Chapter ThirtyChapter Thirty
The Labor Market, The Labor Market, Unemployment, and Unemployment, and
InflationInflation
The Labor MarketThe Labor Market
Demand for laborDemand for labor: quantity of labor hired by firms at various wage rates
Supply of laborSupply of labor: quantity of labor provided by households at various wage rates
The Classical Labor MarketThe Classical Labor Market
In the long run, the labor market must be in equilibrium.
QuantitySupplied
QuantityDemanded
The Classical Labor MarketThe Classical Labor MarketWage Rate
L0
Demand
Supply
W0
Units of labor
The Classical Labor MarketThe Classical Labor MarketWage Rate
L1
D0
Supply
W1
Units of labor
D1
L0
W0
Deriving the AS CurveDeriving the AS Curve
P Ld Y
P Ld Y
Explaining the Existence of Explaining the Existence of UnemploymentUnemployment
Sticky wages Efficiency wage theory Imperfect information Minimum wage laws
Sticky WagesSticky WagesWage Rate
L1
D0
S
W1
Units of labor
D1
L0
W0
L*
New equilibrium wage
UnemploymeUnemploymentnt
Efficiency Wage TheoryEfficiency Wage Theory
The efficiency wage theoryefficiency wage theory 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.
Minimum Wage Laws & Minimum Wage Laws & UnemploymentUnemployment
Wage Rate
L0
Demand
Supply
W0
Units of labor
WMin
UnemploymntUnemploymnt
Relationship between the price level Relationship between the price level and the unemployment rate...and the unemployment rate...
Price Level, P
Unemployment Rate, U
Phillips CurvePhillips Curve
The Phillips CurvePhillips Curve is a graph showing the relationship between the inflation rate and the unemployment rate.A negative relationship between unemployment and inflationAn empirical relationship that held during the 1960s
The Phillips CurveThe Phillips Curve
Unemployment Rate, U (%)
Inflation rate (%)
0
UnemploymentRate
InflationRate
1%
2%
3%
1%
4% 10%
Phillips curvePhillips curve
Explaining the Phillips CurveExplaining the Phillips Curve --Rightward Shift in AD-Rightward Shift in AD-
Price level and output riseEmployment increasesUnemployment decreasesPrice level and unemployment move in opposite directions.
Explaining the Phillips CurveExplaining the Phillips Curve -Leftward Shift in AD- -Leftward Shift in AD-
Price level and output fallEmployment decreasesUnemployment increasesPrice level and unemployment move in opposite directions.
0
1
2
3
4
5
6
7
8
9
10
2 4 6 8 10
1960s
1970s
1980s
Unemployment
Inflation
The Phillips Curve: U.S. ExperienceThe Phillips Curve: U.S. Experience
The Natural Rate of UnemploymentThe Natural Rate of Unemployment
The natural rate of unemploymentnatural rate of unemployment is a concept consistent with the notion of a fixed long-run output at potential GDP. Generally considered the sum of the frictional and structural unemployment rates.
The The NNon-on-AAccelerating ccelerating IInflation nflation RRate of ate of UUnemployment (NAIRU)nemployment (NAIRU)change in the inflation rate
Unemployment Rate, UU1 U2NAIRU
0
-1
1
pp
Review Terms & ConceptsReview Terms & Concepts
Cost-of-living adjustments (COLA’s)
Cyclical unemployment Efficiency wage theory Explicit contracts Frictional
Unemployment Inflation rate
Labor demand curve Labor supply curve Minimum wage laws NAIRU Natural rate of
unemployment Phillips Curve
Review Terms & Concepts Review Terms & Concepts (cont.)(cont.)
Relative-wage explanation of unemployment
Social, or implicit, contracts Structural unemployment Unemployment rate