Download No Slide Title

Chapter 7
Unemployment
©1999 South-Western College Publishing
The supply of labor is a
flow into the labor market.
Stock of
unemployed
Unemployment is the
stock of workers who are
not matched with firms.
The demand for labor is a
flow out of the labor market.
Figure 7.1
2
Y (Net output produced by the
firm after paying its search costs)
The Labor Demand Curve in a
Market with Search Costs
Panel A
Real Wage = 1
Profit 1
Y1
B
L1
Search
cost C
A
L (Quantity of labor employed by a single firm)
Figure 7.2A
3
©1999 South-Western College Publishing
Y (Net output produced by the
firm after paying its search costs)
The Labor Demand Curve in a
Market with Search Costs
Panel B
Real Wage = 2
Profit 2
Y2
C
L2
Search
cost C
A
L (Quantity of labor employed by a single firm)
Figure 7.2B
4
©1999 South-Western College Publishing
The Labor Demand Curve in a
Market with Search Costs
Panel C
1
1
2 > 1
2
L1
L2
LD (Quantity of labor employed by a single firm)
5
Figure 7.2C
©1999 South-Western College Publishing
 (Real wage)
*
1
*
Profit, the Real Wage, and the Natural
Rate of Unemployment
Panel A
Labor
supply
U* (Natural rate of
unemployment)
E
Labor demand
L1 L*
Figure 7.3A
LE
L (Employment)
6
©1999 South-Western College Publishing
 (Profit)
Profit, the Real Wage, and the Natural
Rate of Unemployment
*
Panel B
E
This is how profit would
vary with  if there were
no search costs
This is how
profit varies
with  when
there are
search costs
*
E *
 (Real wage)
Figure 7.3B
7
©1999 South-Western College Publishing
(w/P) (Real wage)
Sticky Wages and the Labor Market
Panel A
Labor supply
U*
* = (w1/P1)
U2
(w1/P2)
Labor
demand
L*
Figure 7.4A
L2
L (Employment)
8
©1999 South-Western College Publishing
(w/P) (Real wage)
Sticky Wages and the Labor Market
Panel B
Labor supply
U3
(w1/P3)
U*
* = (w1/P1)
Labor
demand
L3
Figure 7.4B
L*
L (Employment)
9
©1999 South-Western College Publishing
P (Price of commodities)
Aggregate Supply in the Short
Run and the Long Run
P2
Aggregate
supply
(long run)
Aggregate supply
(short run)
Quantity of output that
will be produced when
unemployment is at the
natural rate
P1
P3
Y3
Y*
Y2
Y (Aggregate quantity of commodities supplied)
Figure 7.5
10
©1999 South-Western College Publishing
(w/P) (Real wage)
Moving from the Short Run to the Long Run
Panel A
U3
(w1/P3)
(w1/P1)
U*
U2
(w1/P2)
Labor
demand
L3
Figure 7.6A
Labor
supply
L*
L2
L (Employment)
11
©1999 South-Western College Publishing
Moving from the Short Run to the Long Run
Panel B
 (Profit)
*
2
3
Figure 7.6B
2 *
3
 (Real wage)
12
©1999 South-Western College Publishing
Percentage deviation of
GDP from trend
Okun’s Law
40
30
20
10
0
-10
-20
-30
According to Okun’s
law, a 1% rise in
unemployment
causes GDP to fall
3% below trend.
0
Box 7.1
5
10 15 20 25 30
Percentage unemployment
13
©1999 South-Western College Publishing
P (Price level)
The Response to a Reduction in the Money
Supply Predicted by the Search Model
Panel A
LR aggregate
supply
P1
SR aggregate
supply
AD1: Aggregate
demand before
money supply
contracts
AD2: Aggregate
demand after
money supply
contracts
P3
Y3 Y*
Y (Quantity of commodities demanded and supplied)
Figure 7.7A
14
©1999 South-Western College Publishing
Y (Aggregate supply)
The Response to a Reduction in the Money
Supply Predicted by the Search Model
Panel C
The production function
Y*
Y3
L3
Figure 7.7C
L*
L (Employment)
15
©1999 South-Western College Publishing
(w/P) (Real wage)
The Response to a Reduction in the Money
Supply Predicted by the Search Model
Panel D
U3
(w1/P3)
Labor
supply
U*
(w1/P1)
Labor
demand
L3
Figure 7.7D
L*
L (Employment)
16
©1999 South-Western College Publishing
Index number
15
14
Wages and Prices in the United
States During the Great Depression
Panel A
13
12
11
Time
10
1929 ’30 ’31 ’32 ’33 ’34 ’35 ’36 ’37 ’38 ’39
Nominal price of
commodities
Box 7.2A
Nominal wage
17
©1999 South-Western College Publishing
1.00
0.95
0.90
0.090
0.85
0.085
0.80
0.75
Time
0.70
1929 ’30 ’31 ’32 ’33 ’34 ’35 ’36 ’37 ’38 ’39
Employment as a
fraction of the labor
force (left scale)
Real wage index
Fraction of labor force
Box 7.2C
Wages and Prices in the
United States During the 0.105
Great Depression
0.100
Panel B
0.095
Real wage (right scale)
18
©1999 South-Western College Publishing
END