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Some people worry that technology causes structural unemployment. In the past, new technologies have put lower skilled employees out of work, but at the same time they create demand for higher skilled workers to use the new technologies. Education seems to be the key in minimizing the amount of structural unemployment. Individuals who have degrees can be retrained if they become structurally unemployed. For people with no skills and little education, that option is more limited.

Natural unemployment and potential real gdp

The natural unemployment rate is related to two other important concepts: full employment and potential real GDP. The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential. Operating above potential is only possible for a short while, since it is analogous to all workers working overtime.

Productivity shifts and the natural rate of unemployment

Unexpected shifts in productivity can have a powerful effect on the natural rate of unemployment. Over time, the level of wages in an economy will be determined by the productivity of workers. After all, if a business paid workers more than could be justified by their productivity, the business will ultimately lose money and go bankrupt. Conversely, if a business tries to pay workers less than their productivity then, in a competitive labor market, other businesses will find it worthwhile to hire away those workers and pay them more.

However, adjustments of wages to productivity levels will not happen quickly or smoothly. Wages are typically reviewed only once or twice a year. In many modern jobs, it is difficult to measure productivity at the individual level. For example, how precisely would one measure the quantity produced by an accountant who is one of many people working in the tax department of a large corporation? Because productivity is difficult to observe, wage increases are often determined based on recent experience with productivity; if productivity has been rising at, say, 2% per year, then wages rise at that level as well. However, when productivity changes unexpectedly, it can affect the natural rate of unemployment for a time.

The U.S. economy in the 1970s and 1990s provides two vivid examples of this process. In the 1970s, productivity growth slowed down unexpectedly (as discussed in Economic Growth ). For example, output per hour of U.S. workers in the business sector increased at an annual rate of 3.3% per year from 1960 to 1973, but only 0.8% from 1973 to 1982. [link] (a) illustrates the situation where the demand for labor—that is, the quantity of labor that business is willing to hire at any given wage—has been shifting out a little each year because of rising productivity, from D 0 to D 1 to D 2 . As a result, equilibrium wages have been rising each year from W 0 to W 1 to W 2 . But when productivity unexpectedly slows down, the pattern of wage increases does not adjust right away. Wages keep rising each year from W 2 to W 3 to W 4 . But the demand for labor is no longer shifting up. A gap opens where the quantity of labor supplied at wage level W 4 is greater than the quantity demanded. The natural rate of unemployment rises; indeed, in the aftermath of this unexpectedly low productivity in the 1970s, the national unemployment rate did not fall below 7% from May, 1980 until 1986. Over time, the rise in wages will adjust to match the slower gains in productivity, and the unemployment rate will ease back down. But this process may take years.

Questions & Answers

The quantity of a good demanded rises from 1000 to 1500 units when the price fallsfrom$1. 50 to$1. 00 per unit. Find the price elasticity of demand?
Rishiraj Reply
what is meant by Regional policy
Itz Reply
what is demand
Tangwe Reply
nice question..
Suman
what is aggregate demand and the equation for Y(GDP)
Davido Reply
what is cost concept
Fatai Reply
is a type of mechanism which makes consumers and individuals understand the price of goods and services
Davido
who is the father of Economics
John Reply
i dont know
Suman
Adam Smith
deep
hi
Zafraan
Adam
Zafraan
smith
Zafraan
Adam Smith
Bevingtone
What is opportunity cost
Bevingtone
is the value of the next best thing you give up when making a decision.
Bongiwe
opportunity cost is a made in order to enjoy something else
Laila
what is cost concept
Fatai
Adam Smith
Md
Adam Smith
Akligo
Adam Smith
Samura
What is demand and supply
Ehwehwe
demand refers to goods and services which consumers are willing and able to buy at a particular period of time and supply refers to the goods and services which consumers are willing and able to offer for sale at a particular period of time
Davido
demand is the quantity of goods and services which a particular customer is willing and able to purchase at that point in time.while supply is a quantity of goods and services which the company is willing and able to render to the customer who purchased it at that point
Israel
Adam Smith
Israel
cost concept. it is used for analyzing the cost of a project in short and long run
Israel
opportunity cost can be seen as a forgone alternative. it can be seen as the loss of other alternatives when one alternative is chosen
Israel
cost is value of imput and output at particular period of time. but we can classify in short run and long run.
Nago
Cost is the aggregated sum accrue in procuring something worthwhile.
KATUNKUS
Adam Smith
Som
Adam Smith
Tandan
Adam smith
Hafiz
what is the formula for elasticity
Umar Reply
perc of qty chg/perc of price chg
Suman
ok
Umar
I need some help regarding economic numericals.
Hassan
Send your problems
Tandan
utility
Oppong
demand or supply equation dy hn OK iska schedule bnana above equation ko dekhty hue kasy bnaye gy
Saba
what is cobweb?
Solomon Reply
A spider's web, especially when old and dusty (The wooden carvings were almost obliterated by cobwebs)
huzaif
what is Economic
Mbarohey Reply
Economic is a social science that study human behavior in relationship with end and scarce means which have alternative uses
Agyenkwa
Economics is an inquiry into nature that causes wealth of nations.
Eric
what are the importance of economic
Mbarohey
it helps us use our limited resources to satisfy our unlimited wants
Daniel
economic is the science of wealth
Joseph
it's helps us to be current on what's going on in the world
Joseph
economics can be defined as the science of wealth
Joseph
what are the advantages of sole proprietorship
Mbarohey
is the study of mankind in the ordinary business
Awini
Economic is science which study human behavior in relation to relatively scarce resources and how they are managed
Akligo
What is the formula for calculating elasticity?
Haruna Reply
(%change in quantity) / (%change in price)
Rahul
thx
lil
.
Tandan
.
Tandan
government spending increase will cause economic grew
Jia Reply
no
Helicia
no because government expenditure is very high the growth of the economy will decrease
Davido
what is trade by batter
Iko Reply
trade involves the transfer of good or services from one person to another, often in exchange for money.
musadique
Now trade by batter :it may define as form of trading in which good are exchange directly for other goods without the use of money as medium of exchange
musadique
is it good to trade with something with a value but given something which has no value
sandra
trade in batter means the exchange of goods and services without using money
Maa
It may be defined as an exchange of goods to satisfy the needs of two parties
Haruna
is the exchange of goods and services for the consumption of human wants
Davido
mention six factors that explain efficiency and productivity of labour
fanelchainz Reply
mention six factors that explain efficiency and productivity of labour
bohvy
factors that explain efficiency of labor are 1.population, 2.technology, 3.education, 4.working environment, 5.incentives (tax holidays) and 6.religious or cultural beliefs.
Solomon
What is demand
SoFIA Reply
is the abulity and willingness of a consumer to purchase goods and services at a particular peeiod of time in a given price
Fadhil
Is goods or service that a consumer is willing and able to purchase at a particular time over a giving period of time
Konja
is the ability and the willingness to buy a goods at a particular period of time in a given price
Prince
please go ahead it's been long time you all are explaining basic topics so now there are many topics left you have to discuss them .
Zahid
what is a central bank
Fadhil Reply
transactionsss with all banks of any country
Economics
What is national income
Benjamin Reply
national income it means the value of goods and services produce by a country for every financial year.
Simon

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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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