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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 scarcity
Bonny Reply
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
needs of people ar called demand
what's the difference between opportunity cost and production possibility curve?
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
It deals with making choices in the face of scarcity
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
what is scarcity
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
what is perfect complements?
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
economics is important on expenditure analysis
because it is to make choice
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Economic is important because of the fact of scarcity and desire for efficiency...
it enable us to make rational choice
what is unemployment
unemployment occurs when a person is actively searching for employment is unable to find work .....
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
It is important because economics provide solutions about scarcity.
which of the following measures will the government take during inflation?
Price falls and demand is inelastic Please define it with an example and diagram.
Muhammad Reply
difference between nominal gdp and real gdp
Sakshi Reply
main is adjustment for inflation
what are the factors of production
Sheku Reply
capital, labor, technology
is economic a science
Emmanuel Reply
as economic a science
yes because it study human behavior
yes it deal with human activity and the welfare of people in the country
yes because it uses scientific methods of solving problems
yes because it uses scientific methods in solving problems
pls can I ask a question
Pls what are the characteristics of opportunity costs
identify the type of price elasticity of demand
economic is a science
what is monopoly
Is Economics a Science
Albert Reply
what is scarcity
Edmore Reply
Scarcity is the limitedness of resources relative to human wants. In economic sense means that the available resources are not sufficient to satisfy all human wants.
Moreover, Fiscal policy deal with government revenue and expenditure. Government expenditure puts money in public hands while government revenue withdraws the money. Role of fiscal policy is to reduces money circulation as a means of reducing demand.
What is an inflationary spiral?
Suppose that you 're nominated as a Minister of Finance in your country's. How can you finance a deficit budget?
is economic a science
yes because we studying human behaviour
what are the factors of production
pls Emmanuel adjei do we know each other
Emmanuel adjei pls did u attend living God school
Can you explain the terms 'fiscal deficit' and 'fiscal policy'?
Brahmani Reply
fiscal deficit refers to the government expenditure exceed expected to the government revenue
fiscal deficit is like budget deficit
fiscal policy it occurs when the government takes and maintain the strategic to resolve the inflation.

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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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