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Principles of Economics: College Physics

This document discusses unemployment and the labor market. It defines key terms like employed, unemployed, labor force, and outlines how unemployment is measured. It describes different types of unemployment like frictional, structural, cyclical, and seasonal unemployment. It presents the classical view that unemployment should not exist due to wage flexibility bringing the labor market into equilibrium. However, it also presents the Keynesian view that wages are rigid downward, so unemployment can exist when demand decreases due to the fixed wage above the new equilibrium. It uses diagrams to illustrate how the labor market adjusts to changes in demand and productivity.

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Ahsan Jordan
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71 views19 pages

Principles of Economics: College Physics

This document discusses unemployment and the labor market. It defines key terms like employed, unemployed, labor force, and outlines how unemployment is measured. It describes different types of unemployment like frictional, structural, cyclical, and seasonal unemployment. It presents the classical view that unemployment should not exist due to wage flexibility bringing the labor market into equilibrium. However, it also presents the Keynesian view that wages are rigid downward, so unemployment can exist when demand decreases due to the fixed wage above the new equilibrium. It uses diagrams to illustrate how the labor market adjusts to changes in demand and productivity.

Uploaded by

Ahsan Jordan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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PRINCIPLES

COLLEGEOFPHYSICS
ECONOMICS
Chapter
Chapter 21#Unemployment
Chapter Title
PowerPoint Image Slideshow
FIGURE 21.1

Borders was one of the many companies unable to recover from the economic
recession of 2008-2009.
3 of 25
LABOR MARKET

Employed: Currently working for pay

Unemployed: Out of who work, but actively


looking for work

Labor Force: Employed + Unemployed

Out of Labor Force: Out of who work, but not


looking for work
4 of 25
UNEMPLOYMENT

An unemployed person is any one who is:

• Sixteen years old or older

• Out of who work

• Actively searching for work: he/she has made


specific efforts to find work during the previous
four weeks
MEASURING UNEMPLOYMENT

population = labor force + not in labor force

labor force = employed + unemployed

unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population
EMPLOYMENT DATA
PATTERNS OF UNEMPLOYMENT

The U.S. unemployment rate moves up and down as the economy


moves in and out of recessions. But over time, the unemployment
rate seems to return to a range of 4% to 6%. Highest rate was about
10% in 1983-84 and 2007-09 recession.
PATTERNS OF UNEMPLOYMENT
TYPES OF UNEMPLOYMENT

Frictional unemployment: Unemployment due to


searching time for jobs and waiting time between jobs

e.g., Jennifer, just graduated from college, is looking for a


job that matches her qualifications

Structural unemployment: Unemployment due to


changes in the structure of the economy that result in a
loss of jobs in certain industries

e.g., Ken, a farm laborer, lost his job due to mechanization.


He is getting trained to be a security officer.
TYPES OF UNEMPLOYMENT

Cyclical unemployment: Unemployment due to


labor lay-offs in a recession

e.g., Nancy, an engineer, is let go as her employer


attempts to cut labor cost.

Seasonal unemployment: Unemployment due to


seasonal changes

e.g., Tom, a ski instructor, loses his job when winter


Ends.
TYPES OF UNEMPLOYMENT

Natural Rate of Unemployment: Unemployment


that occurs as a normal functioning of the economy.
=
Frictional Unemployment + Structural Unemployment

Usually 4 to 5 percent of the labor force is searching for


jobs, waiting between jobs, or getting trained for new jobs.

Unemployment rate above the natural rate is


considered to be cyclical, e.g., 7.5% – 5% = 2.5%
THE CLASSICAL VIEW: WAGE FLEXIBILITY

The labor market is brought to equilibrium by rising


and falling wage rates.

There should not be any persistent unemployment


above the natural rate.
THE CLASSICAL VIEW: WAGE FLEXIBILITY

In a labor market with flexible wages, the equilibrium will


occur at wage We and quantity Qe, where the demand for
labor intersect the supply of labor.
THE KEYNESIAN VIEW: WAGE RIGIDITY

Wages are “rigid” or “sticky” downward.

Sticky Wages refers to the downward rigidity


of wages as an explanation for the existence
of unemployment.
THE KEYNESIAN VIEW: WAGE RIGIDITY

Because the wage rate is stuck at W, above the


equilibrium, the number of job seekers (Qs) is greater than
the number of job openings (Qd). The result is
unemployment = Qs – Qd.
ADJUSTMENT TO INCREASED DEMAND

a) In a labor market where wages could rise, an


increase in the demand for labor leads to an
increase in equilibrium wage and employment.

b) In a labor market where wages could not fall, a


decline in the demand for labor leads to a loss
of employment at the original wage. At the
fixed wage of W0, unemployment = Q0 – Q2
ADJUSTMENT TO INCREASED DEMAND
ADJUSTMENT TO PRODUCTIVITY INCREASED

o Productivity improves, increasing the demand for labor,


wage, and employment.
o Then productivity stops increasing. Still, wages keep rising.
o But, the demand for labor has not increased, so at a market
wage, unemployment exists.

 There is no improvement in productivity.


 There is no wage increase.
 Now, productivity improves, increasing the demand for labor
and creating more jobs.
ADJUSTMENT TO PRODUCTIVITY INCREASED

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