Chapter Thirty

1
Chapter Thirty

• The Labor Market, Unemployment, and Inflation

2
The Labor Market

• Demand for labor quantity of labor hired by
  firms at various wage rates
• Supply of labor quantity of labor provided by
  households at various wage rates

3
The Classical Labor Market

• In the long run, the labor market must be in
  equilibrium.

Quantity Supplied
Quantity Demanded
4
The Classical Labor Market
Wage Rate
Supply
W0
Demand
L0
Units of labor
5
The Classical Labor Market
Wage Rate
Supply
W0
W1
D0
D1
L1
Units of labor
L0
6
Deriving the AS Curve
P
Ld
Y
P
Ld
Y
7
Explaining the Existence of Unemployment

• Sticky wages
• Efficiency wage theory
• Imperfect information
• Minimum wage laws

8
Sticky Wages
Wage Rate
S
Unemployment
W0
New equilibrium wage
W1
D0
D1
L1
Units of labor
L0
L
9
Efficiency Wage Theory

• The efficiency 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.

10
Minimum Wage Laws Unemployment
Wage Rate
Unemploymnt
Supply
WMin
W0
Demand
L0
Units of labor
11
Relationship between the price level and the
unemployment rate...
Price Level, P
Unemployment Rate, U
12
Phillips Curve

• The Phillips Curve is a graph showing the
  relationship between the inflation rate and the
  unemployment rate.
• A negative relationship between unemployment and
  inflation
• An empirical relationship that held during the
  1960s

13
The Phillips Curve
Inflation rate ()
0
Unemployment Rate, U ()
14
Unemployment Rate
3
Phillips curve
2
1
Inflation Rate
1
4
10
15
Explaining the Phillips Curve -Rightward Shift
in AD-

• Price level and output rise
• Employment increases
• Unemployment decreases
• Price level and unemployment move in opposite
  directions.

16
Explaining the Phillips Curve -Leftward Shift
in AD-

• Price level and output fall
• Employment decreases
• Unemployment increases
• Price level and unemployment move in opposite
  directions.

17
The Phillips Curve U.S. Experience
Inflation
Unemployment
18
The Natural Rate of Unemployment

• The natural 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.

19
The Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
change in the inflation rate
1
0
-1
pp
Unemployment Rate, U
U1
U2
NAIRU
20
Review Terms Concepts

• Cost-of-living adjustments (COLAs)
• 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

21
Review Terms Concepts (cont.)

• Relative-wage explanation of unemployment
• Social, or implicit, contracts
• Structural unemployment
• Unemployment rate