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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

what is microeconomics and macroeconomics
Usman Reply
microeconomic deal with the study of individual firms and household and macroeconomics deal with the economy as a whole.
difine VAT,, and give advantage and disadvantage VAT
definition of Monopoly
malonzy Reply
Wat is the importance of economics
Vicky Reply
it broaden one's mind
it help us to make good choices
what is an efficient wage and how it causes structural unemployment and how it could be shown graphically?
Amos Reply
economics is a social science and an art discuss
Kerry Reply
further explanation on the definition
Samuel Reply
is demand the same as quantity demanded
what is business economics
Nelson Reply
business economics is the way the society uses its limited resources to satisfy their unlimited wants
what is business economics
how did Mc connel defined economics
Isaac Reply
what is a economy planning?
Jacob Reply
what is demand
Sunday Reply
demand means desire for a commodity backed by willingness & ability to pay for that commodity
what is supply
supply means suppliers supplying more commodities when price's high or less when price's low to satisfy human want
the coefficient of price elasticity of supply is the measure of percentage change in the quantity supplied of a good due to a given percentage change in its price.
Please what is Economics of Scales?
what is cardinal and ordinal utility?
Cardinal utility is the satisfaction derived by the consumers from the consumption of goods and services while ordinal is ranked in terms of preference.
Please explain what is meant by Economic Integration?
Please I need help!!!!
economics scales I don't know but I know laws of returns to scale
can someone help explain to me what is fairly inelastic dd
Economics Economics - The study of how people use their limited resources to try to satisfy unlimited wants
Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrate
Inelastic Demand When consumers are relatively unresponsive to price changes. A PED coefficient of less than one means that a particular change in the price of a good will be met by a proportionally smaller change in the quantity demanded.
demand refers to goods and services that a consumer is willing and able to buy at given rate over a given period of time
Demand  - The entire relationship between the quantity of product that buyers wish to purchase per period time and the price of that product..
what are the factor that affect demand
what is development planning?
Emmanuel Reply
What is economics?
Shubham Reply
economics is study of scarcity and how humans make decisions.
reason for development planning in West Africa
what is development planning?
What is homo Economicus?
nongo Reply
when a person is part 50% rational and the other part of him is 50% focused on money as an incentive
what makes the economy to be stable
what measures are necessary to the economy which is not doing fine
must find out the problems originating from and take remedy for it.
Economics as a social science Discuss

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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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