worker actively looking for a job, but hasn’t found one
ratio of number of people unemployed to total number of people in the labor force (people who are currently working or looking for jobs)
the Humphrey-Hawkins bill passed by Congress in 1978 called on the government to seek full employment (4% unemployment rate)
What are some reasons for job loss?
rise and fall of industries as technologies and tastes change; quality of management; luck; personal reasons
when workers spend time looking for employment (normal for it to take a few weeks)
unemployment due to the time workers spend in job search
Why is frictional unemployment inevitable?
constant process of job creation and job destruction, and new workers entering the job market
unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate
Market for Labor
Y-Axis = Wage Rate, X-Axis = Quantity of Labor; consists of Labor Demand (employers demand less labor when price of labor increases – negative sloping), Labor Supply (more workers willing to supply labor as price of labor increases – positive)
What factors can lead to a wage rate in excess of We?
minimum wages, labor unions, efficiency wages, side effects of government policies
government-mandated floor on price of labor
If binding minimum wages generally lead to structural unemployment, why does the government impose them?
to help ensure that people who work can earn enough income to afford at least a minimally comfortable lifestyle
How do the actions of labor unions lead to structural unemployment?
threatens using labor strikes and collective bargaining, leading to higher wages, which causes structural unemployment; long-term contracts that bind wage rates
unions bargain for all a firm’s workers collectively in order to win higher wages from employers; threatens labor strikes (collective refusal to work)
firms are on different timetable for negotiating their labor contracts, leading the labor market to move slowly from one equilibrium to another when demand for labor changes
wages that employers set above the equilibrium wage rate as incentive for better performance (workers know more about their work opportunities than employers, higher degree of worker effort)
Natural Rate of Unemployment
normal unemployment rate around which the actual employment rate fluctuates, arises from effects of frictional and structural unemployment
deviations in actual rate of unemployment from natural rate (unemployment that arises from business cycle)
Natural Unemployment =
Frictional Unemployment + Structural Unemployment
Actual Unemployment =
Natural Unemployment + Cyclical Unemployment
What causes the natural rate of unemployment to change?
factors such as changes in characteristics of labor force, changes in labor market institutions, changes in government policies, changes in productivity
In general, unemployment rates tend to be lower for
experienced workers than for inexperienced workers
Technological change leads to
an increase in the demand for skilled workers who are familiar with the technology and a reduction in the demand for unskilled workers
How might government policies intended to help workers have an undesirable effect on employment?
high minimum wage and unemployment benefits can increase structural and frictional unemployment (some are good like job training and employment subsidies)
Changes in productivity can explain
the changes in the natural rate of unemployment (an acceleration in productivity growth can translate to lower unemployment rates for a while, and vice versa)
The Eurosclerosis hypothesis states that
high European unemployment is the result of policies intended to help workers, the unintended side-effect of government policies
What’s wrong with trying to keep unemployment below the natural rate?
an attempt to achieve such a target would lead to high and accelerating inflation
Short-run Phillips Curve (SRPC)
negative short-run relationship between the unemployment rate and the inflation rate (when unemployment is high, wage rate tends to fall, and vice versa)
Why is there a negative short-run relationship between the unemployment rate and the inflation rate?
there is a negative relationship between real GDP and unemployment rate, and when real GDP is higher than potential, the unemployment rate will be low then when real GDP is below potential; so, increases in aggregate price level are associated with increases in GDP, which tend to lower unemployment rates
What is the difference between the short-run Phillips curve and the short-run aggregate supply curve?
SRAS describes relationship between changes in unemployment rate and inflation, while SRPC describes relationship between level of unemployment rate and inflation
What other factors affect the SRPC?
supply shocks (negative shock shifts SRPC up, while positive shifts it down), expected inflation rate
Expected Inflation Rate
rate of inflation that employers and workers expect in the near future, most important factor affecting inflation other than unemployment
An increase in expected inflation shifts the
SRPC upwards (actual rate of inflation at any given unemployment rate is higher when expected inflation is higher)
What determines the expected rate of inflation?
in general, people base their expectations about inflation on experience
Why were economists skeptical of the 4% target for unemployment in the Humphrey-Hawkins bill?
a persistent attempt to trade off lower unemployment for higher inflation leads to accelerating inflation over time
How do you avoid accelerating inflation over time?
the unemployment rate must be high enough so that the actual rate of inflation matches the expected rate of inflation
Nonaccelerating Inflation Rate of Unemployment (NAIRU)
unemployment rate at which inflation does not change over time; another name for the natural rate of unemployment (frictional + structural unemployment)
Long-run Phillips Curve
relationship between unemployment and inflation in the long run; vertical line LPRC because any unemployment rate below NAIRU leads to ever-accelerating inflation