Chapter 31

Chapter 31 - Chapter 31 Employment and Unemployment Over...

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Chapter 31 Employment and Unemployment Over the span of many years, increases in the labor force are more or less matched by increases in employment, and unemployment is roughly stable. Over the course of the business cycle, unemployment fluctuates considerably Change in employment In most years, enough jobs are created to o Replace old jobs that have been eliminated o Provide jobs for the growing labor force During periods of rapid economic growth, the unemployment rate usually falls. During recessions or period of slow growth, the unemployment rate usually rises. The actual level of unemployment is determined both by the demand for labor and by the supply of labor – in Canada the labor supply has expanded virtually every year Flows in the labor market The level of activity in the labor market is better reflected by the flow into and out of unemployment that by the overall unemployment rate. Even though the unemployment rate may be constant, hundreds of thousands of Canadians flow between employment and unemployment every month. By looking at the gross flows in the labor market, we are able to see economic activity that is hidden when we just look at the overall level of employment and unemployment. Consequences of unemployment 2 important costs associated with unemployment are:
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o Lost output and income – the unemployed are valuable resources who are current not being used. – this is a loss to society that cannot be regained o Personal costs – loss of self-esteem and skills Unemployment fluctuations Cyclical unemployment is the difference between the actual level of unemployment and the amount that exists at “full employment” – this is, when Y=Y* When Y=Y*, all unemployment is either frictional or structural o Frictional – normal turnover o Structural – regional or occupation ‘mismatch’ People who are cyclically unemployed are normalled presumed to be suffered from involuntary unemployment – they are willing to work at the going wage but are unable to find appropriate jobs Keynesians argue that cyclical unemployment exists because real wages do not quick adjust to clear labor markets in response to shocks of various kinds. The New classic economists has a different view of short run fluctuations in unemployment, in their models, real wages adjust very quickly to clear labor markets and as a result real GDP is always equal to Y*. for these economists, there is no cyclical unemployment whatsoever, only frictional and structural. Why does cyclical unemployment exist? With perfectly flexible wages, employment and real wages would be procyclical (rising in booms and falling in slumps) but there would be no involuntary unemployment. – but this is not what we observe New Classical Theory New classical economics is one approach for explaining short-run macroeconimic fluctuations. In this view, shocks to technology and tastes play
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This note was uploaded on 04/07/2009 for the course ECON 295 taught by Professor Ragan during the Spring '08 term at McGill.

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Chapter 31 - Chapter 31 Employment and Unemployment Over...

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