CHAPTER 32Labor Markets, Unemployment

and Inflation

PowerPoint® Slides by Can Erbil

© 2005 Worth Publishers, all rights reserved

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What you will learn in this chapter:

The meaning of the natural rate of unemployment, and why it isn’t zero

Why cyclical unemployment changes over the business cycle

How factors such as a minimum wage and efficiency wages can lead to structural unemployment

The reasons that unemployment can be higher or lower than the natural rate for extended periods

The existence of a short-run trade-off between unemployment and inflation, called the short-run Phillips curve, that disappears in the long run

Why the NAIRU, the nonaccelerating inflation rate of unemployment, is an important measure for policy-making

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The Nature of UnemploymentWorkers who spend time looking for employment are engaged in job search.

Frictional unemployment is unemployment due to the time workers spend in job search.

Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.

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Distribution of the Unemployedby Duration of Unemployment, 2000

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The Effect of a Minimum Wage on the Labor Market

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Causes of Structural UnemploymentMinimum wages

Unions

Efficiency wages

Side effects of government policies

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The Natural Rate of Unemployment

The natural rate of unemployment

Cyclical unemployment

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The Changing Makeup of the U.S. Labor Force

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Changes in the Natural Rate of Unemployment

Changes in Labor Force Characteristics

Changes in Labor Market Institutions

Changes in Government Policies

Changes in Productivity

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The Actual Unemployment Rate FluctuatesAround the Natural Rate

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These Fluctuations Correspond to the Output Gap

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Okun’s Law

Each additional percentage point of output gap reduces the unemployment rate by less than 1 percentage point.

Unemployment rate = Natural rate of unemployment – (0.5 – Output gap)

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Why Doesn’t the Labor Market Move Quickly toEquilibrium?Misperceptions

Sticky Wages

Menu Costs

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Unemployment and Inflation: The Phillips Curve

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Unemployment and Inflation in the 1960s

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Expected Inflation and the Short-Run Phillips Curve

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The NAIRU and the Long-Run Phillips Curve

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Unemployment and Inflation, 1961–1990

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The End of Chapter 32

coming attraction:Chapter 33:

Inflation, Disinflation, and Deflation