Unformatted text preview: What's less obvious is why a firm would want to hold excess labor and capital. Â· Suppose there's an economic downturn and a firm needs to cut back production. Laying off workers or selling some capital could involve large adjustment costs, such as hurting worker morale. A firm may be better off having more inputs than necessary to avoid these costs. Â· One final concept we can discuss is Okun's Law, which says the unemployment rate falls by about one percent for every 3 percent increase in real GDP. Although the relationship is not exactly one to three, it's true a one percent increase in output leads to less than a one percent decrease in the unemployment rate. Â· Why? Well, firms increase the number of hours their current workers work. Output increases without a drop in unemployment. When output goes up, workers who were discouraged start looking for work again. The labor force increases, which puts upward pressure on the unemployment rate, even though output is increasing....
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- Spring '05