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Principles Of Economics Power Point Presentation Chapter 9 Unemployment March 9, 2007 © J. Patrick Gunning.

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1 Principles Of Economics Power Point Presentation Chapter 9 Unemployment March 9, 2007 © J. Patrick Gunning

2

3 Unemployment Cartoon

4 Unemployment During The Great Depression ( ) Unemployment and the great depression: – Beginning with the 1929 stock market crash, high unemployment in the U.S. lasted for 8 years. – At its worst, the unemployment rate was 25%. – It was 99% in the poorest areas. – Teachers took jobs sweeping factory floors.

5 Looking For Jobs

6 Great Depression Unemployment Figure 9-1

7 Waiting In A Breadline (1932)

8 A shanty built of refuse near the Sunnyside slack pile, Herrin, Illinois Many residences in southern Illinois coal towns were built with money borrowed from building and loan associations. During the depression building and loan associations almost all went into receivership. Their mortgages were sold for whatever they would bring.

9 Part of an impoverished family of nine on a New Mexico highway. Depression refugees from Iowa. Left Iowa in 1932 because of father's ill health. Father an auto mechanic laborer, painter by trade, tubercular. Family has been on relief in Arizona but refused entry on relief roles in Iowa to which state they wish to return. Nine children including a sick four-month-old baby. No money at all. About to sell their belongings and trailer for money to buy food. "We don't want to go where we'll be a nuisance to anybody".

10 What Caused The Unemployment (1) The great depression unemployment has often been called cyclical. It had been observed many times before 1929 but the problem was never so severe and prolonged. – Cyclical unemployment: unemployment that occurs as a consequence of changes in the quantity of money, which causes businesspeople to make errors in calculations. A commonly accepted theory of the cause of cyclical unemployment: Banks created new money, which they lent to businesses. The businesses invested it in producing goods that they could not sell. Prices rose unexpectedly. The businesses laid off the workers who could not find new jobs.

11 Cyclical Unemployment

12 What Caused The Unemployment (1) The basis of this theory: – Money is the measuring rod used by businesses to calculate and prices are the means they use to communicate (to signal). – The increase in money led to false signals. To the entrepreneurs, marginal cost had fallen and demand was rising. – But, from the efficient use of resources view, there had been no change in how resources should be distributed to achieve maximum consumer utility. – A period of time was needed for entrepreneurs do discover the truth. Thus, the banks caused a business cycle by producing too much new money.

13 Goal Of The Chapter To fully understand this the theory of cyclical unemployment, we need a lot more study: Ch. 10,11,12. Goal of this chapter: to present some general principles upon which practically all economists would agree.

14 Subjects Discussed In This Chapter 1. The meaning of unemployment and the role of entrepreneurship in creating jobs. 2. How a change in demand conditions can cause unemployment. 3. How a change in technology (a supply condition) can cause unemployment. 4. The idea of a natural rate of unemployment.

15 Part 1: The Meaning Of Unemployment Some definitions: 1. Labor: physical activity performed by a human being. 2. Work: labor plus human capital. 4. Unemployment refers to work, not to labor alone.

16 Definition Of Unemployment (1) Unemployment: a situation in which an employer has decided not to renew an employment agreement with an employee, the employee is not employed by someone else, and the employee wants to continue his work under the same pay and conditions.

17 Definition Of Unemployment (2) Three parts to the definition of unemployment: 1. An employer has decided not to renew an employment agreement. 2. The former employee does not accept an employment offer from a new employer. 3. The former employee wants to be employed in the same kind of job and under the same pay and conditions as before. And he would accept a job offer that meets these conditions.

18 Example Of An Unemployed Worker A high school dropout who has been employed as a carpenters helper for several years but now is laid off because he has not acquired a sufficient amount of skill and because the employer expects a decrease in demand.

19 Who Is In The Work Force? Work force: employed plus unemployed plus people searching for jobs. Four categories of individuals based on the definition of unemployment: – 1. Not in the work force (housewives, students, disabled, retired, elderly.) – 2. Classified as employed. – 3. Classified as unemployed. – 4. Searchers for work who have recently quit their jobs or recently entered the work force and who are not classified as employed or unemployed.

