chapter 29 the labor market in the macroeconomy © 2009 pearson education, inc. publishing as...
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PowerPoint Lectures for
Principles of Economics, 9e
By
Karl E. Case, Ray C. Fair & Sharon M. Oster
; ;
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
29PART V THE CORE OF MACROECONOMIC THEORY
The Labor Market In
the Macroeconomy
Fernando & Yvonn Quijano
Prepared by:
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The Labor Market: Basic Concepts
The Classical View of the Labor MarketThe Classical Labor Market and the Aggregate Supply CurveThe Unemployment Rate and the Classical View
Explaining the Existence of UnemploymentSticky WagesEfficiency Wage TheoryImperfect InformationMinimum Wage LawsAn Open Question
The Short-Run Relationship Between the Unemployment Rate and InflationThe Phillips Curve: A Historical PerspectiveAggregate Supply and Aggregate Demand Analysis and the Phillips CurveExpectations and the Phillips CurveIs There a Short-Run Trade-Off between Inflation
and Unemployment?
The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of UnemploymentThe Nonaccelerating Inflation Rate of Unemployment (NAIRU)
Looking Ahead
CHAPTER OUTLINE
The Labor Market In
the Macroeconomy
29PART V THE CORE OF MACROECONOMIC THEORY
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The Labor Market: Basic Concepts
The labor force (LF) is the number of employed plus unemployed:
LF = E + U
unemployment rate The number of people unemployed as a percentage of the labor force.
Unemployment rate = U/LF
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The Labor Market: Basic Concepts
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.
cyclical unemployment The increase in unemployment that occurs during recessions and depressions.
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The Classical View of the Labor Market
labor demand curve A graph that illustrates the amount of labor that firms want to employ at each given wage rate.
labor supply curve A graph that illustrates the amount of labor that households want to supply at each given wage rate.
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The Classical View of the Labor Market
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.
FIGURE 29.1 The Classical Labor Market
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The classical view of the unemployment market is consistent with the following idea:
a. The wage rate adjusts to equate the quantity of labor demanded with the quantity of labor supplied; therefore, persistent unemployment above the frictional and structural amount is unlikely.
b. If the wage rate in the labor market is too low, people will work for themselves.
c. The amount of labor that a firm hires depends on the value of the output that workers produce.
d. All of the above.
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The classical view of the unemployment market is consistent with the following idea:
a. The wage rate adjusts to equate the quantity of labor demanded with the quantity of labor supplied; therefore, persistent unemployment above the frictional and structural amount is unlikely.
b. If the wage rate in the labor market is too low, people will work for themselves.
c. The amount of labor that a firm hires depends on the value of the output that workers produce.
d. d. All of the above.All of the above.
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The Classical View of the Labor Market
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.
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The Classical View of the Labor Market
The Unemployment Rate and the Classical View
The unemployment rate is not necessarily an accurate indicator of whether the labor market is working properly.
The measured unemployment rate may sometimes seem high even though the labor market is working well.
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Explaining the Existence of Unemployment
Sticky Wages
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.
FIGURE 29.2 Sticky Wages
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Refer to the graph below. The meaning of “sticky wages” in this graph refers to:
a. The decrease in the equilibrium wage that results after the decrease in demand.
b. The failure of the wage rate to fall after the decrease in demand.
c. The tendency for the wage rate to rise above W0 after the decrease in demand.
d. The decrease in unemployment that results after the decrease in demand.
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Refer to the graph below. The meaning of “sticky wages” in this graph refers to:
a. The decrease in the equilibrium wage that results after the decrease in demand.
b.b. The failure of the wage rate to fall after the decrease in The failure of the wage rate to fall after the decrease in demand.demand.
c. The tendency for the wage rate to rise above W0 after the decrease in demand.
d. The decrease in unemployment that results after the decrease in demand.
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Explaining the Existence of Unemployment
Sticky Wages
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.
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Explaining the Existence of Unemployment
Sticky Wages
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.
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Explaining the Existence of Unemployment
Sticky Wages
Explicit Contracts
Graduate School Applications in Recessions
Graduate School Offers Relief During Economic Recession
Oklahoma Daily (U. Oklahoma)
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Explaining the Existence of Unemployment
Efficiency Wage Theory
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.
