Understanding Unemployment and Inflation: The Role of Wage Adjustment in the Labor Market , Study notes of Economics

Download Understanding Unemployment and Inflation: The Role of Wage Adjustment in the Labor Market and more Study notes Economics in PDF only on Docsity! 1 Chapter 14: The Labor Market, Unemployment, and Inflation Wage Adjustment
Labor Market  In order to understand how wages adjust we need to understand how the behavior of the labor market.  Shows the relationship between the wage rate and the quantity of workers The Labor Market Labor Supply – Represents the amount of workers willing to work at a given wage Labor Demand – Represents the amount of workers a firm is willing to hiring at a given wage 2 The Classical View of the Labor Market
If labor demand decreases, the equilibrium wage will fall.
Anyone who wants a job at W1 will have one. There is always full employment in this sense.
Classical economists believe that the labor market always clears. Explaining the Existence of Unemployment
If wages “stick” at W0 rather than fall to the new equilibrium wage of W* following a shift of demand, the result will be unemployment equal to L0 – L1. The Labor Market
Labor Supply  Household tradeoff between working and leisure
Labor Demand  Productivity of workers (positive)  Output prices (positive)  Prices of alternative inputs
Complements (negative)
Substitutes (positive) 5 Existence of Unemployment
Social or Implicit Contracts  Workers could be under the impression that there wages won’t change during recessions
Explicit Contracts  It takes time for contracts to expire and to allow workers the ability to negotiate new wages Existence of Unemployment
Efficiency Wage Theory  Some firms have an incentive to offer higher than market wages  This creates an excess supply of workers  Increases the opportunity cost of shirking Existence of Unemployment
Imperfect Information  Workers and firms may not know the market wage  Firms may hire the wrong worker
Minimum Wages  In some industries minimum wages create above equilibrium wages 6 Aggregate Supply
The relationship between AS/AD and unemployment
As the economy moves up the AS curve  Output increases  Price level increases  Labor demand increases  Employment increases Phillips Curve
Shows the relationship between price/inflation and unemployment
Negative relationship  Tradeoff between a lower unemployment and higher inflation
From the AS curve  We get the relationship between price level and unemployment  Phillips Curve uses inflation Phillips Curve – 1960’s The Phillips Curve was realized after the 1960’s. Looking back the 1960’s follow the negative relationship 7 The Phillips Curve Shows the negative relationship between Inflation and Unemployment Rate Policymakers tried to target values on the Phillips Curve When AD shifts it causes movements along the Phillips Curve Aggregate Demand and Phillips Curve When AD increases, unemployment decreases and prices increase This will cause the economy to move along the Phillips Curve Policymakers began to exploit this relationship The Phillips Curve – 70’s and 80’s It appears the relationship breaks down when looking at data from the 1970’s and 1980’s 10 The Nonaccelerating Inflation Rate of Unemployment (NAIRU)
A favorable shift of the PP curve is to the left because the PP curve crosses zero at a lower unemployment rate.
A possible recent source of favorable shifts is increased foreign competition, which may have kept both wage costs and other input costs down.
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.
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. 11
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.
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.
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. 12
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.
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.
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. 15
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.
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.
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. 16
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.