PRINCIPLES OF MACROECONOMICS PART III The Core of Macroeconomic Theory TENTH EDITION CASE FAIR OSTER © 2012 Pearson Education, Inc Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly ofTefft 29 PART III The Core of Macroeconomic Theory © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 The Labor Market in the Macroeconomy 14 CHAPTER OUTLINE The Labor Market: Basic Concepts The Classical View of the Labor Market The Classical Labor Market and the Aggregate Supply Curve The Unemployment Rate and the Classical View Explaining the Existence of Unemployment PART III The Core of Macroeconomic Theory Sticky Wages Efficiency Wage Theory Imperfect Information Minimum Wage Laws An Open Question © 2012 Pearson Education, Inc Publishing as Prentice Hall The Short-Run Relationship between the Unemployment Rate and Inflation The Phillips Curve: A Historical Perspective Aggregate Supply and Aggregate Demand Analysis and the Phillips Curve Expectations and the Phillips Curve Inflation and Aggregate Demand The Long-Run Aggregate Supply Curve, Potential Output, and the Natural Rate of Unemployment The Nonaccelerating Inflation Rate of Unemployment (NAIRU) Looking Ahead of 47 The Labor Market: Basic Concepts The labor force (LF) is the number of employed plus unemployed: LF = E + U PART III The Core of Macroeconomic Theory unemployment rate The number of people unemployed as a percentage of the labor force U unemployment rate LF © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 The Labor Market: Basic Concepts frictional unemployment The portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems PART III The Core of Macroeconomic Theory structural unemployment The portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries cyclical unemployment The increase in unemployment that occurs during recessions and depressions © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 The Classical View of the Labor Market PART III The Core of Macroeconomic Theory labor demand curve A graph that illustrates the amount of labor that firms want to employ at each given wage rate labor supply curve A graph that illustrates the amount of labor that households want to supply at each given wage rate © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 PART III The Core of Macroeconomic Theory The Classical View of the Labor Market FIGURE 14.1 The Classical Labor Market Classical economists believe that the labor market always clears If the demand for labor shifts from D0 to D1, the equilibrium wage will fall from W0 to W1 Anyone who wants a job at W1 will have one © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 PART III The Core of Macroeconomic Theory The classical view of the unemployment market is consistent with the following idea: a The wage rate adjusts to equate the quantity of labor demanded with the quantity of labor supplied; therefore, persistent unemployment above the frictional and structural amount is unlikely b If the wage rate in the labor market is too low, people will work for themselves c The amount of labor that a firm hires depends on the value of the output that workers produce d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 PART III The Core of Macroeconomic Theory The classical view of the unemployment market is consistent with the following idea: a The wage rate adjusts to equate the quantity of labor demanded with the quantity of labor supplied; therefore, persistent unemployment above the frictional and structural amount is unlikely b If the wage rate in the labor market is too low, people will work for themselves c The amount of labor that a firm hires depends on the value of the output that workers produce d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 The Classical View of the Labor Market The Classical Labor Market and the Aggregate Supply Curve The classical idea that wages adjust to clear the labor market is consistent with the view that wages respond quickly to price changes In the absence of sticky wages, the AS curve will be vertical PART III The Core of Macroeconomic Theory In this case, monetary and fiscal policy will have no effect on real output Indeed, in this view, there is no unemployment problem to be solved! © 2012 Pearson Education, Inc Publishing as Prentice Hall 10 of 47 ... amount of labor that a firm hires depends on the value of the output that workers produce d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 PART III The Core of Macroeconomic... amount of labor that a firm hires depends on the value of the output that workers produce d All of the above © 2012 Pearson Education, Inc Publishing as Prentice Hall of 47 The Classical View of. .. Publishing as Prentice Hall of 47 The Classical View of the Labor Market PART III The Core of Macroeconomic Theory labor demand curve A graph that illustrates the amount of labor that firms want