ch14 The Labor Market in the Macroeconomy.pptVIP

Prepared by: Fernando Quijano Shelly Tefft;;The labor force (LF) is the number of employed plus unemployed: LF = E + U;frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems. ;labor demand curve A graph that illustrates the amount of labor that firms want to employ at each given wage rate. ;Classical economists believe that the labor market always clears. If the demand for labor shifts from D0 to D1, the equilibrium wage will fall from W0 to W1. Anyone who wants a job at W1 will have one.;The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes. In the absence of sticky wages, the AS curve will be vertical. In this case, monetary and fiscal policy will have no effect on real output. Indeed, in this view, there is no unemployment problem to be solved!;Some economists argue that the unemployment rate is not a good measure of whether the labor market is working well. The economy is dynamic and at any given time some industries are expanding and some are contracting. A positive unemployment rate as measured by the government does not necessarily indicate that the labor market is working poorly. The measured unemployment rate may sometimes seem high even though the labor market is working well. Economists who view unemployment this way do not see it as a major problem. There are other views of unemployment, as we will now see.;sticky wages The downward rigidity of wages as an explanation for the existence of unemployment. ;social, or implicit, contracts Unspoken agreements between workers and firms that firms will not cut wages. ;explicit contracts Employment contracts that stipulate workers’ wages, usually for a period of 1 to 3 years.;efficiency wage theory An explanation for unemployment that holds that the productivity of workers increases with the wage rate. If this is so, fir