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By the end of this section, you will be able to:

  • Analyze cyclical unemployment
  • Explain the relationship between sticky wages and employment using various economic arguments
  • Apply supply and demand models to unemployment and wages

We have seen that unemployment varies across times and places. What causes changes in unemployment? There are different answers in the short run and in the long run. Let's look at the short run first.

Cyclical unemployment

Let’s make the plausible assumption that in the short run, from a few months to a few years, the quantity of hours that the average person is willing to work for a given wage does not change much, so the labor supply curve does not shift much. In addition, make the standard ceteris paribus assumption that there is no substantial short-term change in the age structure of the labor force, institutions and laws affecting the labor market, or other possibly relevant factors.

One primary determinant of the demand for labor from firms is how they perceive the state of the macro economy . If firms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor, and the labor demand curve shifts to the right. Conversely, if firms perceive that the economy is slowing down or entering a recession, then they will wish to hire a lower quantity of labor at any given wage, and the labor demand curve will shift to the left. The variation in unemployment caused by the economy moving from expansion to recession or from recession to expansion (i.e. the business cycle) is known as cyclical unemployment    .

From the standpoint of the supply-and-demand model of competitive and flexible labor markets, unemployment represents something of a puzzle. In a supply-and-demand model of a labor market, as illustrated in [link] , the labor market    should move toward an equilibrium wage and quantity. At the equilibrium wage (We), the equilibrium quantity (Qe) of labor supplied by workers should be equal to the quantity of labor demanded by employers.

The unemployment and equilibrium in the labor market

The graph reveals the complexity of unemployment in that, presumably, the number of jobs available should equal the number of individuals pursuing employment.
In a labor market with flexible wages, the equilibrium will occur at wage We and quantity Qe, where the number of people looking for jobs (shown by S) equals the number of jobs available (shown by D).

One possibility for unemployment is that people who are unemployed are those who are not willing to work at the current equilibrium wage, say $10 an hour, but would be willing to work at a higher wage, like $20 per hour. The monthly Current Population Survey would count these people as unemployed, because they say they are ready and looking for work (at $20 per hour). But from an economist’s point of view, these people are choosing to be unemployed.

Probably a few people are unemployed because of unrealistic expectations about wages, but they do not represent the majority of the unemployed. Instead, unemployed people often have friends or acquaintances of similar skill levels who are employed, and the unemployed would be willing to work at the jobs and wages similar to what is being received by those people. But the employers of their friends and acquaintances do not seem to be hiring. In other words, these people are involuntarily unemployed. What causes involuntary unemployment ?

Questions & Answers

price paid by consumers after the sales tax is called?
Pinias Reply
why government impose price floor on certain products?
how can black market be occurred when price ceiling is introduced?
How can inflation affect goods and services?
When prices rise for energy, food, commodities, and other goods and services, the entire economy is affected
If inflation becomes too high the economy can suffer conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases.
Is it necessary to make decision when it fails you
Evelin Reply
Pls when what fails u
I think so
well i might naught know what you on about but i gotta tell you, it is necessary
how can the demand side approach solve unemployment
Tshepiso Reply
demand side approach to solve unemployment
Tshepiso Reply
no get ur questions
differentiate between choice and scale of preference
choice are the various wants of every individual whiles scale of preference is the list of unsatisfied wants arranged in order of important priority
choice refers to the act of selecting from alternatives or it refers to the act of choosing one thing instead of the other but Scale of preference refers to the listing of wants in order of important by providing the pressing need on top and the less pressing need at the bottom
four cardinal types of demand
Henry Reply
what are the types of demand
they are the derived,complementary,substitute and supplementary demands
What is equilibrium
equilibrium is the state of balance where there is no tendency for a change to occur.
Derived, competitive, complementary and composite demands
why is economics said to be a dismal science?
hi friends
fyn what is meaning of monopoly
monopoly is when a particular good is produced without competing with any other good.
good evening
draw the market demand curve from the individual demand curve?
With the aid of diagrams,compare the short run equilibrium positions of a perfect competitor and an imperfect competitors
Monlay Reply
What is the term consultation in economics?
Nthabiseng Reply
why is it that the long run Average cost curve does not touch that of the short run curve at its minimum?
Baah Reply
In few words, what is the role of interest rate in economy?
Carlos Reply
what is population
Nyakeh Reply
total number of people in a given area or country
the total number of people at a given area or country
total number of people in a given area or country
What is price Elasticity of demand?.
The responsiveness of the quantity of a commodity demanded to a change in its price, expressed as the percentage change in quantity demanded divided by the percentage change in price.
why is it that the long run Average cost doesn't touch the short run cost curve at its minimum?
what is supply
please rice and beans will be what type of demand but note we mostly cook it together
Oladosu Reply
complementary or joint demand
but did you know you can demand for rice without beans so how is it joint or complementary
From my point of view, rice and beans are replaceable goods, hence they can't be complementary.
what are the money value
Wisdom Reply
Nothing more than a purchase power, in other words, $100 now, must have the same value after 1 year.
what is Monopoly
Rebecca Reply
what is money
Lawal Reply
It can be define as a big transaction that can control any business for one place to another base.
money is recognisable note to accept both parties selling and buying
i don still understan
money is anything generally accepted as a medium of exchange
Money is anything generally accepted as a medium of exchange and for the settlement of goods and services .
hi good ppl, pls help out
discuss human and natural resources as develop strategies ro improving living condition of citizens in developing countries.
I don't understand the question.
it's a form of currency used for 2 or more individuals or parties in order to reach their amicable personal or business attainment. one must understand that money itself can manifest in multiple fashions for which the individuals or parties adheres.
are u trying to say we shld discuss ways in which human natural resources help in improving living condition of citizens in developing countries?
money is a legal thunder generally accepted as a medium of exchange for the payment of debt ,goods and services
money is a way of payment.
money is any thing that is generally accepted as a medium of exchange good for good and settlement of debt and means of payment
money is nothing but a object which is used for exchange of goods and services.
money is anything that is generally accepted as payment of goods and services and settlement of debt
hello everyone , I'm New here, third degree price discrimination?
Saeed Reply
2nd degree price discrimination?

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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