Transcript Chapter 9

Principles Of Economics
Power Point Presentation
Chapter 9
Unemployment
March 9, 2007
© J. Patrick Gunning
Unemployment Cartoon
Unemployment During The Great
Depression (1929-1937)

Unemployment and the great
depression:
– Beginning with the 1929 stock market
crash, high unemployment in the U.S.
lasted for 8 years.
– At its worst, the unemployment rate was
25%.
– It was 99% in the poorest areas.
– Teachers took jobs sweeping factory
floors.
Looking For Jobs
Great Depression Unemployment
Figure 9-1
Waiting In A Breadline (1932)

A shanty built of refuse near
the Sunnyside slack pile,
Herrin, Illinois Many
residences in southern Illinois
coal towns were built with
money borrowed from
building and loan
associations. During the
depression building and loan
associations almost all went
into receivership. Their
mortgages were sold for
whatever they would bring.

Part of an impoverished family of
nine on a New Mexico highway.
Depression refugees from Iowa.
Left Iowa in 1932 because of
father's ill health. Father an auto
mechanic laborer, painter by
trade, tubercular. Family has
been on relief in Arizona but
refused entry on relief roles in
Iowa to which state they wish to
return. Nine children including a
sick four-month-old baby. No
money at all. About to sell their
belongings and trailer for money
to buy food. "We don't want to
go where we'll be a nuisance to
anybody".
What Caused The Unemployment (1)

The great depression unemployment has often been called
“cyclical.” It had been observed many times before 1929
but the problem was never so severe and prolonged.
– Cyclical unemployment: unemployment that occurs as a
consequence of changes in the quantity of money, which causes
businesspeople to make errors in calculations.

A commonly accepted theory of the cause of cyclical
unemployment: Banks created new money, which they
lent to businesses. The businesses invested it in producing
goods that they could not sell. Prices rose unexpectedly.
The businesses laid off the workers who could not find
new jobs.
Cyclical Unemployment
What Caused The Unemployment (1)

The basis of this theory:
– Money is the measuring rod used by businesses to calculate and
prices are the means they use to communicate (to signal).
– The increase in money led to false signals. To the entrepreneurs,
marginal cost had fallen and demand was rising.
– But, from the efficient use of resources view, there had been no
change in how resources should be distributed to achieve
maximum consumer utility.
– A period of time was needed for entrepreneurs do discover the
truth.

Thus, the banks caused a business cycle by producing too
much new money.
Goal Of The Chapter

To fully understand this the theory of
cyclical unemployment, we need a lot more
study: Ch. 10,11,12.
 Goal of this chapter: to present some
general principles upon which practically all
economists would agree.
Subjects Discussed
In This Chapter

1. The meaning of unemployment and the role of
entrepreneurship in creating jobs.
 2. How a change in demand conditions can cause
unemployment.
 3. How a change in technology (a supply
condition) can cause unemployment.
 4. The idea of a natural rate of unemployment.
Part 1: The Meaning Of
Unemployment

Some definitions:
 1. Labor: physical activity performed
by a human being.

2. Work: labor plus human capital.

4. Unemployment refers to work, not to labor
alone.
Definition Of Unemployment (1)
a situation in which an
employer has decided not to renew an
employment agreement with an
employee, the employee is not
employed by someone else, and the
employee wants to continue his work
under the same pay and conditions.
 Unemployment:
Definition Of Unemployment (2)


Three parts to the definition of unemployment:
1. An employer has decided not to renew an
employment agreement.
 2. The former employee does not accept an
employment offer from a new employer.
 3. The former employee wants to be employed in
the same kind of job and under the same pay and
conditions as before. And he would accept a job
offer that meets these conditions.
Example Of An Unemployed
Worker

A high school dropout who has been employed as a
carpenter’s helper for several years but now is laid off
because he has not acquired a sufficient amount of skill and
because the employer expects a decrease in demand.
Who Is In The Work Force?