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The efficiency wage is among the theories of unemployment that explain why:
a. Firms tend to pay wages above the wage at which the quantity of labor demanded equals the quantity supplied.
b. Firms tend to pay wages below the wage at which the quantity of labor demanded equals the quantity supplied.
c. Firms prefer to pay the wage at which quantity supplied equals quantity demanded in the labor market.
d. There is only one level of the wage rate at which quantity supplied equals quantity demanded, called the efficiency wage rate.
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The efficiency wage is among the theories of unemployment that explain why:
a.a. Firms tend to pay wages above the wage at which the Firms tend to pay wages above the wage at which the quantity of labor demanded equals the quantity supplied.quantity of labor demanded equals the quantity supplied.
b. Firms tend to pay wages below the wage at which the quantity of labor demanded equals the quantity supplied.
c. Firms prefer to pay the wage at which quantity supplied equals quantity demanded in the labor market.
d. There is only one level of the wage rate at which quantity supplied equals quantity demanded, called the efficiency wage rate.
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Explaining the Existence of Unemployment
Imperfect Information
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.
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Explaining the Existence of Unemployment
Minimum Wage Laws
minimum wage laws Laws that set a floor for wage rates—that is, a minimum hourly rate for any kind of labor.
An Open Question
The aggregate labor market is very complicated, and there are no simple answers to why there is unemployment.
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Refer to the figure below. What happens in this labor market if the minimum wage (W0) is abolished?
a. Unemployment will rise.
b. Unemployment will fall.
c. The quantity of labor demanded falls.
d. The quantity of labor supplied rises.
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Refer to the figure below. What happens in this labor market if the minimum wage (W0) is abolished?
a. Unemployment will rise.
b.b. Unemployment will fall.Unemployment will fall.
c. The quantity of labor demanded falls.
d. The quantity of labor supplied rises.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
The AS curve shows a positive relationship between the price level (P) and aggregate output (income) (Y).
FIGURE 29.3 The Aggregate Supply Curve
In the short run, the unemployment rate (U) and aggregate output (income) (Y) are negatively related.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
This curve shows a negative relationship between the price level (P) and the unemployment rate (U). As the unemployment rate declines in response to the economy’s moving closer and closer to capacity output, the price level rises more and more.
FIGURE 29.4 The Relationship Between the Price Level and the Unemployment Rate
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
inflation rate The percentage change in the price level.
Phillips Curve A curve showing the relationship between the inflation rate and the unemployment rate.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
The Phillips Curve shows the relationship between the inflation rate and the unemployment rate.
FIGURE 29.5 The Phillips Curve
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Which of the following relationships is correct?
a. There is a positive relationship between unemployment and output.
b. There is a negative relationship between output and the overall price level.
c. There is a negative relationship between the unemployment rate and the price level.
d. There is a negative relationship between output and employment.
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Which of the following relationships is correct?
a. There is a positive relationship between unemployment and output.
b. There is a negative relationship between output and the overall price level.
c.c. There is a negative relationship between the unemployment There is a negative relationship between the unemployment rate and the price level.rate and the price level.
d. There is a negative relationship between output and employment.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
During the 1960s, there seemed to be an obvious trade-off between inflation and unemployment. Policy debates during the period revolved around this apparent trade-off.
FIGURE 29.6 Unemployment and Inflation, 1960–1969
The Phillips Curve: A Historical Perspective
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Policy discussions in the 1960s concerning the Phillips Curve revolved around the issue of:
a. What point to choose along a smooth Phillips Curve.
b. What to do about a highly unstable Phillips Curve.
c. How to maintain low inflation and at the same time lower the unemployment rate.
d. How to maintain low unemployment and at the same time lower the inflation rate.
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Policy discussions in the 1960s concerning the Phillips Curve revolved around the issue of:
a.a. What point to choose along a smooth Phillips Curve.What point to choose along a smooth Phillips Curve.
b. What to do about a highly unstable Phillips Curve.
c. How to maintain low inflation and at the same time lower the unemployment rate.
d. How to maintain low unemployment and at the same time lower the inflation rate.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
From the 1970s on, it became clear that the relationship between unemployment and inflation was anything but simple.
