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CHAPTER 29 The Labor Market In the Macroeconomy
PowerPoint Lectures for
Principles of Economics,
9e
; ;
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
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CHAPTER 29 The Labor Market In the Macroeconomy
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PART V THE CORE OF MACROECONOMIC THEORY
29
The Labor Market In
the Macroeconomy
Prepared by:
Fernando & Yvonn Quijano
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
PART V THE CORE OF MACROECONOMIC THEORY
29
The Labor Market In
the Macroeconomy
CHAPTER OUTLINE
CHAPTER 29 The Labor Market In the Macroeconomy
The Labor Market: Basic Concepts
The Classical View of the Labor Market
The Classical Labor Market and the Aggregate
Supply Curve
The Unemployment Rate and the Classical View
Explaining the Existence of Unemployment
Sticky Wages
Efficiency Wage Theory
Imperfect Information
Minimum Wage Laws
An Open Question
The Short-Run Relationship Between the
Unemployment Rate and Inflation
The Phillips Curve: A Historical Perspective
Aggregate Supply and Aggregate Demand Analysis
and the Phillips Curve
Expectations and the Phillips Curve
Is There a Short-Run Trade-Off between Inflation
and Unemployment?
The Long-Run Aggregate Supply Curve,
Potential Output, and the Natural Rate of
Unemployment
The Nonaccelerating Inflation Rate of
Unemployment (NAIRU)
Looking Ahead
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The Labor Market: Basic Concepts
The labor force (LF) is the number of employed
plus unemployed:
CHAPTER 29 The Labor Market In the Macroeconomy
LF = E + U
unemployment rate The number of people
unemployed as a percentage of the labor force.
Unemployment rate = U/LF
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CHAPTER 29 The Labor Market In the Macroeconomy
The Labor Market: Basic Concepts
frictional unemployment The portion of
unemployment that is due to the normal working of
the labor market; used to denote short-run job/skill
matching problems.
structural unemployment The portion of
unemployment that is due to changes in the
structure of the economy that result in a significant
loss of jobs in certain industries.
cyclical unemployment The increase in
unemployment that occurs during recessions and
depressions.
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The Classical View of the Labor Market
CHAPTER 29 The Labor Market In the Macroeconomy
labor demand curve A graph that illustrates the
amount of labor that firms want to employ at each
given wage rate.
labor supply curve A graph that illustrates the
amount of labor that households want to supply at
each given wage rate.
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CHAPTER 29 The Labor Market In the Macroeconomy
The Classical View of the Labor Market
 FIGURE 29.1 The Classical Labor Market
Classical economists believe that the labor market always clears. If the demand for labor shifts from D0 to D1,
the equilibrium wage will fall from W0 to W1. Anyone who wants a job at W1 will have one.
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CHAPTER 29 The Labor Market In the Macroeconomy
The classical view of the unemployment market is consistent with the
following idea:
a.
The wage rate adjusts to equate the quantity of labor demanded
with the quantity of labor supplied; therefore, persistent
unemployment above the frictional and structural amount is
unlikely.
b.
If the wage rate in the labor market is too low, people will work for
themselves.
c.
The amount of labor that a firm hires depends on the value of the
output that workers produce.
d. All of the above.
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CHAPTER 29 The Labor Market In the Macroeconomy
The classical view of the unemployment market is consistent with the
following idea:
a.
The wage rate adjusts to equate the quantity of labor demanded
with the quantity of labor supplied; therefore, persistent
unemployment above the frictional and structural amount is
unlikely.
b.
If the wage rate in the labor market is too low, people will work for
themselves.
c.
The amount of labor that a firm hires depends on the value of the
output that workers produce.
d. All of the above.
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The Classical View of the Labor Market
CHAPTER 29 The Labor Market In the Macroeconomy
The Classical Labor Market and the Aggregate Supply Curve
The classical idea that wages adjust to clear the
labor market is consistent with the view that wages
respond quickly to price changes. This means that
the AS curve is vertical.
When the AS curve is vertical, monetary and fiscal
policy cannot affect the level of output and
employment in the economy.
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The Classical View of the Labor Market
CHAPTER 29 The Labor Market In the Macroeconomy
The Unemployment Rate and the Classical View
The unemployment rate is not necessarily an
accurate indicator of whether the labor market is
working properly.
