Summary14 - for labor will result in unemployment 4 How can an increase in the minimum wage cause unemployment An effective minimum wage raises

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CHAPTER 14 SUMMARY: 1. Are classical economists ones who listen to Mozart? Classical economists believe that wages adjust in the labor market so the quantity demanded of labor equals the quantity supplied. In this view, unemployment consists only of frictional and structural components. 2. Is it possible that involuntary unemployment does not exist? How can this be? According to classical economists, unemployment increases when the demand for labor declines because some people are not willing to accept the lower equilibrium wage rate, preferring to try to find work at higher wages. In this view, these people are voluntarily unemployed. 3. Does "sticky wages" refer to paychecks with gum on them? Wages may be more flexible in the upward direction than in the downward direction. In other words, wages seem to be "sticky" downward. If wages do not fall readily, declines in the demand
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Unformatted text preview: for labor will result in unemployment. 4. How can an increase in the minimum wage cause unemployment? An effective minimum wage raises wages above the equilibrium wage rate. This causes a surplus in the labor market. This surplus is called unemployment. 5. Are there other reasons for unemployment? The efficiency wage theory maintains that employers may pay wages higher than the equilibrium wage rate. This will cause some unemployment. Another theory claims that imperfect information exists in the labor market and that firms, not knowing the equilibrium wage rate, may offer wages above this rate. 6. Is there such a thing as having too little unemployment? Is there a downside to having lots of people working? If unemployment falls too low, wages and prices may start to rise. Too little unemployment, therefore, can lead to an increase in inflation....
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This note was uploaded on 09/14/2009 for the course ECON 304L taught by Professor Staff during the Fall '07 term at University of Texas at Austin.

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