20 Unemployed Vs. Searching For Work (1) This definition raises lots of questions. If someone is offered a job but decides not to take it, how is she different from a person classified as a searcher for work? The carpenters helper may decide not to take a job because he hopes to find a better one in the future. In this respect, he may be like a business executive who quits in order to search for a better job.

21 Unemployed Vs. Searching For Work (2) Why, then, is the carpenter classified as unemployed while the others are not? The definition is based on the assumption that government leaders who authorize the definition care more about those who have recently been laid off than about those who quit their jobs or who are just entering the work force.

22 Unemployed Vs. Out Of The Work Force (1) Another question: if someone can find a job, how is she different from someone who is out of the work force? The carpenters helper may decide not to take a different kind of job because the pay is too low or the working conditions too undesirable. In this respect, he may be like a housewife or student, who is not in the work force.

23 Unemployed Vs. Out Of The Work Force (2) Why, then, is the carpenter classified as unemployed while the others are not? An answer is that government sympathies lie more with a person who was previously working is eager to work than with the others. Also, in many real capitalist nations, a government department is required to give aid to workers who it determines cannot find a job, but not to the others. If it gave aid to housewives and students, it would have the more difficult task of judging whether these people were truly willing to work.

24 Other Issues Of Definition After how long a period of unemployment should we reclassify an unemployed worker into the category of not in the work force? How do we judge whether a person who has two jobs and is laid off of one of them is unemployed? How do we judge whether a person who works part time, or is laid off from a part time job is unemployed? There are no definite answers to these questions. Our judgment may depend on our sympathies at the time.

25 Part Time Jobs And Multiple Jobs In everyday life, some people have more than one job and people work for different numbers of hours. Government agents who collect statistics on the amount of unemployment or its rate have the task of classifying real people into the categories described above. How they do so varies from time to time and place to place.

26 Unemployed vs. Unemployable If someone who was previously employed cannot find a job because no one will hire her, how is she different from another unemployable person who is not in the work force? The carpenters helper may be similar to other unemployables who have never been employed. Reason for unemployability – lack of human capital and the capacity to produce it, poor health due to disability or age, lack of emotional maturity, physical handicap.

27 The Unemployment Rate Unemployment rate: the percent of the total work force that is classified as unemployed. Number of Unemployed x 100 = Unemployment Rate Number in the Work Force

28 January U.S. Unemployment Rate: (Figure 9-2)

29 Unemployment Rates in Different Countries

30 Two Causes Of The Unemployment Of Workers Who Are Capable Of Being Employed 1. A decision by an employer to lay off employee. 2. A decision by an employee to not accept employment, even if it requires him to accept lower pay or different working conditions.

31 The Economists Point Of View At first glance, the immediate seems to be the sole cause of unemployment because he changed his appraised value and decided to lay off. However, the employee is also a cause because employment is an agreement.

32 Entrepreneurship as a Cause Of Hiring And Firing Entrepreneurship aims to hire work that it believes will add to profits. It appraises the work by calculating how much it is likely to add to profit. If the appraised value is higher than the wages it expects to pay, it hires the work. If the appraised value is lower and if it has already hired the work, it lays off the work. Wage rate: the price of work of a given type for a given period of time worked.

33 The Employee As A Cause Of Unemployment Unless the employee lacks skill and the ability to produce it, the employee is also a cause for three possible reasons: – 1. He may be unwilling to accept a new job at lower pay. – 2. He has not produced human capital that has a sufficiently high appraised value for employers to hire him. – 3. He does not possess entrepreneurship and human capital himself to employ his own work in a new business.

34 Entrepreneurship Causes Work To Be Produced Work is produced by the workers themselves, by families, by employers, and others. People produce work through training, education, and trial and error experimentation. They try to produce work that will be regarded by future employers as a resource.

