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notes 5 - EC202 Fall 09 Lecture Notes 5 Gabriele Gratton 1...

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EC202 Fall °09 Lecture Notes 5 Gabriele Gratton September 29, 2009 1 Readings Mankiw, Ch. 6 2 Unemployment There is no discussion about the economy in politics which does not touch the topic of unemployment. The percentage of people looking for a job but not being able to ±nd one is an economic ±gure touching everybody directly. From the point of view of an economist, unemployment is quite a mysterious object. In the end, if everybody is acting rationally, why should there be people not working though they are willing to do so if paid what other people receive to work? The following sections will introduce us to the labor market and several concepts and ideas about unemployment. 3 The labor market In lecture 3 we have studied the behavior of a ±rm with production function y = f ( K; L ) (1) with constant return to scale and diminishing return of both factors. Pro±t maximizing behavior implies hiring both factors up to the point in which the marginal product of each is equal to its own price (normalizing goods and ser- vices price p = 1) : @f ( K; L ) @L = W p ° w (2) @f ( K; L ) @K = r p ° °: 1
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Figure 1: production where w is the real wage paid by the ±rm. Notice that equation 2 completely de±nes the demand for labor of a ±rm. Indeed it is possible to aggregate for all ±rms and get the total demand for labor in the economy described by @F ( K; L ) @L = W p ° w: (3)
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