The measured unemployment rate may
sometimes seem high even though the labor
market is working well.
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Explaining the Existence of Unemployment
Sticky Wages
CHAPTER 29 The Labor Market In the Macroeconomy
sticky wages The downward rigidity of wages as
an explanation for the existence of unemployment.
 FIGURE 29.2 Sticky Wages
If wages “stick” at W0 instead of
falling to the new equilibrium wage
of W* following a shift of demand
from D0 to D1, the result will be
unemployment equal to L0 - L1.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the graph below. The meaning of “sticky wages” in this graph
refers to:
a.
b.
c.
d.
The decrease in the equilibrium wage that results after the
decrease in demand.
The failure of the wage rate to fall after the decrease in demand.
The tendency for the wage rate to rise above W0 after the
decrease in demand.
The decrease in unemployment that results after the decrease in
demand.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the graph below. The meaning of “sticky wages” in this graph
refers to:
a.
b.
c.
d.
The decrease in the equilibrium wage that results after the
decrease in demand.
The failure of the wage rate to fall after the decrease in
demand.
The tendency for the wage rate to rise above W0 after the
decrease in demand.
The decrease in unemployment that results after the decrease in
demand.
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Explaining the Existence of Unemployment
Sticky Wages
CHAPTER 29 The Labor Market In the Macroeconomy
Social, or Implicit, Contracts
social, or implicit, contracts Unspoken
agreements between workers and firms that firms
will not cut wages.
relative-wage explanation of unemployment
An explanation for sticky wages (and therefore
unemployment): If workers are concerned about
their wages relative to other workers in other firms
and industries, they may be unwilling to accept a
wage cut unless they know that all other workers
are receiving similar cuts.
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Explaining the Existence of Unemployment
Sticky Wages
CHAPTER 29 The Labor Market In the Macroeconomy
Explicit Contracts
explicit contracts Employment contracts that
stipulate workers’ wages, usually for a period of 1
to 3 years.
cost-of-living adjustments (COLAs) Contract
provisions that tie wages to changes in the cost of
living. The greater the inflation rate, the more
wages are raised.
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Explaining the Existence of Unemployment
Sticky Wages
CHAPTER 29 The Labor Market In the Macroeconomy
Explicit Contracts
Graduate School
Applications in
Recessions
Graduate School Offers
Relief During Economic
Recession
Oklahoma Daily
(U. Oklahoma)
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Explaining the Existence of Unemployment
CHAPTER 29 The Labor Market In the Macroeconomy
Efficiency Wage Theory
efficiency wage theory An explanation for
unemployment that holds that the productivity of
workers increases with the wage rate. If this is so,
firms may have an incentive to pay wages above
the market-clearing rate.
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CHAPTER 29 The Labor Market In the Macroeconomy
The efficiency wage is among the theories of unemployment that
explain why:
a.
Firms tend to pay wages above the wage at which the quantity of
labor demanded equals the quantity supplied.
b.
Firms tend to pay wages below the wage at which the quantity of
labor demanded equals the quantity supplied.
c.
Firms prefer to pay the wage at which quantity supplied equals
quantity demanded in the labor market.
d.
There is only one level of the wage rate at which quantity supplied
equals quantity demanded, called the efficiency wage rate.
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CHAPTER 29 The Labor Market In the Macroeconomy
The efficiency wage is among the theories of unemployment that
explain why:
a.
Firms tend to pay wages above the wage at which the
quantity of labor demanded equals the quantity supplied.
b.
Firms tend to pay wages below the wage at which the quantity of
labor demanded equals the quantity supplied.
c.
Firms prefer to pay the wage at which quantity supplied equals
quantity demanded in the labor market.
d.
There is only one level of the wage rate at which quantity supplied
equals quantity demanded, called the efficiency wage rate.
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Explaining the Existence of Unemployment
CHAPTER 29 The Labor Market In the Macroeconomy
Imperfect Information
Firms may not have enough information at their
disposal to know what the market-clearing wage
is. In this case, firms are said to have imperfect
information.
If firms have imperfect or incomplete information,
they may set wages wrong—wages that do not
clear the labor market.