Work force: employed plus unemployed plus
people searching for jobs.
 Four categories of individuals based on the
definition of unemployment:
– 1. Not in the work force (housewives, students, disabled,
retired, elderly.)
– 2. Classified as employed.
– 3. Classified as unemployed.
– 4. Searchers for work who have recently quit their jobs
or recently entered the work force and who are not
classified as employed or unemployed.
Unemployed Vs. Searching For
Work (1)

This definition raises lots of questions.
 If someone is offered a job but decides not to take
it, how is she different from a person classified as
a searcher for work? The carpenter’s helper may
decide not to take a job because he hopes to find a
better one in the future. In this respect, he may be
like a business executive who quits in order to
search for a better job.
Unemployed Vs. Searching For
Work (2)

Why, then, is the carpenter classified as
unemployed while the others are not?
 The definition is based on the assumption
that government leaders who authorize the
definition care more about those who have
recently been laid off than about those who
quit their jobs or who are just entering the
work force.
Unemployed Vs. Out Of The
Work Force (1)

Another question: if someone can find a job,
how is she different from someone who is
out of the work force? The carpenter’s
helper may decide not to take a different
kind of job because the pay is too low or the
working conditions too undesirable. In this
respect, he may be like a housewife or
student, who is not in the work force.
Unemployed Vs. Out Of The
Work Force (2)




Why, then, is the carpenter classified as unemployed while
the others are not?
An answer is that government sympathies lie more with a
person who was previously working is eager to work than
with the others.
Also, in many real capitalist nations, a government
department is required to give aid to workers who it
determines cannot find a job, but not to the others.
If it gave aid to housewives and students, it would have the
more difficult task of judging whether these people were
truly willing to work.
Other Issues Of Definition




After how long a period of unemployment should we
reclassify an unemployed worker into the category of “not
in the work force?”
How do we judge whether a person who has two jobs and
is laid off of one of them is unemployed?
How do we judge whether a person who works part time,
or is laid off from a part time job is unemployed?
There are no definite answers to these questions. Our
judgment may depend on our sympathies at the time.
Part Time Jobs And Multiple Jobs

In everyday life, some people have more than one
job and people work for different numbers of
hours.
 Government agents who collect statistics on the
amount of unemployment or its rate have the task
of classifying real people into the categories
described above. How they do so varies from time
to time and place to place.
Unemployed vs. Unemployable

If someone who was previously employed cannot
find a job because no one will hire her, how is she
different from another unemployable person who
is not in the work force? The carpenter’s helper
may be similar to other unemployables who have
never been employed.
 Reason for unemployability – lack of human
capital and the capacity to produce it, poor health
due to disability or age, lack of emotional
maturity, physical handicap.
The Unemployment Rate




Unemployment rate: the percent of the total
work force that is classified as unemployed.
Number of Unemployed
------------------------------------ x 100 = Unemployment Rate
Number in the Work Force
January U.S. Unemployment
Rate: 1994-2004 (Figure 9-2)
Unemployment Rates in
Different Countries
Two Causes Of The
Unemployment Of Workers Who
Are Capable Of Being Employed

1. A decision by an employer to lay off
employee.

2. A decision by an employee to not accept
employment, even if it requires him to
accept lower pay or different working
conditions.
The Economist’s Point Of View
 At
first glance, the immediate seems to be
the sole cause of unemployment because
he changed his appraised value and
decided to lay off.
 However, the employee is also a cause
because employment is an agreement.
Entrepreneurship as a Cause Of Hiring
And Firing

Entrepreneurship aims to hire work that
it believes will add to profits. It appraises
the work by calculating how much it is
likely to add to profit.
 If the appraised value is higher than the
wages it expects to pay, it hires the work.
 If the appraised value is lower and if it
has already hired the work, it lays off the
work.
 Wage rate: the price of work of a given
type for a given period of time worked.
The Employee As A Cause Of
Unemployment

