Chapter Thirty The Labor Market, Unemployment, and Inflation

The Labor Market 4 Demand for labor 4 Demand for labor: quantity of labor hired by firms at various wage rates 4 Supply of labor 4 Supply of labor: quantity of labor provided by households at various wage rates

The Classical Labor Market 4 In the long run, the labor market must be in equilibrium. Quantity Supplied Quantity Demanded

The Classical Labor Market Wage Rate L0L0 Demand Supply W0W0 Units of labor

The Classical Labor Market Wage Rate L1L1 D0D0 Supply W1W1 Units of labor D1D1 L0L0 W0W0

Deriving the AS Curve PLdLd Y PLdLd Y

Explaining the Existence of Unemployment 4 Sticky wages 4 Efficiency wage theory 4 Imperfect information 4 Minimum wage laws

Sticky Wages Wage Rate L1L1 D0D0 S W1W1 Units of labor D1D1 L0L0 W0W0 L*L* New equilibrium wage Unemployme nt

Efficiency Wage Theory 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.

Minimum Wage Laws & Unemployment Wage Rate L0L0 Demand Supply W0W0 Units of labor W Min Unemploymnt

Relationship between the price level and the unemployment rate... Price Level, P Unemployment Rate, U

Phillips Curve Phillips Curve The Phillips Curve is a graph showing the relationship between the inflation rate and the unemployment rate. 4 A negative relationship between unemployment and inflation 4 An empirical relationship that held during the 1960s

The Phillips Curve Unemployment Rate, U (%) Inflation rate (%) 0

Unemployment Rate Inflation Rate 1% 2% 3% 1% 4%10% Phillips curve

Explaining the Phillips Curve - Rightward Shift in AD- 4 Price level and output rise 4 Employment increases 4 Unemployment decreases 4 Price level and unemployment move in opposite directions.

Explaining the Phillips Curve -Leftward Shift in AD- 4 Price level and output fall 4 Employment decreases 4 Unemployment increases 4 Price level and unemployment move in opposite directions.

Unemployment Inflation The Phillips Curve: U.S. Experience

The Natural Rate of Unemployment 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.

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) change in the inflation rate Unemployment Rate, U U1U1 U2U2 NAIRU 0 1 pp

Review Terms & Concepts 4 Cost-of-living adjustments (COLA’s) 4 Cyclical unemployment 4 Efficiency wage theory 4 Explicit contracts 4 Frictional Unemployment 4 Inflation rate 4 Labor demand curve 4 Labor supply curve 4 Minimum wage laws 4 NAIRU 4 Natural rate of unemployment 4 Phillips Curve

Review Terms & Concepts (cont.) 4 Relative-wage explanation of unemployment 4 Social, or implicit, contracts 4 Structural unemployment 4 Unemployment rate