Textbook Notes (363,442)
Canada (158,371)
ECON 209 (28)
Chapter 31

Economics Chapter 31 Summary.docx

5 Pages
Unlock Document

McGill University
Economics (Arts)
ECON 209
Mayssun El- Attar Vilalta

Chapter 31 Unemployment Fluctuations and the NAIRU 31.1 Employment and Unemployment - Over the span of many years, increases in labour force are more or less matched by increases in employment. Over the short term, however, the unemployment rate fluctuates considerably b/c changes in labour force are not exactly matched by changes in employment Changes in Employment - Labour force has expanded virtually every year - Many existing jobs are eliminated and many new ones are created - In most years, enough new jobs are created both to replace old jobs that have been eliminated and to provide jobs for growing labour force. Result is net increase in employment in most years Changes in Unemployment - During rapid economic growth, unemployment rate usually falls - During recessions or periods of slow growth, unemployment rate usually rises Flows in the Labour Market - Amount of activity in labour market is better reflected by flows into and out of unemployment than by overall unemployment rate Consequences of Unemployment 1. Lost Job output - Unemployed are valuable resources who are not producing output; output not produced is a loss for society - Nothing makes up for this past loss even when worker finds a job; it’s lost forever 2. Personal Costs - Prolonged unemployment leads to loss of self-esteem and dislocation of families 31.2 Unemployment Fluctuations - New Keynesians emphasize distinction between unemployment that exists when Y=Y* and unemployment due to output gaps - Cyclical unemployment: unemployment not due to frictional or structural factors; it is due to deviations of Y from Y* - New Classical economists thing real wages adjust immediately to clear labour markets thus Y always = Y*. unemployment fluctuates but only b/c of changes in amounts of frictional or structural unemployment—there is no cyclical - New Keynesians think those suffering from cyclical unemployment are involuntarily unemployed - New Classical economist think all unemployment is deemed voluntary Stocks and Flows in Canadian Labour Market - Stock of unemployment: number of people unemployed at a particular point in time but this hides much activity in labour market that is revealed by looking at gross flows in labour market What are Labour Market Flows? - Flows are amount of people leaving the different possible states of employment: employed, unemployed, not in labour force - When flows in unemployment exceed flows out of unemployment, stock of unemployment rises - When flows out of unemployment exceed flow in unemployment, stock of unemployment falls Using Flows Data - Useful b/c: shows tremendous amount of activity in labour market even though stock of unemployment may not be changing significantly - Useful b/c: relationship between flows and stock can tell us something about amount of time average unemployed person spend unemployed - Avg. duration of unemployment spell=stock of unemploy./monthly outflow from unemployment New Classical Theories - Unemployment is voluntary decision made by individuals choosing it b/c they don’t want to accept job offers - Fluctuations in employment and real wages occurs b/c of changes in technology that affect marginal product of labour and lead to changes in demand for labour—can be pos. or neg. - Fluctuations can also occur b/c changes in willingness of individual to work will lead to changes in supply of labour and thus to frictional in level of employment and real wages - Both cases involve clearing of labour market - Problem: empirical observation is not consistent w/ fluctuations in real wages—employment is volatile whereas real wages show little cyclical variation - Problem: it predicts no involuntary unemployment whatsoever, prediction that is unsupported by empirical observation New Keynesian Theories - Believe that people would accept an offer of work in jobs for which they are trained at the going wage rate if such an offer were made - Wages don’t change every time demand or supply shifts - When wage rate does not change enough to equate Q which Q thDre will bS unemployment in slumps and labour shortages in booms A Closer Look at New Classical Theory - If what they proposed would be true, Y always = Y*, then there’d be on inflationary or recessionary gaps Key Propositions and Criticisms - They believe the NAIRU itself fluctuates - Monetary factors play no role Claims: 1. Economy subject to technological and taste shocks (w/o AD fluctuations) has fluctuations similar to actual economy 2. Suggest integrated approach to understanding cycles & growth may be appropriate. Distinction made is some shocks are temporary (cyclical effects) whereas others are permanent (affect economy’s long-term growth) 3. Provides useful insights into how shocks, regardless of origin, spread over time to different sectors of economy - Cannot however provide insight into short-term correlation between money and output Policy Implications - Provides no role for stabilization operation through monetary and fiscal policies - Believe cycles are efficient responses to shocks hitting economy - Believe New Classical may help in the long run economy Long-Term Employment Relationships - Workers want job security in face of fluctuating demand and employers want workers who understand firm’s organization making them want a long term relationship - Wages must then be regular as they are an extended employment relationship not a device for fine-tuning the current supplies of and demands for labour - In many labour markets in which long-term relationships are important, the wage rate does not fluctuate to clear the market continuously Menu and Wage Contracts - Changing prices and wages in response to every minor fluctuation in demand is costly and time consuming - Wages tend to be inflexible in the short term b/c wage rates are generally set only occasionally - Costs associated w/ changing prices and wages lead firms and workers to make such changes only infrequently as a result many prices and wages are slow in adjusting to shocks Efficiency Wages - Employers get a more efficient workforce when paying labour more than minimum amount - Firms pay a wage premium aka efficiency wage to workers making them reluctant to get laid off - Problem: there will be more labour supply than workers they need creating involuntary unemployment - Wages won’t fall to clear labour market b/c firms rather pay high wage to get motivated workers than low wage to those who would shirk their duties Union Bargaining - Employed workers are represented by union who has the “insiders” (employed) as their priority not the “outsiders” (unemployed) - Unions will thus try and bid up wages even though it harms unemployed - If bargaining is decentralized, union can push for higher wages for insiders w/o worrying about effects on outsiders - If bargaining is centralized, effect on r
More Less

Related notes for ECON 209

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.