FIGURE 29.7 Unemployment and Inflation, 1970–2007
The Phillips Curve: A Historical Perspective
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
Aggregate Supply and Aggregate Demand Analysis and the Phillips Curve
FIGURE 29.8 Changes in the Price Level and Aggregate Output Depend on Shifts in Both Aggregate Demand and Aggregate Supply
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If there is no systematic relationship between inflation and unemployment, it is because:
a. The aggregate demand curve shifts, without a shift in the aggregate supply curve.
b. Both the aggregate demand and the aggregate supply curve shift simultaneously.
c. Neither the aggregate demand nor the aggregate supply curves shift.
d. Government policies have effectively eradicated inflation and unemployment.
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If there is no systematic relationship between inflation and unemployment, it is because:
a. The aggregate demand curve shifts, without a shift in the aggregate supply curve.
b.b. Both the aggregate demand and the aggregate supply curve Both the aggregate demand and the aggregate supply curve shift simultaneously.shift simultaneously.
c. Neither the aggregate demand nor the aggregate supply curves shift.
d. Government policies have effectively eradicated inflation and unemployment.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
Aggregate Supply and Aggregate Demand Analysis and the Phillips Curve
FIGURE 29.9 The Price of Imports, 1960 I–2007 IV
The Role of Import Prices
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
Expectations and the Phillips Curve
Expectations are self-fulfilling. This means that wage inflation is affected by expectations of future price inflation.
Price expectations that affect wage contracts eventually affect prices themselves.
Inflationary expectations shift the Phillips Curve to the right.
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Refer to the graph below. The impact of higher inflationary expectations on this Phillips curve is reflected by the move:
a. From a to b.
b. From a to c.
c. From a to d.
d. None of the above. Inflationary expectations do not affect the Phillips curve.
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Refer to the graph below. The impact of higher inflationary expectations on this Phillips curve is reflected by the move:
a. From a to b.
b. From a to c.
c.c. From From aa to to dd..
d. None of the above. Inflationary expectations do not affect the Phillips curve.
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The Short-Run Relationship Betweenthe Unemployment Rate and Inflation
Is There a Short-Run Trade-Off between Inflation and Unemployment?
There is a short-run trade-off between inflation and unemployment, but other factors besides unemployment affect inflation. Policy involves more than simply choosing a point along a nice smooth curve.
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The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment
If the AS curve is vertical in the long run, so is the Phillips Curve. In the long run, the Phillips Curve corresponds to the natural rate of unemployment—that is, the unemployment rate that is consistent with the notion of a fixed long-run output at potential output. U* is the natural rate of unemployment.
FIGURE 29.10 The Long-Run Phillips Curve: The Natural Rate of Unemployment
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The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment
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.
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The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment
The Nonaccelerating Inflation Rate of Unemployment (NAIRU)
NAIRU The nonaccelerating inflation rate of unemployment.
To the left of the NAIRU, the price level is accelerating (positive changes in the inflation rate); to the right of the NAIRU, the price level is decelerating (negative changes in the inflation rate). Only when the unemployment rate is equal to the NAIRU is the price level changing at a constant rate (no change in the inflation rate).
FIGURE 29.11 The NAIRU Diagram
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Refer to the figure below. Which of the following causes a leftward shift in the PP curve?
a. A positive change in the rate of inflation.
b. A negative change in the rate of inflation.
c. An adverse change in input prices.
d. A favorable change in input prices.
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Refer to the figure below. Which of the following causes a leftward shift in the PP curve?
a. A positive change in the rate of inflation.
b. A negative change in the rate of inflation.
c. An adverse change in input prices.
d.d. A favorable change in input prices.A favorable change in input prices.
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cost-of-living adjustments (COLAs)
cyclical unemployment
efficient wage theory
explicit contracts
frictional unemployment
inflation rate
labor demand curve
labor supply curve
minimum wage laws
REVIEW TERMS AND CONCEPTS
NAIRU
natural rate of unemployment
Phillips Curve
relative-wage explanation of unemployment
social, or implicit, contracts
sticky wages
structural unemployment
unemployment rate