Unless the employee lacks skill and the ability to
produce it, the employee is also a cause for three
possible reasons:
– 1. He may be unwilling to accept a new job at
lower pay.
– 2. He has not produced human capital that has a
sufficiently high appraised value for employers to
hire him.
– 3. He does not possess entrepreneurship and
human capital himself to employ his own work in
a new business.
Entrepreneurship Causes Work
To Be Produced

Work is produced by the
workers themselves, by
families, by employers, and
others.
 People produce work through training, education,
and trial and error experimentation.
 They try to produce work that will be regarded by
future employers as a resource.
Entrepreneurship Causes Work
To Be Produced

In producing work, individuals act as
entrepreneurs. They try to predict (1)
future demands for work of various
kinds and (2) the work that others will
supply.
 Because work is produced, practically
every worker is capable (1) of
supplying many different types of
work and (2) of learning to supply
additional types if he gets further
training or education.
A Person’s Labor And Human Capital
Work May Not Be A Resource



We may feel sympathy for
an unemployable person
who has been laid off.
But we should be careful
to interfere with markets
for work on her behalf
because it may harm
consumers.
We should recommend a
government policy similar
to that for other
unemployable dependents.
New Topic: How A Change In
Demand Can Cause Unemployment

Two classes of market conditions:
– 1. The wants of consumers (consumer demands, or
demand conditions).
– 2. The means of satisfying them (supply conditions).

The goal of this part is to build some simple
models to show how a change in demand
conditions leads employers to lay off workers.
Demand Conditions Are
Continually Changing

In a market economy, the demands for different
goods are continually changing.
 In other words, the demand curves for different
goods are continually rising and falling.
 Why? Economists answer by referring to the
determinants of demand.
 Determinant of demand: an event that may causes
the demand for a consumer good to change.
Determinants of Demand





1. Wants, which change as people grow older and
as people enter and leave a market (e.g., a country).
2. Birth and death changes the composition of the
population.
3. Incomes.
4. The market conditions for substitute and
complementary goods.
5. Consumer decision-making habits and
advertising.
Offsetting Change In Demand

Offsetting change in demand: an increase in
the demand for one good that is completely
offset by a decrease in demand for another
good.
 Example: an increase in demand for rice
that is offset by a decrease in demand for
potatoes.
Assumptions

The economy is completely coordinated.
 There is no change in the demands for other
goods besides rice and potatoes.
 Producers do not anticipate the change.
 We disregard the supply chains for the
various non-work resources.
Effects Of An Increase In Demand
For Rice On The Rice Industry (1)

1. If producer-sellers do not raise their prices at
first there will be a shortage; then they will
perceive that they can profit by raising their
price and producing more rice.
Effects Of An Increase In Demand
For Rice On The Rice Industry (2)


2. Producer-sellers will bid resources,
including work, away from other industries.
– Prices of non-specific resources will rise
slightly.
– Prices of specialized resources will rise
substantially
3. Employment will rise in the rice industry.
Effects Of An Increase In Demand
For Rice On The Rice Industry (3)



4. The increase in quantity of rice produced and sold will
cause the price to fall.
5. Competition among rice producers for resources will
raise the prices of the resources used to produce rice and,
therefore, raise per-unit costs of production.
6. Rising per-unit costs and falling per-unit revenues will
squeeze profit, causing producers to bring the expansion of
the rice industry to a halt.
Effects Of An Increase In Demand
For Rice On The Rice Industry (4)

A new completely coordinated situation will occur.
In that situation:
– 1. The price of rice will be higher.
– 2. The quantity of rice will be higher.
– 3. The amount of employment in the rice industry will be
higher.
– 4. The price of resources specialized in producing rice
will be higher.
New Situation In The Rice Industry
After An Increase In Demand For
Rice (Figure 7-4)
Effects On The Potato Industry (1)


1. If producer-sellers do not reduce their price at first there
will be a surplus; then they will perceive that they can profit
by reducing their price and producing fewer potatoes.
2. Producer-sellers will reduce their purchases of resources,
including work.
– Prices of non-specific resources will fall slightly.
– Prices of specialized resources will fall substantially.
– Specialized workers are likely to be laid off.
Effects On The Potato Industry (2)

