Transcript 2.3II B Causes and Solutions for DisEquilibrium Unemployment N

2.3 B Causes and Solutions for
DisEquilibrium Unemployment
B & D pages 208 – 211
Learning Objectives
• Describe, using examples, the meaning of
disequilibrium (cyclical) unemployment.
• Explain, using a diagram, that disequilibrium
unemployment is caused by a fall in aggregate
demand.
• Evaluate government policies to deal with the
different types of unemployment.
Wages and employment adjusts to balance the
aggregate supply and aggregate demand for labour.
(similar to the microeconomic that is specific to a type of job; what key word is different to this macro model?)
Average
Wage
(labour price
index)
ASL
Equilibrium
wage, W
ADL
0
Equilibrium
employment
Quantity of
Labour
The Aggregate Demand for Labour ADL
Demand for Labour – slopes downwards from left to right
as employers are able to afford to employ more labour
at a lower wage rate.
Increase in Demand for Labour may
be due to:
Increased GDP
 Capital more costly
• Increased productivity
(output per worker)

ADL’
ADL
The labour supply curve reflects how workers’ decisions
about the labour-leisure tradeoff respond to changes in
opportunity cost.


Wage (price
of labour)

Increased supply of labour are due to…
Work/leisure/education trade-offs
Immigration
Demographic changes –aging population
Market
wage
Market
wage
Maximum
participation
ASL
0
Supply of workers
Quantity of
Labour
1. Disequilibrium u/e
(also called Cyclical Unemployment)
• Due to the downturn in the business cycle
– i.e. decreasing GDP (whatever causes that)
– less production across all industries means less
aggregate demand for labour
• Wages do not fall easily – at least in the short
run (in fact, typically u/e doesn’t begin until
after about 3-6 months of falling output.
Disequilibrium unemployment:
also called “Cyclical”ASU/E Why?
Average (real) wage rate
L
“involuntary”
unemployment
W1
W2
ADL 1
ADL 2
O
Q2
Q1
No. of workers
1. Is it Demand-deficient u/e?
Keynesians would say this is due to market
behaviour of both workers (supply) and
employers (demand)
– For workers due to Sticky wages: workers are
unwilling to accept lower wages.
– for employers due to Efficiency wages: wages set
by employers to attract – or keep – higher quality
workers (due to cost of retraining as well).
Demand Side Solutions - How they work
• Fiscal policy: spending more (income or
welfare benefits or special projects) – or
taxing less!
• Monetary policy: resulting in lower interest
rates – thus increasing business investment
Both are expansionary – thus leads to ↑ AD and
↑ ADL
• Thu ADL returns to previous level and
eliminates “Demand Deficient” u/e
Evaluation of demand side policies
Keynesian Theory focuses on demand side policies and dominated
government policy from 1950 – 1980. Research the main
weaknesses of using demand management to control the
economy:
trade-off problems; time lags and political changes; and classical
economists' critique of demand management.
1. Why might there be conflicts between several of the
macroeconomic goals? Explain one of these conflicts in terms of
a "trade-off'.
2. How might fiscal policy actually serve to increase the amplitude
of the business cycle?
3. Explain how classical/monetarist economists use "rational
expectations" to criticise demand-side policies.
4. Why do you think Keynes referred to classical policies during
recessions in terms of people in the economy having to "grin
2. Or is it Real wage (classical) unemployment?
Not reaching a new equilibrium because of …
•
•
•
Minimum-wage laws: wages regulated by government
to bring about equity.
Collective Bargaining (Union Power): wages contracted
through unions on behalf of workers.
Generous welfare (unemployment) benefits: more
attractive benefits increases the opportunity cost of
working for a living!
Supply Side [Market Reform] Solutions How they work
• Indirectly, lower union/minimum wages and
Lower unemployment benefits will tend to
reduce other wages – thus reducing the
average wage – thus eliminating “real wage”
u/e and increasing employment
• With lower costs of labour, Aggregate Supply
(ASAD model) should increase and thus return
to Yfe.