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Explaining the Existence of Unemployment
CHAPTER 29 The Labor Market In the Macroeconomy
Minimum Wage Laws
minimum wage laws Laws that set a floor for
wage rates—that is, a minimum hourly rate for any
kind of labor.
An Open Question
The aggregate labor market is very complicated,
and there are no simple answers to why there is
unemployment.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the figure below. What happens in this labor market if the
minimum wage (W0) is abolished?
a.
b.
c.
d.
Unemployment will rise.
Unemployment will fall.
The quantity of labor demanded falls.
The quantity of labor supplied rises.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the figure below. What happens in this labor market if the
minimum wage (W0) is abolished?
a.
b.
c.
d.
Unemployment will rise.
Unemployment will fall.
The quantity of labor demanded falls.
The quantity of labor supplied rises.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
In the short run, the unemployment rate (U) and
aggregate output (income) (Y) are negatively
related.
 FIGURE 29.3 The Aggregate
Supply Curve
The AS curve shows a positive
relationship between the price
level (P) and aggregate output
(income) (Y).
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
 FIGURE 29.4 The Relationship
Between the Price Level and the
Unemployment Rate
This curve shows a negative
relationship between the price
level (P) and the unemployment
rate (U). As the unemployment
rate declines in response to the
economy’s moving closer and
closer to capacity output, the price
level rises more and more.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
inflation rate The percentage change in the price
level.
Phillips Curve A curve showing the relationship
between the inflation rate and the unemployment
rate.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
 FIGURE 29.5 The Phillips
Curve
The Phillips Curve shows the
relationship between the inflation
rate and the unemployment rate.
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CHAPTER 29 The Labor Market In the Macroeconomy
Which of the following relationships is correct?
a. There is a positive relationship between unemployment and output.
b.
There is a negative relationship between output and the overall
price level.
c.
There is a negative relationship between the unemployment rate
and the price level.
d.
There is a negative relationship between output and employment.
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CHAPTER 29 The Labor Market In the Macroeconomy
Which of the following relationships is correct?
a. There is a positive relationship between unemployment and output.
b.
There is a negative relationship between output and the overall
price level.
c.
There is a negative relationship between the unemployment
rate and the price level.
d.
There is a negative relationship between output and employment.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
The Phillips Curve: A Historical Perspective
CHAPTER 29 The Labor Market In the Macroeconomy
 FIGURE 29.6 Unemployment
and Inflation, 1960–1969
During the 1960s, there seemed
to be an obvious trade-off
between inflation and
unemployment. Policy debates
during the period revolved around
this apparent trade-off.
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CHAPTER 29 The Labor Market In the Macroeconomy
Policy discussions in the 1960s concerning the Phillips Curve revolved
around the issue of:
a.
What point to choose along a smooth Phillips Curve.
b.
What to do about a highly unstable Phillips Curve.
c.
How to maintain low inflation and at the same time lower the
unemployment rate.
d.
How to maintain low unemployment and at the same time lower
the inflation rate.
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CHAPTER 29 The Labor Market In the Macroeconomy
Policy discussions in the 1960s concerning the Phillips Curve revolved
around the issue of:
a.
What point to choose along a smooth Phillips Curve.
b.
What to do about a highly unstable Phillips Curve.
c.
How to maintain low inflation and at the same time lower the
unemployment rate.
d.
How to maintain low unemployment and at the same time lower
the inflation rate.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
The Phillips Curve: A Historical Perspective
CHAPTER 29 The Labor Market In the Macroeconomy
 FIGURE 29.7 Unemployment
and Inflation, 1970–2007
From the 1970s on, it became
clear that the relationship between
unemployment and inflation was
anything but simple.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
Aggregate Supply and Aggregate Demand Analysis and the
Phillips Curve
 FIGURE 29.8 Changes in the Price Level and Aggregate Output Depend on Shifts in Both
Aggregate Demand and Aggregate Supply
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CHAPTER 29 The Labor Market In the Macroeconomy
If there is no systematic relationship between inflation and
unemployment, it is because:
a.
The aggregate demand curve shifts, without a shift in the
aggregate supply curve.
b.
Both the aggregate demand and the aggregate supply curve shift
simultaneously.
c.
Neither the aggregate demand nor the aggregate supply curves
shift.
d.
Government policies have effectively eradicated inflation and
unemployment.