3. Workers will be laid off and, therefore,
be unemployed.
 4. The decrease in quantity of potatoes
produced and sold will cause their price to
rise.
Effects On The Potato Industry (3)

5. The decrease in bids for resources will reduce the
prices of the resources used to produce potatoes and,
therefore, reduce per-unit costs of production.
 6. Rising per-unit revenues and falling per-unit costs
will ultimately reduce losses and make the industry
profitable again, leading producers to bring the
contraction of the potato industry to a halt.
Decrease In The Demand For Potatoes
(Figure 7-5)
Effects Of The Offsetting Change In
Demand On Employment



In a completely coordinated market, the amount of every
particular kind of work demanded equals the amount of
that kind of work that individuals are willing to supply.
To understand unemployment, we must first understand the
market for a particular kind of work.
The market for a particular kind of work:
– The demand for a particular kind of work is merely the derived
demand for a resource.
– The supply of a particular kind of work is the amount of that work
that individuals are willing to supply at different wages rates.
The Demand For Work

Demand for a particular kind of work: the
quantity of the work demanded at each
wage rate.
 Demand curve for any particular kind of
work: the graphical representation of the
relationship between the wage rate and the
quantity demanded of that work.
 A demand-for-work curve is downsloping.
The Demand For Work Is A
Derived Demand
Marginal revenue product: the marginal employer’s
estimate of the revenue that an additional unit of a
particular kind of work will add when the product is
produced and sold. It is the maximum price that the
marginal employer will pay for the unit of work.
 Marginal revenue product curve: a graph of the
relationship between the quantity of work and the work’s
marginal revenue.
 The marginal revenue product curve is the same as the
demand curve.
 This usually falls as the quantity rises because of the
down-sloping demand for a product.

The Demand For Work Curve
(Figure 9-3)
The Supply Of Work Curve
(Figure 9-4)
Supply Of A Particular
Kind Of Work

Supply of a particular kind of work: the amount of
the work that individuals who possess the work
are willing to supply at each wage rate.
 Supply curve for any particular kind of work: the
graphical depiction of the relationship between the
wage rate and the quantity supplied of that work.
 A supply-of-work curve is ordinarily upsloping.
The quantity supplied at a low wage rate is less
than the quantity supplied at a higher wage rate.
A Completely Coordinated Market
For Work (Figure 9-5)
Explanation Of Figure 9-5

The completely coordinated market wage is $10.5
per hour and quantity is 30 hours.
 If the wage rate was lower than $10.5, the
additional revenue that an employer could earn
from employing one more unit would be greater
than the cost of hiring it. Consider the wage of $8.
 If the wage rate was higher than $10.5, say at $15,
employers would have hired so much work that
the last unit hired is worth less than the marginal
revenue product. They would have erred.
Effect Of An Increase In The
Demand For Work (Figure 9-6)
Explanation Of Figure 9-6

Demand curve shifts from D1 to D2.
 mrp at 8.5 hours ($14.7) becomes greater than the
wage rate ($7.5 per hour); the quantity of work
demanded at $7.5 per hour (22 hours) exceeds the
quantity supplied (8.5 hours).
 Employers try to hire more workers. To do so,
they must bid up the wage rate.
 The new completely coordinated market wage is
$11 per hour. More work is hired, 15 hours.
Explanation Of Figure 9-6

Conclusion

The increase in demand for work causes a
rise in the completely coordinated wage rate
and completely coordinated quantity of this
particular kind of work employed.
Effect Of A Decrease In The
Demand For Work (Figure 9-7)
Explanation Of Figure 9-7


Demand curve shifts from D1 to D2.
mrp at 32 hours ($4 per hour) becomes less than
the wage rate ($11 per hour); the quantity of work
supplied at $11 per hour (32 hours) exceeds the
quantity demanded (3 hours).
 Employers lay off workers and workers compete
for jobs. To get jobs, the workers must bid down
the wage rate.
 The new completely coordinated market wage is
$7.5. Less work is hired, 27 hours.
The Combined Effects Of The Offsetting
Change In Demand On Employment (1)

Case 1: the workers laid off in the potato
industry all could shift to the rice industry.
There would be no long-term effects on
employment.
 Case 2: the workers laid off in the potato
industry seek employment in other
industries.
What Happens To Workers Who
Cannot Easily Find Work Quickly?

