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Macroeconomics: Lecture 9: UNEMPLOYMENT

This document discusses different types of unemployment: natural unemployment, which is the average rate the economy fluctuates around; frictional unemployment, which occurs during workers' job searches; and structural unemployment, which results from wage rigidity where wages fail to adjust and the supply of labor exceeds demand. It defines the unemployment rate as the number of unemployed workers divided by the labor force. The document also identifies causes of wage rigidity like minimum wage laws, union monopoly power, and efficiency wage theories.

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Bakchodi Nhi
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49 views9 pages

Macroeconomics: Lecture 9: UNEMPLOYMENT

This document discusses different types of unemployment: natural unemployment, which is the average rate the economy fluctuates around; frictional unemployment, which occurs during workers' job searches; and structural unemployment, which results from wage rigidity where wages fail to adjust and the supply of labor exceeds demand. It defines the unemployment rate as the number of unemployed workers divided by the labor force. The document also identifies causes of wage rigidity like minimum wage laws, union monopoly power, and efficiency wage theories.

Uploaded by

Bakchodi Nhi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Macroeconomics

Lecture 9: UNEMPLOYMENT
TOPICS TO BE DISCUSSED

1. Unemployment
➢Natural unemployment
➢Frictional unemployment
➢Wage Rigidity and Structural Unemployment

1
NATURAL UNEMPLOYMENT

➢The average rate of unemployment around which the economy


fluctuates
➢The rate of unemployment toward which the economy gravitates in the
long run

L=E+U

Labor force Number of


unemployed
workers

Number of
employed
workers
Source: MACROECONOMICS, 7th. Edition N. Gregory Mankiw
2
UNEMPLOYMENT RATE

Number of Unemployed

Rate of Unemployment =

Labour Force

3
TYPES OF UNEMPLOYMENT

➢Natural rate of unemployment is the rate of unemployment to


which the economy tends to return in the long-run

➢Frictional unemployment results because of the time it takes


workers to search for jobs that suit their skills and tastes

• It is caused by sectoral shift- a change in the composition of


demand among industries or regions is called sectoral shift.

• It takes time for workers to change sectors and hence, there is


always frictional unemployment

➢Structural unemployment results because the number of jobs


available in some labour markets is insufficient to provide a job to
every worker who wants the job
Wage rigidity is the failure of wages to adjust until labor supply
equals labor demand.

Real S
wage Unemployment resulting from wage
U rigidity is called structural
unemployment.
Workers are unemployed not because
they can’t find a job that best suits their
skills, rather, at the going wage, the
supply of labor exceeds the demand.
Rigid
real
wage D

Labor

5
CAUSES OF WAGE RIGIDITY

➢Minimum Wage Legislation- Government causes wage rigidity when it


prevents wages from falling to equilibrium levels

➢Monopoly Power of Trade Unions- Unions set wages above the


equilibrium level and allow the firm to decide how many workers to employ
which results in a decrease in the number of workers hired
➢Efficiency-Wages- suggest that high wages make workers more
productive. Secondly, efficiency-wage theory contends that high wages
reduce labor turnover.

6
RECAP

➢Natural rate of unemployment


➢Frictional unemployment
➢Sectoral shift
➢Wage rigidity leads to Structural unemployment
➢Trade Union & Minimum Wage Legislation cause wage rigidity

7
THANK YOU ☺

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