35 Entrepreneurship Causes Work To Be Produced In producing work, individuals act as entrepreneurs. They try to predict (1) future demands for work of various kinds and (2) the work that others will supply. Because work is produced, practically every worker is capable (1) of supplying many different types of work and (2) of learning to supply additional types if he gets further training or education.

36 A Persons Labor And Human Capital Work May Not Be A Resource We may feel sympathy for an unemployable person who has been laid off. But we should be careful to interfere with markets for work on her behalf because it may harm consumers. We should recommend a government policy similar to that for other unemployable dependents.

37 New Topic: How A Change In Demand Can Cause Unemployment Two classes of market conditions: – 1. The wants of consumers (consumer demands, or demand conditions). – 2. The means of satisfying them (supply conditions). The goal of this part is to build some simple models to show how a change in demand conditions leads employers to lay off workers.

38 Demand Conditions Are Continually Changing In a market economy, the demands for different goods are continually changing. In other words, the demand curves for different goods are continually rising and falling. Why? Economists answer by referring to the determinants of demand. Determinant of demand: an event that may causes the demand for a consumer good to change.

39 Determinants of Demand 1. Wants, which change as people grow older and as people enter and leave a market (e.g., a country). 2. Birth and death changes the composition of the population. 3. Incomes. 4. The market conditions for substitute and complementary goods. 5. Consumer decision-making habits and advertising.

40 Offsetting Change In Demand Offsetting change in demand: an increase in the demand for one good that is completely offset by a decrease in demand for another good. Example: an increase in demand for rice that is offset by a decrease in demand for potatoes.

41 Assumptions The economy is completely coordinated. There is no change in the demands for other goods besides rice and potatoes. Producers do not anticipate the change. We disregard the supply chains for the various non-work resources.

42 Effects Of An Increase In Demand For Rice On The Rice Industry (1) 1. If producer-sellers do not raise their prices at first there will be a shortage; then they will perceive that they can profit by raising their price and producing more rice.

43 Effects Of An Increase In Demand For Rice On The Rice Industry (2) 2. Producer-sellers will bid resources, including work, away from other industries. – Prices of non-specific resources will rise slightly. – Prices of specialized resources will rise substantially 3. Employment will rise in the rice industry.

44 Effects Of An Increase In Demand For Rice On The Rice Industry (3) 4. The increase in quantity of rice produced and sold will cause the price to fall. 5. Competition among rice producers for resources will raise the prices of the resources used to produce rice and, therefore, raise per-unit costs of production. 6. Rising per-unit costs and falling per-unit revenues will squeeze profit, causing producers to bring the expansion of the rice industry to a halt.

45 Effects Of An Increase In Demand For Rice On The Rice Industry (4) A new completely coordinated situation will occur. In that situation: – 1. The price of rice will be higher. – 2. The quantity of rice will be higher. – 3. The amount of employment in the rice industry will be higher. – 4. The price of resources specialized in producing rice will be higher.

46 New Situation In The Rice Industry After An Increase In Demand For Rice (Figure 7-4)

47 Effects On The Potato Industry (1) 1. If producer-sellers do not reduce their price at first there will be a surplus; then they will perceive that they can profit by reducing their price and producing fewer potatoes. 2. Producer-sellers will reduce their purchases of resources, including work. – Prices of non-specific resources will fall slightly. – Prices of specialized resources will fall substantially. – Specialized workers are likely to be laid off.

48 Effects On The Potato Industry (2) 3. Workers will be laid off and, therefore, be unemployed. 4. The decrease in quantity of potatoes produced and sold will cause their price to rise.

49 Effects On The Potato Industry (3) 5. The decrease in bids for resources will reduce the prices of the resources used to produce potatoes and, therefore, reduce per-unit costs of production. 6. Rising per-unit revenues and falling per-unit costs will ultimately reduce losses and make the industry profitable again, leading producers to bring the contraction of the potato industry to a halt.