1. They may compete for jobs in other
industries.
 2. They may acquire new skills in order to
raise the demand for their work.
 3. They may drift from the category of
unemployed workers to the category of out
of the work force.
Why Some Workers May Not Get
Re-employed At All

Employers may be located in a different place
with a different culture and social norms. Rather
than incur the costs, some workers may decide to
drop out of the work force.
 Some workers may not possess the kind of human
capital that is valuable elsewhere and may be
unable to produce it. Such workers are compelled
to drop out of the work force. Their work has
become a non-resource.
Effects Of The Offsetting Change In
Demand On Consumers Of Other Goods

The consumers of other goods are affected
because the changes in demands for rice and
potatoes cause resource prices to change.
 To show how to trace these effects, we look
at the market for a particular resource –
work that is hired by rice employers and
work that is laid off by potato employers.
Goods Whose Production Uses Work
Laid Off By Potato Employers





Four steps in the reasoning
1. There is an increase in the supply of work.
2. The increase in supply of work reduces the perunit costs of production.
3. The lower per-unit costs of production reduces
the completely coordinated market price and
increases the completely coordinated market
quantity.
4. Consumers of those other goods gain.
Step 1: What Happens In Related
Markets For Work When Workers Shift
Out Of The Potato Industry?

There is an increase in the supply of
particular kinds of work in those
employments.
Market For Work Laid Off In The Potato
Industry (Figure 9-8)
Explanation Of Figure 9-8

The increase in supply of this work causes
the completely coordinated market wage to
fall from $7.9 per hour to $6.5 per hour and
the completely coordinated market amount
of employment to rise from 1120 hours to
1370 hours.
Effects Of Job-seeking By Potato
Workers On Related Other Markets
For Work

When workers shift to other markets for work, the
supply of work in those markets will rise.
 The completely coordinated market wage rate will
fall.
 To employers, the fall in wage rate is a decrease in
per-unit costs of producing a consumer good.
 The decrease in per-unit costs will lead to a lower
price and larger quantity of the consumer good as
the market becomes more coordinated.
The Second Step: Market For Other
Consumer Goods Related In Supply
To Potatoes (Figure 9-10)
Explanation Of Figure 9-10

The fall in wage rates causes a decrease in
marginal cost, shifting the curve from MC1
to MC2.
 The completely coordinated market price of
the good falls from 9.2 to 7.8. The
completely coordinated market quantity of
the good rises from 1730 to 2200.
Goods Whose Production Uses Work Bid
Away By Rice Producers





Four steps in our reasoning
1. There is an decrease in the supply of work.
2. The decrease in supply of work raises the perunit costs of production.
3. The higher per-unit costs of production raises
the completely coordinated market price and
reduces the completely coordinated market
quantity.
4. Consumers of those other goods lose.
Step 1: What Happens In Related
Markets For Work When Workers Shift
Into The Rice Industry?

There is a decrease in the supply of the
particular kinds of work in those
employments.
Market For Work That Is Needed In The
Rice Industry (Figure 9-9)
Explanation Of Figure 9-9

The decrease in supply of this work causes
the completely coordinated market wage to
rise from $6.5 per hour to $7.9 per hour and
the completely coordinated market amount
of employment to fall from 1370 hours to
1120 hours.
Steps 2 And 3: Effects Of Worker
Shifts To Rice Production On Costs Of
Producing Related Goods

