ECON 102 Lecture Notes - Demand Curve, Efficiency Wage, Unemployment

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Published on 17 Apr 2013
School
UBC
Department
Economics
Course
ECON 102
Professor
Page:
of 5
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
Data suggests that unemployment varies continuously over the business cycle
Yet, wages do not seem to vary as much
Also, the theory predicts no involuntary unemployment
Theory does not seem to match facts … at least not in the short run
New Keynesian Theories
Wages do not adjust instantaneously to clear markets
Some unemployment is involuntary
o Involuntary means that there are many people willing to work for the
going wage if it was offered
Decrease in Demand for Labour
Assume same demand shock
Incremental (not instantaneous) change: W0 W1 W2
We still have involuntary unemployment
Far more accurate model of the labour market (than New Classical
theory)
Recessionary gap decrease in demand for labour disequilibrium in labour
market involuntary (cyclical) unemployment
Sticky Wages: Why don’t wages adjust instantaneously? Why would they be slow to
adjust? (Partial adjustments)
Long-term relationships
o Between employer and employee
o If you let some go or make them unhappy, when the economy recovers,
you might not be able to win back the very valuable employees.

Document Summary

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* 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. Put it in a demand and supply framework: We"re looking at one stat across all industries. Some industries will be doing better than others. Supply for labour: individuals willingness to work: 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): Agents are continuously optimizing: change their mind everyday on how many hours they wanna work each day, respond instantaneously.