Unemployment Chapter 7

2 ©1999 South-Western College Publishing Figure 7.1 The supply of labor is a flow into the labor market. Stock of unemployed The demand for labor is a flow out of the labor market. Unemployment is the stock of workers who are not matched with firms.

3 ©1999 South-Western College Publishing Figure 7.2A Y (Net output produced by the firm after paying its search costs) Search cost C Real Wage =  1 Y1Y1 L1L1 B A Profit  1 L (Quantity of labor employed by a single firm) The Labor Demand Curve in a Market with Search Costs Panel A

4 ©1999 South-Western College Publishing Figure 7.2B Y (Net output produced by the firm after paying its search costs) Search cost C Real Wage =  2 Y2Y2 L2L2 C A Profit  2 L (Quantity of labor employed by a single firm) The Labor Demand Curve in a Market with Search Costs Panel B

5 ©1999 South-Western College Publishing Figure 7.2C 11 22 L1L1 L2L2  (Real wage) The Labor Demand Curve in a Market with Search Costs Panel C L D (Quantity of labor employed by a single firm)  2 >  1 11

6 ©1999 South-Western College Publishing Figure 7.3A  (Real wage) EE ** 11 ** L (Employment) L1L1 L*L* LELE Labor supply U * (Natural rate of unemployment) Labor demand Profit, the Real Wage, and the Natural Rate of Unemployment Panel A

7 ©1999 South-Western College Publishing Figure 7.3B Panel B  (Real wage) EE **  (Profit) ** EE ** This is how profit would vary with  if there were no search costs This is how profit varies with  when there are search costs Profit, the Real Wage, and the Natural Rate of Unemployment

8 ©1999 South-Western College Publishing Figure 7.4A  * = (w 1 /P 1 ) (w/P) (Real wage) (w1/P2)(w1/P2) Panel A L (Employment) L2L2 L*L* Labor demand Labor supply U*U* U2U2 Sticky Wages and the Labor Market

9 ©1999 South-Western College Publishing Figure 7.4B  * = (w 1 /P 1 ) (w/P) (Real wage) (w1/P3)(w1/P3) Panel B L (Employment) L3L3 L*L* Labor demand Labor supply U3U3 U*U* Sticky Wages and the Labor Market

10 ©1999 South-Western College Publishing Figure 7.5 Aggregate Supply in the Short Run and the Long Run Y (Aggregate quantity of commodities supplied) P (Price of commodities) P1P1 P3P3 P2P2 Aggregate supply (short run) Quantity of output that will be produced when unemployment is at the natural rate Y3Y3 Y*Y* Y2Y2 Aggregate supply (long run)

11 ©1999 South-Western College Publishing Figure 7.6A Moving from the Short Run to the Long Run L (Employment) Panel A L3L3 L*L* L2L2 (w/P) (Real wage) (w1/P3)(w1/P3) (w1/P1)(w1/P1) (w1/P2)(w1/P2) Labor demand Labor supply U3U3 U*U* U2U2

12 ©1999 South-Western College Publishing Figure 7.6B Panel B  (Profit) ** 22 33  (Real wage) 22 ** 33 Moving from the Short Run to the Long Run

13 ©1999 South-Western College Publishing Box 7.1 Okun’s Law Percentage unemployment Percentage deviation of GDP from trend According to Okun’s law, a 1% rise in unemployment causes GDP to fall 3% below trend.

14 ©1999 South-Western College Publishing Figure 7.7A P (Price level) P3P3 P1P1 Y (Quantity of commodities demanded and supplied) Y3Y3 Y*Y* The Response to a Reduction in the Money Supply Predicted by the Search Model AD 1 : Aggregate demand before money supply contracts AD 2 : Aggregate demand after money supply contracts LR aggregate supply SR aggregate supply Panel A

15 ©1999 South-Western College Publishing Figure 7.7C Y (Aggregate supply) Y*Y* L (Employment) L*L* The production function Panel C The Response to a Reduction in the Money Supply Predicted by the Search Model L3L3 Y3Y3

16 ©1999 South-Western College Publishing Figure 7.7D L (Employment) L*L* Panel D Labor demand Labor supply U3U3 U*U* (w/P) (Real wage) (w1/P3)(w1/P3) (w1/P1)(w1/P1) L3L3 The Response to a Reduction in the Money Supply Predicted by the Search Model

17 ©1999 South-Western College Publishing Box 7.2A Index number Nominal price of commodities Nominal wage 1929’30’31’32’33’34’35’36’37’38’39 Wages and Prices in the United States During the Great Depression Panel A Time

18 ©1999 South-Western College Publishing Fraction of labor force Employment as a fraction of the labor force (left scale) Real wage (right scale) 1929’30’31’32’33’34’35’36’37’38’39 Panel B Time Real wage index Box 7.2C Wages and Prices in the United States During the Great Depression

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