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22-pcurve - Labor Market and the Phillips Curve Lecture...

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macroS2010 Lec22-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Labor Market and the Phillips Curve Lecture 22-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. April 14, 2009
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macroS2010 Lec22-page 3 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Inflation and the Labor Market: Recall… The unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force. Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions. Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.
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macroS2010 Lec22-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Classical View of the Labor Market According to classical economists, the quantity of labor demanded and supplied are brought into equilibrium by rising and falling wage rates. There should be no persistent unemployment above the frictional and structural amount.
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macroS2010 Lec22-page 5 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The labor demand curve, D, illustrates the amount of labor that firms want to employ at each given wage rate. The labor supply curve, S, illustrates the amount of labor that households want to supply at each given wage rate. The Classical View of the Labor Market
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macroS2010 Lec22-page 6 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Classical economists believe that the labor market always clears. If labor demand decreases, the equilibrium wage will fall. Anyone who wants a job at W 1 will have one. There is always full employment in this sense. The Classical View of the Labor Market
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macroS2010 Lec22-page 7 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Classical Labor Market and the Aggregate Supply Curve The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes. This means that the AS curve is vertical. When the AS curve is vertical, monetary and fiscal policy cannot affect the level of output and employment in the economy.
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macroS2010 Lec22-page 8 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Unemployment Rate and the Classical View So why is there unemployment then? Some feel: The unemployment rate is not necessarily an accurate indicator of whether the labor market is working properly. The unemployment rate may sometimes seem high even though the labor market is working well.
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