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By the end of this section, you will be able to:

  • Analyze cyclical unemployment
  • Explain the relationship between sticky wages and employment using various economic arguments
  • Apply supply and demand models to unemployment and wages

We have seen that unemployment varies across times and places. What causes changes in unemployment? There are different answers in the short run and in the long run. Let's look at the short run first.

Cyclical unemployment

Let’s make the plausible assumption that in the short run, from a few months to a few years, the quantity of hours that the average person is willing to work for a given wage does not change much, so the labor supply curve does not shift much. In addition, make the standard ceteris paribus assumption that there is no substantial short-term change in the age structure of the labor force, institutions and laws affecting the labor market, or other possibly relevant factors.

One primary determinant of the demand for labor from firms is how they perceive the state of the macro economy . If firms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor, and the labor demand curve shifts to the right. Conversely, if firms perceive that the economy is slowing down or entering a recession, then they will wish to hire a lower quantity of labor at any given wage, and the labor demand curve will shift to the left. The variation in unemployment caused by the economy moving from expansion to recession or from recession to expansion (i.e. the business cycle) is known as cyclical unemployment    .

From the standpoint of the supply-and-demand model of competitive and flexible labor markets, unemployment represents something of a puzzle. In a supply-and-demand model of a labor market, as illustrated in [link] , the labor market    should move toward an equilibrium wage and quantity. At the equilibrium wage (We), the equilibrium quantity (Qe) of labor supplied by workers should be equal to the quantity of labor demanded by employers.

The unemployment and equilibrium in the labor market

The graph reveals the complexity of unemployment in that, presumably, the number of jobs available should equal the number of individuals pursuing employment.
In a labor market with flexible wages, the equilibrium will occur at wage We and quantity Qe, where the number of people looking for jobs (shown by S) equals the number of jobs available (shown by D).

One possibility for unemployment is that people who are unemployed are those who are not willing to work at the current equilibrium wage, say $10 an hour, but would be willing to work at a higher wage, like $20 per hour. The monthly Current Population Survey would count these people as unemployed, because they say they are ready and looking for work (at $20 per hour). But from an economist’s point of view, these people are choosing to be unemployed.

Probably a few people are unemployed because of unrealistic expectations about wages, but they do not represent the majority of the unemployed. Instead, unemployed people often have friends or acquaintances of similar skill levels who are employed, and the unemployed would be willing to work at the jobs and wages similar to what is being received by those people. But the employers of their friends and acquaintances do not seem to be hiring. In other words, these people are involuntarily unemployed. What causes involuntary unemployment ?

Questions & Answers

I want Keynes clear example of critics on Long run , please!!
AA Reply
what study of macro economic..?
Yogini Reply
What is say's law of marketing?
INGRID Reply
goods once sold can't be returned
Marvin
but thats not true at all goods are returned all the time
Gregory
yah ur right, as a buyer, But in the marketing world, once a good is sold, its sold.
Marvin
thanks @marvin
INGRID
what study of macro economic ..?
Yogini
what does this saying in economics means "there is no such thing as a free lunch pls
Saibu Reply
autonomous consumption
Alhassan
consumption that is not related to level of income u hve.. eg consumption of basic necessities.
Ar
autonomous consumption is the consumption when income is zero or expenditure is not vary from income
ABIYOT
what is investment function?
Zahid
what is the relationship between demand and supply?
INGRID
According to ijmb marking guide, Differentiate between capital expenditure and revenue expenditure.
elemi Reply
Sir please provide me notes on :-unemployment-the trade-off between inflation and unemployment
Swikrit Reply
what is income
NAHUM Reply
reward for rendering a sercive the real income is after a taxt y-t = (y)
Alhassan
what are the components of trade?
Michelle Reply
whats is gdp
odell Reply
what is gdp per capita
odell
GDP of state divided by its population: GDP per capita. it is one of the most relevant indicator of prosperity among its citizens.
Dinesh
thanks
odell
which one is more advantageous or accurate to the other between GDP and GNP?
Katheery
Both, GDP measures only the incomes generated within the country, irrespective of ownership. whereas,GNP measures the total income earned by nationals.
Bon
but which one is a better measure
Katheery
what are supernormal profits
Caroline Reply
what are zero economic profits
Caroline
under what circumstances may a firm continue operating even when it is making losses
Caroline
why should government influence location of a firm
Caroline
using an illustration,distinguish between breakeven and shutdown point of a firm
Caroline
supernormal profits are profits beyond the normal profits a firm expects to have after the sale of all goods n services it produced
Katheery
what are the differences between choice and scarcity
Primus Reply
what is the difference between choice and scarcity
Primus
choice means we have many options scarcity means limitation within the same option we chose among choices.
Bijaya
what the d/f production efficeincy and out put efficeincy
ABIYOT
what is money?
Primus Reply
money is the material which used to exchange to buy or sell
ABIYOT
What is the law of large numbers
Nana Reply
Can anybody provide Solow Growth Model?
Sakar Reply
compare and contrast the classical view and the Keynesian view of economic growth
idoko Reply
long and short term run
AA

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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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