Explaining Business Cycle Fluctuations with the Classical Model
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Explaining Business Cycle Fluctuations with the Classical Model Outline: 1. The business cycle: again. 2. Cyclical fluctuations as an equilibrium phenomenon • Shifts of labor supply • Shifts of labor demand 3. Cyclical fluctuations as a disequilibrium phenomenon • Labor union truculence • Wage legislation
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Explaining Business Cycle Fluctuations with the Classical Model. Outline: The business cycle: again. Cyclical fluctuations as an equilibrium phenomenon Shifts of labor supply Shifts of labor demand Cyclical fluctuations as a disequilibrium phenomenon Labor union truculence - PowerPoint PPT Presentation
Transcript of Explaining Business Cycle Fluctuations with the Classical Model
Explaining Business Cycle Fluctuations with the Classical Model
Outline:
1. The business cycle: again.
2. Cyclical fluctuations as an equilibrium phenomenon
• Shifts of labor supply
• Shifts of labor demand
3. Cyclical fluctuations as a disequilibrium phenomenon
• Labor union truculence
• Wage legislation
2000
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10000
60 65 70 75 80 85 90 95 00
Quarterly GDP, 1996 Dollars, Annual Rate
Recessions are shaded
www.economagic.com
11000
12000
13000
14000
15000
16000
60 65 70 75 80 85 90 95 00
Employment in Manufacturing Industries, Monthly, in Thousands Recessions are shaded
www.economagic.com
500
1000
1500
2000
2500
3000
60 65 70 75 80 85 90 95 00
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Housing Starts, Monthly, Annual Rate, in Thousands
Recessions are shaded
0
200
400
600
800
1000
60 65 70 75 80 85 90 95 00
Monthly Consumer Durable Goods Sales, 1996 Dollars, Annual Rate
www.economagic.com
Recessions are shaded
Our next slide will illustratea recession that results from a shift of the labor supply (LS) schedule.
Notice this is an equilibrium situation in that both actual and
potential GDP change.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LD
LS1
100
100
R
$15
$7 Trillion
0
0
B$17
Z
LS2
92
92
$6.5 Trillion
Some economists believe that fluctuations of real
GDP and employment can be explained by shifts in the supply of labor—but they
are in the minority.
Our next slide will illustratea recession that results from a shift of the labor supply (LD) schedule. Again notice this is an equilibrium
situation in that both actual and potential GDP change.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LD1
LS1
100
100
R
$15
$7 Trillion
0
0
$13
Z
LS
2
92
92
$6.5 Trillion
B
LD2
Economists of the 1930’s viewed the Depression as a
“non-market clearing”, disequilibrium
phenomenon. That is, “frictions” in the labor
market were causing the wage to get stuck above its
equilibrium value.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LS
LS1
100
100
R
$15
$7 Trillion
0
0
Wage is stuck at $17
Now we Have a GDP Gap = $.5 Trillion
$17
92 108
92
$6.5 Trillion
Excess Supply
•Firms may have to pay minimum starting wages and benefits under the terms of collective bargaining agreements with the UAW, Teamsters, UMW, USW, UTW, or other major unions.
•Federal law stipulates minimum wages and contributions for social insurance.
