Lecture Twelve: Ch. 9: Unemployment & Natural Rate
Review: Why is there unemployment?
• There are three types of unemployment
1. Frictional unemployment
1. Structural unemployment *
1. Cyclical unemployment -> business cycle
*Natural rate of unemployment.
1. Minimum wage: economic theory
• Price floor: Legal minimum binding
• Sps min wage increases
a. Increases in unemployment
a. Employed decreases
Minimum wage: real world
• Types of workers effected by minimum wage are unskilled workers. • In addition McDonalds cant cut back on employees since they need a certain amount of
people to manage the place (cook, cashier, etc. )
• Minimum wage therefore does not effect lawyers since $10.25 is not binding as its well
• Considering a small town that has one factory and many small businesses. Why would
you expect the wage to be the same in both industries?
• Equilibrium will be the same.
Now suppose workers in the factory form a union: What happens?
1. Efficiency wages
• Firms operate more efficiently by increased worker productivity if wages are above
a. Worker health
a. Worker turnover
a. Worker effort: decrease in shirking
b. Worker quality • Henry ford: paid his workers 2x the wa