50 Decrease In The Demand For Potatoes (Figure 7-5)

51 Effects Of The Offsetting Change In Demand On Employment In a completely coordinated market, the amount of every particular kind of work demanded equals the amount of that kind of work that individuals are willing to supply. To understand unemployment, we must first understand the market for a particular kind of work. The market for a particular kind of work: – The demand for a particular kind of work is merely the derived demand for a resource. – The supply of a particular kind of work is the amount of that work that individuals are willing to supply at different wages rates.

52 The Demand For Work Demand for a particular kind of work: the quantity of the work demanded at each wage rate. Demand curve for any particular kind of work: the graphical representation of the relationship between the wage rate and the quantity demanded of that work. A demand-for-work curve is downsloping.

53 The Demand For Work Is A Derived Demand Marginal revenue product: the marginal employers estimate of the revenue that an additional unit of a particular kind of work will add when the product is produced and sold. It is the maximum price that the marginal employer will pay for the unit of work. Marginal revenue product curve: a graph of the relationship between the quantity of work and the works marginal revenue. The marginal revenue product curve is the same as the demand curve. This usually falls as the quantity rises because of the down-sloping demand for a product.

54 The Demand For Work Curve (Figure 9-3)

55 The Supply Of Work Curve (Figure 9-4)

56 Supply Of A Particular Kind Of Work Supply of a particular kind of work: the amount of the work that individuals who possess the work are willing to supply at each wage rate. Supply curve for any particular kind of work: the graphical depiction of the relationship between the wage rate and the quantity supplied of that work. A supply-of-work curve is ordinarily upsloping. The quantity supplied at a low wage rate is less than the quantity supplied at a higher wage rate.

57 A Completely Coordinated Market For Work (Figure 9-5)

58 Explanation Of Figure 9-5 The completely coordinated market wage is $10.5 per hour and quantity is 30 hours. If the wage rate was lower than $10.5, the additional revenue that an employer could earn from employing one more unit would be greater than the cost of hiring it. Consider the wage of $8. If the wage rate was higher than $10.5, say at $15, employers would have hired so much work that the last unit hired is worth less than the marginal revenue product. They would have erred.

59 Effect Of An Increase In The Demand For Work (Figure 9-6)

60 Explanation Of Figure 9-6 Demand curve shifts from D 1 to D 2. mrp at 8.5 hours ($14.7) becomes greater than the wage rate ($7.5 per hour); the quantity of work demanded at $7.5 per hour (22 hours) exceeds the quantity supplied (8.5 hours). Employers try to hire more workers. To do so, they must bid up the wage rate. The new completely coordinated market wage is $11 per hour. More work is hired, 15 hours.

61 Explanation Of Figure 9-6 Conclusion The increase in demand for work causes a rise in the completely coordinated wage rate and completely coordinated quantity of this particular kind of work employed.

62 Effect Of A Decrease In The Demand For Work (Figure 9-7)

63 Explanation Of Figure 9-7 Demand curve shifts from D 1 to D 2. mrp at 32 hours ($4 per hour) becomes less than the wage rate ($11 per hour); the quantity of work supplied at $11 per hour (32 hours) exceeds the quantity demanded (3 hours). Employers lay off workers and workers compete for jobs. To get jobs, the workers must bid down the wage rate. The new completely coordinated market wage is $7.5. Less work is hired, 27 hours.

64 The Combined Effects Of The Offsetting Change In Demand On Employment (1) Case 1: the workers laid off in the potato industry all could shift to the rice industry. There would be no long-term effects on employment. Case 2: the workers laid off in the potato industry seek employment in other industries.

65 What Happens To Workers Who Cannot Easily Find Work Quickly? 1. They may compete for jobs in other industries. 2. They may acquire new skills in order to raise the demand for their work. 3. They may drift from the category of unemployed workers to the category of out of the work force.

66 Why Some Workers May Not Get Re-employed At All Employers may be located in a different place with a different culture and social norms. Rather than incur the costs, some workers may decide to drop out of the work force. Some workers may not possess the kind of human capital that is valuable elsewhere and may be unable to produce it. Such workers are compelled to drop out of the work force. Their work has become a non-resource.

