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BU204 Unit 9 Seminar Chapter 8 Labor Markets, Unemployment, and Inflation Slide 2 There is always a positive amount of unemployment in the economy: job search leads to frictional unemployment. There may also be structural unemployment, which is the result of factors that include minimum wages, unions, efficiency wages, and side effects of government policies. Chapter 8 Slide 3 Frictional plus structural unemployment make up the natural rate of unemployment. Its a rate that can and does shift over time. At any given time, the actual unemployment rate fluctuates around the natural rate because of the business cycle. Chapter 8 Slide 4 Cyclical unemployment is linked to the output gap: when the output gap is positive, cyclical unemployment is negative; when the output gap is negative, cyclical unemployment is positive. Swings in cyclical unemployment are, however, smaller than swings in the output gap, a fact captured by Okuns law (for every one percentage point by which the actual unemployment rate exceeds the so-called natural rate of unemployment, real gross domestic product is reduced by 2% to 3%). Chapter 8 Slide 5 Unlike many markets, the labor market doesnt move quickly to equilibrium. This may, in part, reflect misperceptions on the part of workers and employers about the state of the market. Sticky wages (resistant to change) also appear to play a role, slowing the adjustment of wages even in the absence of misperceptions. Prices (including the wage rate) are also slow to adjust in some cases, in part reflecting the menu costs of changing prices. Chapter 8 Slide 6 The short-run Phillips curve shows a negative relationship between the unemployment rate and inflation rate. The short-run Phillips curve is related to, but not the same thing as, the short-run aggregate supply (SRAS) curve. Today, macroeconomists believe that the short- run Phillips curve shifts with changes in the expected rate of inflation. Chapter 8 Slide 7 Because expectations change with experience, attempts to keep the unemployment rate persistently low lead not only to high inflation but also to constantly accelerating inflation. The nonaccelerating inflation rate of unemployment, or NAIRU, is the rate of unemployment at which inflation is stable. It is equal to the natural rate of unemployment. The long-run Phillips curve is vertical because there is no trade-off between the unemployment rate and the inflation rate in the long run. Chapter 8 Slide 8 Chapter 8 conclusion This concludes our coverage of key points from Chapter 8 This concludes our coverage of key points from Chapter 8 Are there any questions? Are there any questions?