Theories of Unemployment

1
Theories of Unemployment

• Chapter 7, Sections 3 4

2
Classical Theory

• No involuntary unemployment
• Bozo revisited
• Fig 7.3 (p.12) Fig 7.4 (p.13)
• Free market interference
• Government regulation
• Labor unions
• What to do?
• Laissez-faire revisited

3
Figure 7.3 A Supply and Demand Model for Labor
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Figure 7.4 Classical Unemployment
5
Imperfect labor markets

• Think/Share/Pair How does the market for labor
  differ from the market for fish?
• Sticky wage theories slow market adj.
• Insider-outsider theory
• Efficiency wage theory
• What to do?
• Let inflation erode real wages?
• A more Keynesian perspective?

6
Labor vs. fish Labor

• Has legal and moral rights (fish none)
• Has a long term relationship with the buyer the
  employer (fish spoil quickly spot market in
  fish)
• Provides an uncertain amount of work (fish
  calories a known quantity)
• Needs motivation (fish just cooked eaten)
• Has human fragilities (spoiled fish gets tossed)
• Can organize for power (fish just swim in
  schools)
• Faces employers who own the jobs, can set wages
  (fish markets have many buyers and sellers)

7
Focus on AD, not labor markets

• Keynes
• Classical solution of lower wages ? lower AD
• But only a higher AD will reduce a high
  unemployment rate
• What to do?
• Focus on reasons why AD might be weak
• Fig 7.5 p. 17

8
Figure 7.5 The Keynesian Model of Employment
Determination
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No Fault theories of unemployment
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Active learning

• No fault theories of unemployment
• Share/pair Exercise 3, p.26
• Suppose an economy is suffering unemployment due
  to too high wages, as theorized by Classical
  economists.
• a. Draw and numerically label a graph
  illustrating this case, in which the going wage
  is 20, the equilibrium wage is 15, 50 million
  people want to work, but only 30 million are
  employed.
• b. Describe some of the assumptions about labor
  markets that underlie this graph.
• c. how could unemployment be eliminated at the
  going wage of 20?

11
The NAIRU debate

• Is there a natural rate of unemployment?
• Bozo again
• Yes Fig 7.7 p. 18
• No Fig 7.8 p. 20
• It seems to depend on public policy and the
  extent of unionization.

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Figure 7.7 The Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
13
Figure 7.6 The Natural Rate of Unemployment
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Figure 7.8 Empirical Data and the Natural Rate
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The changing nature of work

• Employment flexibility two meanings
• Worker flextime
• Employer discretion
• What qualities to you want from your career
  job?
• Three-step interview like our opening day
  introductions technique
• Step 1A interviews B
• Step 2 B interviews A
• Step 3 Students A and B each summarize their
  partners responses for Students C and D, and
  vice versa.