macsg14 - 14 [29] The Labor Market in the Macroeconomy C...

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353 14 [29] The Labor Market in the Macroeconomy C hapter objectives: 1. Interpret a diagram representing the classical view of the labor market and explain the beliefs of the classical economists. 2. Distinguish among the theories explaining wage stickiness. Relate wage stickiness to persistent unemployment. 3. Outline the efficiency wage theory, the role of imperfect information in the wage adjustment process, and the possible effects of a minimum wage law. 4. Use the AS/AD model to explain the Phillips Curve and the short-run trade-off between the unemployment rate and the inflation rate as it appeared in the 1950s and 1960s and to explain why the relationship collapsed after that. 5. Explain why a vertical AS curve implies a vertical (long-run) Phillips Curve. Link the vertical Phillips Curve to the concept of the natural rate of unemployment and comment on the effectiveness of fiscal and monetary policy. 6. Explain what is implied by the non-accelerating inflation rate of unemployment (NAIRU). The textbook has addressed the issue of unemployment before. This chapter, however, isn’t simply a rerun of previous material. Make a list of the theories relevant to unemployment. In most cases, this is new material. Note that theories need not be mutually exclusive. BRAIN TEASER: On leaving college you will be swamped with job offers (hopefully). How will you choose among them? Will nominal wage be your sole criterion? If not, what else might be important to you? How “perfect” is your information? Will you necessarily accept the job for which you have the least imperfect information? As an entry-level employee, how long do you think you will want to stay in your first job—i.e., how long will you be prepared to “live with” a poor job selection? And lastly, if you consider leaving, aren’t you running the risk of entering a similar job market and making another similarly poor selection?
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354 Study Guide to Principles of Macroeconomics OBJECTIVE 1: Interpret a diagram representing the classical view of the labor market and explain the beliefs of the classical economists. Classical economists argued that wages adjust freely to clear the labor market. During economic upswings, workers accept higher wages and, in downturns, accept lower wages. Unemployment shouldn’t persist—the wage rate should adjust until equilibrium (full employment) is restored. Price level changes would cause rapid changes in wages, implying a vertical aggregate supply curve. The classical economists saw little role for active fiscal or monetary policy. Persistent (involuntary) unemployment is not possible in such a model; events during the Depression showed that the model was implausible. (page 260 [572]) ±±± LEARNING TIP: The critical assumption of the classical economists is that wages are perfectly flexible . Keynesians, however, believe wages are “sticky,” especially downward.
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macsg14 - 14 [29] The Labor Market in the Macroeconomy C...

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