers are receiving similar cuts.
explicit contracts Employment contracts thatstipulate workers’ wages, usually for a period of 1 to 3 years.
Explicit Contracts
cost-of-living adjustments (COLAs) Contract provisions that tie wages to changes in the cost of living. The greater the inflation rate, the more wages are raised.
efficiency wage theory An explanation forunemployment that holds that the productivity of workers increases with the wage rate. If this is so, firms may have an incentive to pay wages above the market-clearing rate.
Firms may not have enough information at their disposal to know what the market-clearing wage is. In this case, firms are said to have imperfect information.
If firms have imperfect or incomplete information, they may set wages wrong—wages that do not clear the labor market.
• Keynesians who favored low unemployment targets argued for further government intervention in the form of wage and price controls• “Keynesian” models—short run models with various types of market imperfections• Long run models of a more “classical” character—rational expectations, policy neutrality• More emphasis on long run issues of government debt, growth, intergenerational issues