67 Effects Of The Offsetting Change In Demand On Consumers Of Other Goods The consumers of other goods are affected because the changes in demands for rice and potatoes cause resource prices to change. To show how to trace these effects, we look at the market for a particular resource – work that is hired by rice employers and work that is laid off by potato employers.

68 Goods Whose Production Uses Work Laid Off By Potato Employers Four steps in the reasoning 1. There is an increase in the supply of work. 2. The increase in supply of work reduces the per- unit costs of production. 3. The lower per-unit costs of production reduces the completely coordinated market price and increases the completely coordinated market quantity. 4. Consumers of those other goods gain.

69 Step 1: What Happens In Related Markets For Work When Workers Shift Out Of The Potato Industry? There is an increase in the supply of particular kinds of work in those employments.

70 Market For Work Laid Off In The Potato Industry (Figure 9-8)

71 Explanation Of Figure 9-8 The increase in supply of this work causes the completely coordinated market wage to fall from $7.9 per hour to $6.5 per hour and the completely coordinated market amount of employment to rise from 1120 hours to 1370 hours.

72 Effects Of Job-seeking By Potato Workers On Related Other Markets For Work When workers shift to other markets for work, the supply of work in those markets will rise. The completely coordinated market wage rate will fall. To employers, the fall in wage rate is a decrease in per-unit costs of producing a consumer good. The decrease in per-unit costs will lead to a lower price and larger quantity of the consumer good as the market becomes more coordinated.

73 The Second Step: Market For Other Consumer Goods Related In Supply To Potatoes (Figure 9-10)

74 Explanation Of Figure 9-10 The fall in wage rates causes a decrease in marginal cost, shifting the curve from MC 1 to MC 2. The completely coordinated market price of the good falls from 9.2 to 7.8. The completely coordinated market quantity of the good rises from 1730 to 2200.

75 Goods Whose Production Uses Work Bid Away By Rice Producers Four steps in our reasoning 1. There is an decrease in the supply of work. 2. The decrease in supply of work raises the per- unit costs of production. 3. The higher per-unit costs of production raises the completely coordinated market price and reduces the completely coordinated market quantity. 4. Consumers of those other goods lose.

76 Step 1: What Happens In Related Markets For Work When Workers Shift Into The Rice Industry? There is a decrease in the supply of the particular kinds of work in those employments.

77 Market For Work That Is Needed In The Rice Industry (Figure 9-9)

78 Explanation Of Figure 9-9 The decrease in supply of this work causes the completely coordinated market wage to rise from $6.5 per hour to $7.9 per hour and the completely coordinated market amount of employment to fall from 1370 hours to 1120 hours.

79 Steps 2 And 3: Effects Of Worker Shifts To Rice Production On Costs Of Producing Related Goods When workers shift to rice production, the supply of work in other markets falls. The completely coordinated market wage rate rises. To employers, the rise in wage rates is an increase in costs. The completely coordinated market price rises and the completely coordinated market quantity falls.

80 The Second Step: Markets For Other Consumer Goods Related In Supply To Rice (Figure 9-11)

81 Explanation Of Figure 9-11 The rise in wage rates increases marginal cost, shifting the curve from MC 1 to MC 2. The completely coordinated market price of the consumer good rises from $7.8 per unit to 9.2 per unit. The completely coordinated market quantity of the good falls from 2200 to 1730.

82 Effects Of Job-seeking By Potato Workers On Related Other Markets For Work When workers shift to other markets for work, the supply of work in those markets will rise. The completely coordinated market wage rate will fall. To employers, the fall in wage rate is a decrease in per-unit costs of producing a consumer good. The decrease in per-unit costs will lead to a lower price and larger quantity of the consumer good as the market becomes more coordinated.

83 The Demand For Work And The Degree Of Work Specificity Two polar extreme classes of work: – Completely specialized work. – Non-specific work. The supply of non-specific work is price elastic. The supply of specialized work is price inelastic.

