ECON 105 Lecture Notes - Lecture 14: Nominal Rigidity, Real Wages, Efficiency Wage

• School: Simon Fraser University
• Department: Economics
• Course: ECON 105
• Professor: Brian Krauth

Document Summary

Sticky wages: upward-sloping (ls, downward sloping (ld, wage adjusts (ls = ld, frictional unemployment = when it takes time for employees and firms ro find one. In competitive markets, workers and firms will negotiate a nominal wage (wo) that will clear the market (ls = ld) at the expected price level (pc) If p0 = pc, output is at potential ( y =y*: actual output can be more or less than potential output. In the long run, wages adjust so that: unemployment is at its natural rate, actual output equals potential output, the long run (lras curves on the same graph. Shifts in lras: the lras curve us a vertical line at y*, so anything that affects y* shifts the lras curve. If the natural rate of unemployment goes up: potential output goes down (y* down, lras curve shifts in. If labour force participation or the working-age population go up: potential output goes p (y* up, lras curve shift out.