Measuring the Econo12

Measuring the Econo12 - happen if there were not government...

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Measuring the Economy The Causes of Unemployment Now that we have covered the types of unemployment and how to calculate the unemployment rate, let's go over what causes unemployment. There are four basic causes of unemployment in a healthy, working economy. These reasons for unemployment are: minimum wage laws, labor unions, efficiency wages, and job search. In the real world economy all four of these forces work together to create the unemployment that is reflected in the unemployment rate. Minimum Wage Laws In microeconomics, we learned that in an efficient market, the price of a good changes to equilibrate the quantity demanded and the quantity supplied. The labor market, in its natural form, is just like any other market. If there are unemployed workers who want jobs, the price of labor or the wage will simply drop until all of the labor force is employed. That is, this would
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Unformatted text preview: happen if there were not government intervention into the labor market. In order to help maintain a certain standard of living among all workers, the government implements a minimum wage, which artificially inflates the wages of the workers at the bottom of the wage scale above what the firm would normally pay at equilibrium. This in turn causes the people above the minimum wage workers to demand more pay and for the people above them to do the same. Eventually, the minimum wage causes the wages of all workers to increase above the market-clearing level. When the wage demanded is greater than the wage offered, workers earn more; but in response firms will cut jobs to recoup the money they are losing, increasing unemployed workers. Raising the minimum wage therefore also increases unemployment...
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