When workers shift to rice production, the supply
of work in other markets falls.
 The completely coordinated market wage rate
rises.
 To employers, the rise in wage rates is an increase
in costs.
 The completely coordinated market price rises and
the completely coordinated market quantity falls.
The Second Step: Markets For Other
Consumer Goods Related In Supply
To Rice (Figure 9-11)
Explanation Of Figure 9-11

The rise in wage rates increases marginal
cost, shifting the curve from MC1 to MC2.
 The completely coordinated market price of
the consumer good rises from $7.8 per unit
to 9.2 per unit. The completely coordinated
market quantity of the good falls from 2200
to 1730.
Effects Of Job-seeking By Potato
Workers On Related Other Markets
For Work

When workers shift to other markets for work, the
supply of work in those markets will rise.
 The completely coordinated market wage rate will
fall.
 To employers, the fall in wage rate is a decrease in
per-unit costs of producing a consumer good.
 The decrease in per-unit costs will lead to a lower
price and larger quantity of the consumer good as
the market becomes more coordinated.
The Demand For Work And The
Degree Of Work Specificity

Two polar extreme classes of work:
– Completely specialized work.
– Non-specific work.

The supply of non-specific work is price
elastic.
 The supply of specialized work is price
inelastic.
Different Price Elasticities
Of Supply (Figure 9-12)
Price Elasticity Of Supply (1)


On the supply of non-specific work curve (Sn), begin at the
point at which the market is completely coordinated. The
wage rate is $10 per hour and the amount of work employed
is 118 hours. If there is a small 5 % (approximately) rise to
$10.5, the quantity of work supplied rises by almost 100 %
to 225 hours of work.
Supply is price elastic.
Price Elasticity Of Supply (2)

On the supply of specialized work curve (Ss), begin
at the same point, where the market is completely
coordinated ( $10 per hour and 118 hours). If there
is a large 50 % (approximately) rise to $15, the
quantity of work supplied rises by only about 7% to
125 hours.
 Supply is price inelastic.
Effects Of An Increase In
Demand For Work (Figure 9-13)
Explanation Of Figure 9-13

The demand for each kind of work rises from D1
to D2.
 For specialized work, the wage rate rises
substantially, while the additional completely
coordinated market hours of work rises by only a
small amount.
 For non-specific work, the wage rate rises by only
a small amount, while the additional completely
coordinated market hours of work rises
substantially.
New Topic: Changes In Supply
Conditions In A Market Economy

Types of changes that may occur.


1. Changes in technology.
2. Changes in the amounts of resources.
3. Changes in the prices of resources.

These are called determinants of supply.

We discuss the first two of these changes. We focus mostly
on the first.

Two Types Of Technological
Advance

1. Work-saving:
– Example 1: robots assembling cars.
– Example 2: word processing programs helping
to produce reports.

2. Work-using:
– Example: A new inexpensive machine that
increases the amount of product that can be
produced but requires more workers. Workusing technological advances are rare.
Effects Of A Work-saving
Technological Advance

Goal of the exercise: to consider the effects of a
work-saving technological advance on markets up
and down the supply chain from the technological
advance and in other consumer goods industries.
 The advance occurs at a specific joint. It consists
of an ability to produce a particular capital good at
a lower cost of production.
 We assume that the capital good is work-saving.
Employment Down And Up
The Supply Chain

Down the supply chain: producers in this industry
produce a lower-priced capital good, which
complements other work at positions down the
supply chain. Will the lower priced capital good
raise or lower employment down the supply chain?
 Up the supply chain: producers in this industry
demand capital goods that complement the work
in this industry that is saved. Will the changed
demand for capital goods raise or lower
employment up the supply chain?
Procedure

1. First identify the effects on employment
at the point in the supply chain where the
technological advance occurs.
 2. Then identify the effects down and up the
supply chain.
 3. Later examine other consumer goods
industries.
The Point Where The Technological
Advance Occurs (1): Figure 9-10
The Point Where The Technological
Advance Occurs (2)

