Labor Force Concepts Unemployment rate (UR) = unemployed / labor force Graph by Harcourt, Inc.

The Beveridge Curve Equal numbers of vacancies and unemployed can mean either frictional or structural unemployment. Beveridge curve will shift out with higher natural rate of unemp. More unemployed than vacancies is demand deficient unemployment. An overheated economy produces more vacancies than unemployed. Graph by Harcourt, Inc.

Beveridge Curves for the US Over Time Curve shifted out during 1970’s and 1980’s, back in during 1990’s. Graph by Harcourt, Inc.

Graph copyright © 2003 by Pearson Education, Inc. The Basic Search Theory Model Given the potential wage distribution, there are some jobs with too high of qualifications and some below the reservation wage. All others are acceptable, so can determine the probability get a job.

Determination of Reservation Wage Graph by Harcourt, Inc. Wage offer at hand The reservation wage is set at the point where the MC and MB of continuing to search are equal.

Unemployment Insurance Benefits Higher levels of UI benefits imply a lower MC of searching and will increase the reservation wage. This is a typical UI benefit schedule. Graph copyright © 2003 by Pearson Education, Inc.

Unemployment Due to Rigid Wages Graph copyright © 2003 by Pearson Education, Inc. When demand shifts in, if the wage falls to W 2, then employment declines to E 2, and there is no unemployment. If the wage stays at W 0, unemployment of E 0 – E 1 results.

Unemployment Due to Efficiency Wages Intersection of supply and demand sets the standard equilibrium wage and employment level, with no unemployment in equilibrium. Intersection of No-Shirking curve and demand sets the efficiency wage and employment level, with unemployment in equilibrium.

The “Wage Curve” Graph copyright © 2003 by Pearson Education, Inc. The negative relationship between wages and unemployment implied by the efficiency wage model have been found empirically and referred to as the “wage curve”. Note that if the x-axis were the inflation rate (i.e. change in the wage rate) instead of wage rate, this would be a Phillips curve instead of a wage curve.

Policy Application: UI Financing Graph copyright © 2003 by Pearson Education, Inc. Firm’s at the maximum rate can layoff employees at zero MC. They can offer “UI holidays” that are subsidized by the other firms.