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03.06 - Labour Markets

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ECON 102
Lanny Zrill

Labour Markets 03-06-2013 Types of Unemployment  Structural – mismatch in skills, industry or location between available jobs and unemployed workers  Frictional – results from turnover in the labour market as workers move between jobs  Cyclical – due to deviations of GDP from Y* Generally, we’re only worried/concerned with cyclical unemployment. Natural Rate of Unemployment  Natural Rate of Unemployment (U*) – rate of unemployment where Real GDP is equal to Y*  At U*, there is no cyclical unemployment, BUT there still exists some unemployment  Usually about 7% - structural, season, or frictional reasons Theories of Cyclical Unemployment Put it in a demand and supply framework:  How does the hourly wage change over the business cycle?  We’re looking at one stat across all industries. Some industries will be doing better than others.  Supply for labour: individuals willingness to work o Goes up when wage goes up (aggregate, not individual representation)  Demand: downward sloping – the more producers have to pay for labour, the less they’ll want it How the labour market responds to cyclical unemployment (2 theories): New Classical Theories  Agents are continuously optimizing o Change their mind everyday on how many hours they wanna work each day o Respond instantaneously  Markets continuously clear o Market changes in response to people’s decision of how much labour they want to supply Prediction: This implies that there can be no involuntary unemployment.  There’s a job out there that you want, but there’s a reason you can’t have it.  Voluntary: “none of these are gonna pay me enough, I’m gonna sit on my couch instead” Causes of fluctuations: o Changes in technology that affect the MP of labour  Affects demand for labour o Changes in the willingness of individuals to work  Affects the supply of labour Decrease in Demand for Labour  Ex. recession  decrease in real GDP  recessionary gap  firms produce less stuff  you require less labour  leftward shift in demand  wage falls  Given our earlier assumption, this adjustment process will happen instantaneously Wage Adjustment  Wage is assumed to adjust instantly from W0 to W1  Employment falls from L0 to L!  Those workers with reservation wages below W1 are not willing to work  All unemployment is voluntary Problems with New Classical Theory  Da
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