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One efficiency wage theory holds that wages influence

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Unformatted text preview: the natural rate of unemployment. Reasons for unemployment: 1. Job search. Frictional unemployment: the unemployment caused by the time it takes workers to search for a job. Unemployment of this type may be cause by a sectoral shift, a change in the composition of demand among industries or regions. Workers can also find themselves out of work when their firm fails, job performance is unacceptable, or their skills are no longer needed. They may also quit or move to another part of the country. Government employment agencies which disseminate information about job vacancies in order to match jobs and workers, and publicly funded retraining programs increase the rate of job finding, decreasing the natural rate of unemployment. Employment insurance, under which unemployed workers can collect a fraction of their wages for a certain period after losing their jobs, increases the amount of frictional unemployment by reducing the rate of job finding since workers are less pressed to search for new employment, and increases the rate of job separation since workers may choose jobs with less job security. 2. Real- wage rigidity. Wage rigidity is the failure of wages to adjust to a level at which labour supply equals labour demand. When the real wage is above the level that equilibrates supply and demand, the quantity of labour supplied exceeds the quantity demanded, causing firms to ration scarce jobs among workers, and resulting in unemployment. Structural unemployment is the unemployment resulting from wage rigidity and job rationing. Workers are unemployed because there is a fundamental mismatch between the number of people who want to work and the number of jobs available. Causes of wage- rigidity Minimum- wage laws: the government causes wage rigidity when it prevents wages from falling to equilibrium levels. It has the greatest effect on teenagers because they are the most unskilled members of the labour force, therefore the minimum wage is often binding for them. Advocates of a higher minimum wage claim it raises the income of the working poor, and although it causes unemployment for some, it raises others out of poverty. Opponents of a higher minimum wage claim that it is poorly Page 18 of 52 Jessica Gahtan Prof: Mokhles Hos...
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