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Some people worry that technology causes structural unemployment. In the past, new technologies have put lower skilled employees out of work, but at the same time they create demand for higher skilled workers to use the new technologies. Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become structurally unemployed. For people with no skills and little education, that option is more limited.

Natural unemployment and potential real gdp

The natural unemployment rate is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to all workers working overtime.

Productivity shifts and the natural rate of unemployment

Unexpected shifts in productivity can have a powerful effect on the natural rate of unemployment. Over time, the level of wages in an economy will be determined by the productivity of workers. After all, if a business paid workers more than could be justified by their productivity, the business will ultimately lose money and go bankrupt. Conversely, if a business tries to pay workers less than their productivity then, in a competitive labor market, other businesses will find it worthwhile to hire away those workers and pay them more.

However, adjustments of wages to productivity levels will not happen quickly or smoothly. Wages are typically reviewed only once or twice a year. In many modern jobs, it is difficult to measure productivity at the individual level. For example, how precisely would one measure the quantity produced by an accountant who is one of many people working in the tax department of a large corporation? Because productivity is difficult to observe, wage increases are often determined based on recent experience with productivity; if productivity has been rising at, say, 2% per year, then wages rise at that level as well. However, when productivity changes unexpectedly, it can affect the natural rate of unemployment for a time.

The U.S. economy in the 1970s and 1990s provides two vivid examples of this process. In the 1970s, productivity growth slowed down unexpectedly (as discussed in Economic Growth ). For example, output per hour of U.S. workers in the business sector increased at an annual rate of 3.3% per year from 1960 to 1973, but only 0.8% from 1973 to 1982. [link] (a) illustrates the situation where the demand for labor—that is, the quantity of labor that business is willing to hire at any given wage—has been shifting out a little each year because of rising productivity, from D 0 to D 1 to D 2 . As a result, equilibrium wages have been rising each year from W 0 to W 1 to W 2 . But when productivity unexpectedly slows down, the pattern of wage increases does not adjust right away. Wages keep rising each year from W 2 to W 3 to W 4 . But the demand for labor is no longer shifting up. A gap opens where the quantity of labor supplied at wage level W 4 is greater than the quantity demanded. The natural rate of unemployment rises; indeed, in the aftermath of this unexpectedly low productivity in the 1970s, the national unemployment rate did not fall below 7% from May, 1980 until 1986. Over time, the rise in wages will adjust to match the slower gains in productivity, and the unemployment rate will ease back down. But this process may take years.

Questions & Answers

What is Bank rate
Arranolla Reply
How defined macroeconomics
Arranolla Reply
Macroeconomics is the study of economy wide phenomena,including inflation,economic growth and unemployment.
munna
Someone tells you "That theory has no practical value because it is abstract, it is not real , it exist only in the mind of the theorist". Refute the Statement.
johan Reply
Truly theory sometimes look like an abstract, but some theory has been tested scientifically and we believed they exist. just like the law of demand which States that the higher the price, the lower the quantity demanded vice versa. But the rule does not hold in luxury goods.
Ganiyu
Ty for the answer sir..😘
johan
Is it right
Arranolla
explain estimation problem please.
Nnenna Reply
Which is the role of household in the Government policy?
Giada Reply
What is the role of household in the Government policy?
Giada Reply
households are very important because the consumption of the goods and services are by people. households play a big role in that
Raghava
And how about work? Can they influence the government policy through the work market?
Giada
yes household can influence government policy. you see it is all about the demand and supply of commodities. Demand generated by household has to be fulfilled by the industries which in turn ofcourse influence government policies
Rishav
Do the neoclassica theory and the Keynesian one have a different vision about the household's influence in the Government policy?
Giada
what are the causes of voluntary and involuntary unemployment?
JONATHAN Reply
involentary the unemployment is when say someone is working part-time but wishes to work full time
Warface
in most of economists view a person is involuntarily unemployed if he want to move for better wage rate at some point above the market equilibrium, that he stays right now.
Salman
what are the two type of intermediation and whats there differences?
Simonsakala Reply
This might help friend. ***economicshelp.org/blog/6318/economics/functions-and-examples-of-financial-intermediaries/
Ti
ok
Habeeph
I'm new myself. I couldn't explain it very well. That's why I gave the link.
Ti
OK tnx
Habeeph
i dont know sir pls explain anybody
Avinash
thanks...ti khu
Simonsakala
never worry
Habeeph
The are many types of intermediaries
Mohammed
You're welcome Simonsakala Musaka!
Ti
A lot of the content is verbatim what's in my College textbook except this book explains it more whereas my College Book seems to think I should already know haha
Ti
please help explain mpc
Nnenna Reply
MPC is partly the each income to expenditure..
Marusaha
s the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
Kalyango
it's simply how much of one's income spent on consumption. so if on the average people in an economy spend 65% of their income on goods and services and save 35%, the MPC for that economy is 0.65 and their MPS is 0.35. The MPS is how much of their income not spent, but saved. I hope this helps.
Georgina
Georgina explained it impeccably.
Thabiso
Consumption is defined as the usage of goods or services to satisfy human wants.
Bachabor Reply
What is Marginal Propensity to Consume (MPC)?
Bachabor
What is Marginal Propensity to Consume(MPC)?
Bachabor
MPC means that when disposable increase, personal consumer spending increases also.
Thabiso
When debit and credit entries on the balance of payments are not balanced what is it called?
Thabiso Reply
unbalanced balance sheet
Warface
Thank you very much.
Thabiso
what is consumption
Ameer
the use of goods and services by households
Sonali
What is economics?
munna Reply
Economy is a subject which deals with the economic activities of human being such as production, consumption,and distribution
Arranolla
what is demand
ddamba Reply
is the desire backed by ability to buy a certain commodity at given price in given period of time.
Kalyango
yes
Raj
yas
Ashutos
willingness is a must
Sumaya
what's macroeconomics?
munna
Macroeconomics is the study of how society as a whole (an entire country's economy) chooses to allocate and use scarce resources to produce, consume and exchange in the market
Baaba
Thanks!
munna
what is economy
Ameer
How do you distinguish leading indicators from coincident indicators to lagging indicators?
Thabiso Reply
What is externalities and environmental taxation
Ganiyu Reply
environmental taxes are kind of economics instruments to adress environmental problems.
Swapnil
What is the reason behind present increasing interest rate in Argentina? Why its currency is devaluating?
Saujanya
Due to lot of money supply
Arranolla
Due to supply of money...when money supply is raise,interest rate decreases but when it's cut or decrease ,it increases interest rate.So in Argentina,with regards to money supply,interest rate will only increase when money supply decreases which in turn with higher interest rate devalue currency.
Emmanuel

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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