Econ2102_Lecture4_handout

Econ2102_Lecture4_handout - Class Outline The Unemployment...

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8/4/11 1 Econ2102 Professor James Morley Lecture 4 Class Outline The Unemployment Rate in the Long Run Supply and Demand in the Labour Market A simple dynamic model (the “bathtub model”) of FricNonal Unemployment InflaNon in the Long Run The QuanNty Theory of Money Real v. ±ominal Interest Rates Some Unpleasant Monetarist ArithmeNc Readings: Jones Chapters 7-8 ±ext Nme: Jones Chapters 9-11 • The unemployment rate – The fraction of the labor force that is unemployed • A person is unemployed if the following conditions hold: – They do not have a job that pays a wage or salary. – They actively looked for a job during the four weeks before measuring the unemployment rate. – They are available to work. Australian Unemployment Rate 1978-2011
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8/4/11 2 U.S. Unemployment Rate 1948-2011 7.3 Supply and Demand • The labor demand curve slopes downward because of diminishing marginal product of labor (MP L ). • The labor supply curve slopes upward because the price of leisure is higher when wages are higher. • The intersection of labor supply and demand determines the level of employment and the wage rate. Wage Employment Macroeconomics , 2nd Ed Copyright © 2011 W. W. Norton & Company, Inc FIGURE’7.3’ L d Labor demand L s Labor supply w L A Change in Labor Supply • If the government collects a tax on a worker ` s wage: – The labor supply curve shifts left. – A worker receives less money and supplies less labor—this applies to any wage. – In order to be in equilibrium, firms must raise wages.
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8/4/11 3 Wage Employment Macroeconomics , 2nd Ed Copyright © 2011 W. W. Norton & Company, Inc FIGURE’7.4’ L d Labor demand L s Labor supply w A L L s 9 B L 9 w 9 (1 2 T ) w 9 A Change in Labor Demand • Suppose the government creates regulations making it harder to fire workers. – Firms will substitute capital for labour (i.e., demand fewer workers). – Labor demand shifts left, causing wages and employment to fall. – The unemployment rate rises initially and recovers as discouraged workers drop out of the labor force. Wage Employment L d Labor demand L s Labor supply w A L L d 9 Macroeconomics , 2nd Ed Copyright © 2011 W. W. Norton & Company, Inc FIGURE’7.5’ w 9 B L 9
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8/4/11 4 Employment/Pop in Australia 1960-2009 Wage Rigidities • What is a wage rigidity? – Wages fail to adjust after a shock to labor demand or supply. • What happens if wages do not fall in the above demand shock example? – The labor market will not clear and this results in a larger fall in employment and a rise in the unemployment rate Wage Employment Macroeconomics , 2nd Ed Copyright © 2011 W. W. Norton & Company, Inc FIGURE’7.6’ L d Labor demand L s Labor supply w 5 w A L L d 9 w 9 L 9 L 0 C w 5 ± Sources of Wage Rigidities • Nominal Rigidity: Money illusion(?) • Nominal/Real Rigidities: minimum wages, labour-market regulations/institutions • Real Rigidity: “efficiency” wages
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8/4/11 5 Efficiency Wages • Shapiro-Stiglitz Model • One firm, many workers • Imperfect Information
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Econ2102_Lecture4_handout - Class Outline The Unemployment...

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