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CHAPTER 29 The Labor Market In the Macroeconomy
If there is no systematic relationship between inflation and
unemployment, it is because:
a.
The aggregate demand curve shifts, without a shift in the
aggregate supply curve.
b. Both the aggregate demand and the aggregate supply curve
shift simultaneously.
c.
Neither the aggregate demand nor the aggregate supply curves
shift.
d.
Government policies have effectively eradicated inflation and
unemployment.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
Aggregate Supply and Aggregate Demand Analysis and the
Phillips Curve
The Role of Import Prices
 FIGURE 29.9 The Price of Imports, 1960 I–2007 IV
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
Expectations and the Phillips Curve
Expectations are self-fulfilling. This means that
wage inflation is affected by expectations of future
price inflation.
Price expectations that affect wage contracts
eventually affect prices themselves.
Inflationary expectations shift the Phillips Curve to
the right.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the graph below. The impact of higher inflationary expectations
on this Phillips curve is reflected by the move:
a.
b.
c.
d.
From a to b.
From a to c.
From a to d.
None of the above. Inflationary expectations do not affect the
Phillips curve.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the graph below. The impact of higher inflationary expectations
on this Phillips curve is reflected by the move:
a.
b.
c.
d.
From a to b.
From a to c.
From a to d.
None of the above. Inflationary expectations do not affect the
Phillips curve.
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The Short-Run Relationship Between
the Unemployment Rate and Inflation
CHAPTER 29 The Labor Market In the Macroeconomy
Is There a Short-Run Trade-Off between Inflation and
Unemployment?
There is a short-run trade-off between inflation and
unemployment, but other factors besides
unemployment affect inflation. Policy involves
more than simply choosing a point along a nice
smooth curve.
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CHAPTER 29 The Labor Market In the Macroeconomy
The Long-Run Aggregate Supply Curve, Potential Output, and the
Natural Rate of Unemployment
 FIGURE 29.10 The Long-Run Phillips Curve: The Natural Rate of Unemployment
If the AS curve is vertical in the long run, so is the Phillips Curve. In the long run, the Phillips Curve
corresponds to the natural rate of unemployment—that is, the unemployment rate that is consistent
with the notion of a fixed long-run output at potential output. U* is the natural rate of unemployment.
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CHAPTER 29 The Labor Market In the Macroeconomy
The Long-Run Aggregate Supply Curve, Potential Output, and the
Natural Rate of Unemployment
natural rate of unemployment The
unemployment that occurs as a normal part of the
functioning of the economy. Sometimes taken as
the sum of frictional unemployment and structural
unemployment.
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The Long-Run Aggregate Supply Curve, Potential Output, and the
Natural Rate of Unemployment
The Nonaccelerating Inflation Rate of Unemployment (NAIRU)
CHAPTER 29 The Labor Market In the Macroeconomy
NAIRU The nonaccelerating inflation rate of
unemployment.
 FIGURE 29.11 The NAIRU
Diagram
To the left of the NAIRU, the price
level is accelerating (positive
changes in the inflation rate); to
the right of the NAIRU, the price
level is decelerating (negative
changes in the inflation rate). Only
when the unemployment rate is
equal to the NAIRU is the price
level changing at a constant rate
(no change in the inflation rate).
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the figure below. Which of the following causes a leftward shift
in the PP curve?
a.
b.
c.
d.
A positive change in the rate of inflation.
A negative change in the rate of inflation.
An adverse change in input prices.
A favorable change in input prices.
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CHAPTER 29 The Labor Market In the Macroeconomy
Refer to the figure below. Which of the following causes a leftward shift
in the PP curve?
a.
b.
c.
d.
A positive change in the rate of inflation.
A negative change in the rate of inflation.
An adverse change in input prices.
A favorable change in input prices.
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REVIEW TERMS AND CONCEPTS
cost-of-living adjustments
(COLAs)
CHAPTER 29 The Labor Market In the Macroeconomy
cyclical unemployment
efficient wage theory
NAIRU
natural rate of unemployment
Phillips Curve
explicit contracts
relative-wage explanation of
unemployment
frictional unemployment
social, or implicit, contracts
inflation rate
sticky wages
labor demand curve
structural unemployment
labor supply curve
unemployment rate
minimum wage laws
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