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>> Labor Markets, Unemployment, and Inflation Section 3: Why Doesn’t the Labor Market Move Quickly to Equilibrium? chapter 15 We’ve now seen that the unemployment rate fluctuates around the natural rate of unemployment. A look back at Figure 15-4 shows that these fluctuations can last for long periods. For example, the actual unemployment rate was above the natural rate from 1980 to 1987. One way to think about the natural rate of unemployment is that it is an equilib- rium rate, the rate of unemployment that the labor market achieves when employers and workers have had time to adjust. Deviations from the natural rate, then, are sit- uations in which the labor market is out of equilibrium. What we have learned is that the labor market often remains out of equilibrium for long stretches of time. Yet in most economic analyses we assume that markets move quickly to equilibri- um. Why is the labor market different? One compelling answer is that wages behave differently from the prices of many goods and services. Wages do not fall quickly in the face of labor surpluses or rise
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2 CHAPTER 15 SECTION 3: WHY DOESN’T THE LABOR MARKET MOVE QUICKLY TO EQUILIBRIUM? quickly in the face of shortages. Almost all macroeconomists agree that wages adjust slowly to surpluses or shortages of labor. There is, however, some dispute about why wages adjust slowly. Broadly speaking, there are two main theories: misperceptions and sticky wages. Misperceptions: Some macroeconomists believe that an important source of slow wage adjustment is that workers are slow to realize that the equilibrium wage rate has changed. For example, a worker searching for a new job may have expectations based
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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