Macroeconomics Unemployment Economics

Warm-Up Using diagrams, explain the difference between cost-push and demand-pull inflation.

Unemployment Unemployment: Main macroeconomic goal The lower the unemployment rate, the healthier the economy. “People of working age who are without work, available for work and actively seeking employment”

Unemployment Unemployment rate = Number of people unemployed and looking for work Number of people in labor force

Distribution of Unemployment National unemployment rate: Average for an entire country Masks inequalities among different groups Geographical disparities: varied unemployment by region Age disparities: rates in the under-25 category are much higher Ethnic differences: ethnic minorities often have higher unemployment rates Gender disparities: much higher unemployment rates for women

Costs of Unemployment Costs to the unemployed: Lower income, lower standard of living, more health problems Costs to society: Higher rates of crime, gang activities, etc. Costs to the entire economy: Producing at a point inside the PPC; lower output and lower income

Labor Market Equilibrium The labor market In equilibrium when the aggregate demand of labor is equal to the aggregate supply of labor Equilibrium wage for the market is established by the interaction of ADL and ASL.

Disequilibrium Unemployment Real-Wage Unemployment (classical unemployment) Trade unions and government minimum wages interfere with meeting equilibrium Causes a surplus of labor

Real-Wage Solutions Solutions to Real-Wage Unemployment: Limit trade union power Reduce minimum wage What problems could these solutions cause?

Disequilibrium Unemployment Demand-deficient unemployment (cyclical unemployment or Keynesian unemployment) when workers are laid off due to decreases in economic growth

Demand-Deficient Unemployment Causes a decrease in AD for labor This should lead to W2 but does not due to “sticky wages” Leads to a surplus of labor

Solutions Solution to demand- deficient unemployment Increase AD through fiscal or monetary policies Implement Keynesian policies

Equilibrium Unemployment (natural unemployment) People can be unemployed when the labor market is in equilibrium Number of job vacancies equals the number of people looking for jobs

Types of Unemployment Frictional unemployment – when workers are in- between jobs Looking for a better job Can find a job somewhere but wants to hold out for a better offer Solutions: Lower unemployment benefits Improving the flow of information from employers to job-seekers

Types of Unemployment Seasonal unemployment – jobs that depend on the weather Ex. Snow plow drivers = only work in the winter Solutions: Encouraging people to take different jobs in the “off season” Reduced unemployment benefits Greater flow of information

Types of Unemployment Structural unemployment – when workers skills no longer meet the demands of the economy Permanent fall in the demand for a particular type of labor Ex: factory workers where the factories have all closed down Workers relocate to a place where their skills are demanded

Types of Unemployment Solutions (Free-Market Policies) Reduce unemployment benefits Labor market deregulation (unemployment might fall but at a high cost) Solutions: (Interventionist Policies) Educational system to train people to be “occupationally flexible” Spending on adult retraining programs Subsidies to firms that train Subsidies or tax breaks to encourage job seekers to move Government support for apprenticeship programs

Crowding Out Crowding out occurs when governments run budget deficits in order to stimulate the economy and reduce unemployment Higher interest rates keep people from investing

Types of Crowding Out Physical crowding out: Economy is close to productive capacity Psychological crowding out: Private sector worrying about too much government intervention

Practice Workpoints 20.4, Essay Question 2 (a, b)