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MacroeconomicsCHAPTER 15
Labor Markets, Unemployment, and Inflation
PowerPoint® Slides by Can Erbil
© 2006 Worth Publishers, all rights reserved
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What you will learn in this chapter:
The meaning of the natural rate of unemployment, and why it isn’t zero
Why cyclical unemployment changes over the business cycle
How factors such as a minimum wage and efficiency wages can lead to structural unemployment
The reasons that unemployment can be higher or lower than the natural rate for extended periods
The existence of a short-run trade-off between unemployment and inflation, called the short-run Phillips curve, that disappears in the long run
Why the NAIRU, the nonaccelerating inflation rate of unemployment, is an important measure for policy-making
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The Nature of UnemploymentWorkers who spend time looking for employment are engaged in
job search.
Frictional unemployment is unemployment due to the time workers spend in job search.
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The Nature of UnemploymentWorkers who spend time looking for employment are engaged in
job search.
Frictional unemployment is unemployment due to the time workers spend in job search.
Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.
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Distribution of the Unemployed by Duration of Unemployment, 2000
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The Effect of a Minimum Wage on the Labor Market
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Causes of Structural UnemploymentMinimum wages - a government-mandated floor on the price
of labor. In the US, the national minimum wage in 2005 was $5.15 an hour.
Unions - by bargaining for all a firm’s workers collectively (collective bargaining), unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually.
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Causes of Structural UnemploymentEfficiency wages - wages that employers set above the
equilibrium wage rate as an incentive for better performance.
Side effects of government policies - public policies designed to help workers who lose their jobs; these policies canlead to structural unemployment as an unintended side effect.
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The Natural Rate of Unemployment
The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates.
Cyclical unemployment is a deviation in the actual rate of unemployment from the natural rate.
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The Changing Makeup of the U.S. Labor Force
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Changes in the Natural Rate of Unemployment
Changes in Labor Force Characteristics
Changes in Labor Market Institutions
Changes in Government Policies
Changes in Productivity
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Unemployment and the Business CycleThe percentage difference between the actual level of real GDP and potential output is the output gap.
When actual output is equal to potential output, the actual unemployment rate is equal to the natural rate of unemployment.
When the output gap is positive (an inflationary gap), the unemployment rate is below the natural rate. When the output gap is negative (a recessionary gap), the unemployment rate is above the natural rate.
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The Actual Unemployment Rate Fluctuates Around the Natural Rate
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These Fluctuations Correspond to the Output Gap
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Okun’s Law
According to Okun’s law, each additional percentage point of output gap reduces the unemployment rate by less than 1 percentage point.
That is, a modern version of Okun’s law reads:
Unemployment rate = Natural rate of unemployment − (0.5 ×
Output gap)
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Why Doesn’t the Labor Market Move Quickly to Equilibrium?
Some dispute about why wages adjust slowly.
Two main theories:
Misperceptions - workers are slow to realize that the equilibrium wage rate has changed.
Sticky Wages - occur when employers are slow to reduce wages in the face of a surplus of labor.
Prices of some goods and services also seem to adjust slowly: Menu costs
are small costs associated with the act of changing
prices.
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Unemployment and Inflation: The Phillips Curve
The short-run Phillips curve
is the negative short-run relationship between the unemployment rate and the inflation rate.
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Unemployment and Inflation in the 1960s
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Expected Inflation and the Short-Run Phillips Curve The expected rate of inflation is the rate of
inflation that employers and workers expect in the near future.
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The NAIRU and the Long-Run Phillips Curve
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The NAIRU and the Long-Run Phillips Curve
The nonaccelerating inflation rate of unemployment, or NAIRU, is the unemployment rate at which inflation does not change over time.
It is equal to the natural rate of unemployment.
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The NAIRU and the Long-Run Phillips Curve
The long-run Phillips curve shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience.
The long-run Phillips curve is vertical because there is no trade-off between the unemployment rate and the inflation rate in the long run.
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Unemployment and Inflation, 1961–1990
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The End of Chapter 15
coming attraction: Chapter 16:
Inflation, Disinflation, and Deflation