Macroeconomics CHAPTER 15 Labor Markets, Unemployment, and Inflation PowerPoint Slides by Can Erbil 2006 Worth Publishers, all rights reserved
What you will learn in this chapter: The meaning of the natural rate of unemployment, and why it isn t zero Why cyclical unemployment changes over the business cycle How factors such as a minimum wage and efficiency wages can lead to structural unemployment The reasons that unemployment can be higher or lower than the natural rate for extended periods The existence of a short-run trade-off between unemployment and inflation, called the short-run Phillips curve, that disappears in the long run Why the NAIRU, the nonaccelerating inflation rate of unemployment, is an important measure for policy-making 2
The Nature of Unemployment Workers who spend time looking for employment are engaged in job search. Frictional unemployment is unemployment due to the time workers spend in job search. 3
The Nature of Unemployment Workers who spend time looking for employment are engaged in job search. Frictional unemployment is unemployment due to the time workers spend in job search. Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage. 4
Distribution of the Unemployed by Duration of Unemployment, 2000 5
The Effect of a Minimum Wage on the Labor Market 6
Causes of Structural Unemployment Minimum wages - a government-mandated floor on the price of labor. In the US, the national minimum wage in 2005 was $5.15 an hour. Unions - by bargaining for all a firm s workers collectively (collective bargaining), unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually. 7
Causes of Structural Unemployment Efficiency wages - wages that employers set above the equilibrium wage rate as an incentive for better performance. Side effects of government policies - public policies designed to help workers who lose their jobs; these policies can lead to structural unemployment as an unintended side effect. 8
The Natural Rate of Unemployment The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates. Cyclical unemployment is a deviation in the actual rate of unemployment from the natural rate. 9
The Changing Makeup of the U.S. Labor Force 10
Changes in the Natural Rate of Unemployment Changes in Labor Force Characteristics Changes in Labor Market Institutions Changes in Government Policies Changes in Productivity 11
Unemployment and the Business Cycle The percentage difference between the actual level of real GDP and potential output is the output gap. When actual output is equal to potential output, the actual unemployment rate is equal to the natural rate of unemployment. When the output gap is positive (an inflationary gap), the unemployment rate is below the natural rate. When the output gap is negative (a recessionary gap), the unemployment rate is above the natural rate. 12
The Actual Unemployment Rate Fluctuates Around the Natural Rate 13
These Fluctuations Correspond to the Output Gap 14
Okun s Law According to Okun s law, each additional percentage point of output gap reduces the unemployment rate by less than 1 percentage point. That is, a modern version of Okun s law reads: Unemployment rate = Natural rate of unemployment (0.5 Output gap) 15
Why Doesn t the Labor Market Move Quickly to Equilibrium? Some dispute about why wages adjust slowly. Two main theories: Misperceptions - workers are slow to realize that the equilibrium wage rate has changed. Sticky Wages - occur when employers are slow to reduce wages in the face of a surplus of labor. Prices of some goods and services also seem to adjust slowly: Menu costs are small costs associated with the act of changing prices. 16
Unemployment and Inflation: The Phillips Curve The short-run Phillips curve is the negative short-run relationship between the unemployment rate and the inflation rate. 17
Unemployment and Inflation in the 1960s 18
Expected Inflation and the Short-Run Phillips Curve The expected rate of inflation is the rate of inflation that employers and workers expect in the near future. 19
The NAIRU and the Long-Run Phillips Curve 20
The NAIRU and the Long-Run Phillips Curve The nonaccelerating inflation rate of unemployment, or NAIRU, is the unemployment rate at which inflation does not change over time. It is equal to the natural rate of unemployment. 21
The NAIRU and the Long-Run Phillips Curve The long-run Phillips curve shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience. The long-run Phillips curve is vertical because there is no tradeoff between the unemployment rate and the inflation rate in the long run. 22
Unemployment and Inflation, 1961 1990 23
The End of Chapter 15 coming attraction: Chapter 16: Inflation, Disinflation, and Deflation 24