ECON 102 Lecture Notes - Lecture 42: Nominal Rigidity, Unemployment, Menu Cost

• School: UBC
• Department: Economics
• Course: ECON 102
• Professor: Robert Gateman

Document Summary

Causes of downward sticky wages: long-term employment contracts - workers and employers respond to other factors like job security - wages are long term, thus insulated form short term fluctuations - long term contract. Start: dn = sn at ne1 = nfe no cyclical unemployment. Recession: drop in dn i. ii: market clearing theory: ne2 = nfe no cyclical u (weird) iv. v. vi. Non market clearing theory = downward sticky wages. Problem: wages get stuck on the way down. Cyclical unemployment u results: long run picture i. Inevitably, labour will accept a drop in wages: nairu, frictional unemployment i. Turnovers (=search unemployment: e. g. length of time to find first job, e. g. length of time to find new job, structural unemployment, mismatching of s and d of labour, e. g. D-side: high tech: the distinction between frictional and structural unemployment i. ii. Structural u may just be lr frictional u.