Figure 9-10 can be used to show the effects of a
technological advance on the completely
coordinated quantity of a consumer good
demanded and supplied.
 We can adapt this to refer to the capital good
produced with the labor in the industry where the
technological advance occurs.
 The model shows that the completely coordinated
market price falls and that the completely
coordinated market quantity rises.
The Point Where The Technological
Advance Occurs (3)

The model shows that the completely coordinated
market price falls and that the completely
coordinated market quantity rises.
 Because a larger quantity of the product is
produced, either more or less work may employed
in producing the capital good.
 We must remain uncertain about the effect on
unemployment. It depends on the particular
technological advance that occurs.
The Point Where The Technological
Advance Occurs (4)

Example: a machine reduces costs of
milling by substituting for work.
 Less work is employed because machines
substitute for workers.
 More work is employed because more of
the product is demanded and supplied.
– In supply, some types of work still complement
the new machines.
Downstream Employment: The
Capital Good Complements Work

Downstream producers must adjust to the decrease
in price of the capital good.
 They do so by hiring more of it and of the
resources, including work, that complement it.
 Example: more work is demanded by distributors,
bakers and retail bake shops because of the
increase in amount of flour used to satisfy
consumer wants for bread.
Downstream Employment: The
Capital Good Substitutes For Work

For a joint that is immediately downstream,
entrepreneurs buy the capital good. The capital
good substitutes for work. Their situation is
similar to that shown in figure 9-10.
– Employment has a tendency to fall due to the
substitution of the machine for workers.
– It also had a tendency to rise due to the increase in
quantity of the product demanded and supplied.

Further downstream, employment of work has a
tendency to rise due to the increased demand and
supply.
Upstream Employment

Entrepreneurs at the joint where the
technological advance occurs raise their
orders for raw materials. Millers demand
more raw wheat from granaries. Granaries,
in turn, raise their demands for raw wheat
from farmers. In both cases, the demand for
the particular kind of work used by these
entrepreneurs will rise.
Conclusion

The effects on unemployment are
inconclusive because the reduced demand
for particular kinds of work is offset by an
increased demand for other particular kinds
of work.
Effects On Employment Other
Consumer Goods Industries

The effects on employment in other
consumer goods industries depend on
whether consumers as a whole spend more
or less money on the consumer good that
falls in price because of the technological
advance. Suppose that the technological
advance is in TV sets.
Effects On Employment Other
Consumer Goods Industries

The technological advance shifts the marginal cost from
mc1 to mc2.
 The completely coordinated market price of the good falls
from 1000 to 500.
 The completely coordinated market quantity rises from
100 to 200.
 Special characteristic: the total money spent before the
technological advance equals the total money spent
afterwards. Thus consumers do not change their spending
for other goods. Whatever unemployment occurs is due to
the change in demand for work in this industry.
A Model Of An Industry Where
There Is A Technological Advance
(Figure 9-14)
Market for TV sets
Three Cases Of Effects On Employment
In Other Consumer Goods Industries

Demand for the product produced with the
lower priced resource is Da.
 Demand for the product produced with the
lower priced resource is Db.
 Demand for the product produced with the
lower priced resource is Dc.
Three Cases Of Effects On Employment
In Other Consumer Goods Industries
Figure 9-15
Case 1

Demand is Da.
 Because there is no change in spending on
TV sets, there is no increase or decrease in
demand for other consumer goods.
 Employment in other consumer goods
industries is not affected.
Case 2

Demand is Db.
 Because spending on TV sets decreases,
there is an increase in demand for other
consumer goods.
 The increase in demand causes an increase
in the derived demand for work to produce
the other consumer goods.
 The result is an increase in employment.
Case 3

Demand is Dc.
 Because spending on TV sets increases,
there is a decrease in demand for other
consumer goods.
 The decrease in demand causes a decrease
in the derived demand for work to produce
the other consumer goods.
 The result is unemployment.
Consumer Gains From A
Technological Advance

We can show that consumers gain from a
technological advance. They gain from the
lower price.
 Two groups of beneficiaries:
– Consumers who would have paid a higher
price.
– Consumers who would not buy unless the price
is reduced.
Figure 9-16
Explanation Of Figure 9-16

Benefits to consumers who would have bought TV
sets at the completely coordinated price before the
technological advance are represented by the area
A.
 Benefits to consumers who would not have bought
TV sets but who would buy them at the lower
completely coordinated price after the
technological advance are represented by the area
B.
Capital-Saving Technological
Advance




The technological advance may be capital saving as well as
labor-saving.
If so, it may decrease the demand for the capital goods
from upstream producers. An example: computer memory
modules.
A decrease in demand for the capital goods will decrease
the demand for the work needed to produce them. It will
cause unemployment. It may cut across several supply
chains.
On the other hand, if the technological advance is not
capital saving, the demand for capital goods will rise. The
technological advance will cause an increase in demand for
work and an increase in employment.
A More General Technological
Advance

Technological advances are usually spread over
more than one industry.
 A lower-cost capital good can usually be used to
produce more than one type of consumer good.
 To fully trace the effects on unemployment and
consumer benefits, we would have to build a much
more complicated image of effects than we have
done in this discussion.
Effects On Unemployment Of
A Decrease In Resources (1)

Examples of catastrophes: flood, earthquake,
volcano, tsunami, fire, disease, war.
 Effects of a catastrophe: unexpected decreases in
natural resources, capital goods, labor, and human
capital.
 Each catastrophe is different. Some resources are
unaffected, some are affected greatly, others are
affected to a lesser extent.
Effects On Unemployment Of
A Decrease In Resources (2)

A catastrophe obviously changes the completely
coordinated quantities and prices of each
consumer good and resource.
 The new prices and quantities must first be
discovered and then communicated by the
intermediary entrepreneurs.
 The producing entrepreneurs must appraise the
remaining resources and proceed to shift resources
so that they are used in the ways that result in the
maximization of utility.
Effects On Unemployment Of
A Decrease In Resources (3)

Unemployment is a logical outcome, since
many entrepreneur-employers will be
reappraising all resources.
 As the entrepreneur-employers come to
adjust to the new circumstances, the
unemployment will tend to gradually
disappear.
Effects Of An Increase In The Price
Of A Complementary Resource

Examples:
– Price of farm land and farm workers.
– Price of fuel and flight attendants.
– Cost of mining and mine workers.

Consequences: the employer may lay off
workers.
A Natural Rate Of Unemployment

There is practically always some amount of
unemployment in a market economy for two
reasons:
 1. Entrepreneur-employers are always reappraising
work in light of changes in market conditions.
 2. Laid off workers do not immediately accept
new jobs or drop out of the work force.
The Statistician Who Measures
Unemployment

When the statistician measures unemployment at
different times, he always finds some amount.
 Thus it appears that there is always some amount
of unemployment.
 When she compares the rate at one time with the
rate at other times, she may be inclined to think
that some quantity is normal and that other
quantities are abnormal.
 She may regard the average amount as normal.
Natural Unemployment Estimate
A Natural Rate?

The idea of a natural rate is based on the
notion that the observed, or measured rate
of unemployment tends toward an average
rate.
 Natural rate of unemployment: a rate of
unemployment toward which some
economists believe the measured
unemployment rate is tending.
Policies To Alleviate Unemployment
That Is Above The Natural Rate

People who have this idea often recommend
policies that they believe will bring the measured
rate closer to the natural rate.
 Policies:
– Unemployment compensation.
– Training programs or subsidies to individuals who
cause training to occur.
– Public works jobs.
– Other macroeconomic policy (see Chapter 13).
Comments On The Natural
Rate Hypothesis

1. Economists who adopt this idea have made the
error of not realizing that there are different
markets for work and that market conditions are
always changing.
 2. Under ordinary circumstances, government
agents are not in a good position to determine the
effects of their policies on unemployment.
 Conclusion: The idea that government agents
could succeed in reducing unemployment without
reducing the consumer benefit from consuming
goods seems like wishful thinking.