84 Different Price Elasticities Of Supply (Figure 9-12)

85 Price Elasticity Of Supply (1) On the supply of non-specific work curve (S n ), begin at the point at which the market is completely coordinated. The wage rate is $10 per hour and the amount of work employed is 118 hours. If there is a small 5 % (approximately) rise to $10.5, the quantity of work supplied rises by almost 100 % to 225 hours of work. Supply is price elastic.

86 Price Elasticity Of Supply (2) On the supply of specialized work curve (S s ), begin at the same point, where the market is completely coordinated ( $10 per hour and 118 hours). If there is a large 50 % (approximately) rise to $15, the quantity of work supplied rises by only about 7% to 125 hours. Supply is price inelastic.

87 Effects Of An Increase In Demand For Work (Figure 9-13)

88 Explanation Of Figure 9-13 The demand for each kind of work rises from D 1 to D 2. For specialized work, the wage rate rises substantially, while the additional completely coordinated market hours of work rises by only a small amount. For non-specific work, the wage rate rises by only a small amount, while the additional completely coordinated market hours of work rises substantially.

89 New Topic: Changes In Supply Conditions In A Market Economy Types of changes that may occur. 1. Changes in technology. 2. Changes in the amounts of resources. 3. Changes in the prices of resources. These are called determinants of supply. We discuss the first two of these changes. We focus mostly on the first.

90 Two Types Of Technological Advance 1. Work-saving: – Example 1: robots assembling cars. – Example 2: word processing programs helping to produce reports. 2. Work-using: – Example: A new inexpensive machine that increases the amount of product that can be produced but requires more workers. Work- using technological advances are rare.

91 Effects Of A Work-saving Technological Advance Goal of the exercise: to consider the effects of a work-saving technological advance on markets up and down the supply chain from the technological advance and in other consumer goods industries. The advance occurs at a specific joint. It consists of an ability to produce a particular capital good at a lower cost of production. We assume that the capital good is work-saving.

92 Employment Down And Up The Supply Chain Down the supply chain: producers in this industry produce a lower-priced capital good, which complements other work at positions down the supply chain. Will the lower priced capital good raise or lower employment down the supply chain? Up the supply chain: producers in this industry demand capital goods that complement the work in this industry that is saved. Will the changed demand for capital goods raise or lower employment up the supply chain?

93 Procedure 1. First identify the effects on employment at the point in the supply chain where the technological advance occurs. 2. Then identify the effects down and up the supply chain. 3. Later examine other consumer goods industries.

94 The Point Where The Technological Advance Occurs (1): Figure 9-10

95 The Point Where The Technological Advance Occurs (2) Figure 9-10 can be used to show the effects of a technological advance on the completely coordinated quantity of a consumer good demanded and supplied. We can adapt this to refer to the capital good produced with the labor in the industry where the technological advance occurs. The model shows that the completely coordinated market price falls and that the completely coordinated market quantity rises.

96 The Point Where The Technological Advance Occurs (3) The model shows that the completely coordinated market price falls and that the completely coordinated market quantity rises. Because a larger quantity of the product is produced, either more or less work may employed in producing the capital good. We must remain uncertain about the effect on unemployment. It depends on the particular technological advance that occurs.

97 The Point Where The Technological Advance Occurs (4) Example: a machine reduces costs of milling by substituting for work. Less work is employed because machines substitute for workers. More work is employed because more of the product is demanded and supplied. – In supply, some types of work still complement the new machines.

98 Downstream Employment: The Capital Good Complements Work Downstream producers must adjust to the decrease in price of the capital good. They do so by hiring more of it and of the resources, including work, that complement it. Example: more work is demanded by distributors, bakers and retail bake shops because of the increase in amount of flour used to satisfy consumer wants for bread.

99 Downstream Employment: The Capital Good Substitutes For Work For a joint that is immediately downstream, entrepreneurs buy the capital good. The capital good substitutes for work. Their situation is similar to that shown in figure – Employment has a tendency to fall due to the substitution of the machine for workers. – It also had a tendency to rise due to the increase in quantity of the product demanded and supplied. Further downstream, employment of work has a tendency to rise due to the increased demand and supply.

100 Upstream Employment Entrepreneurs at the joint where the technological advance occurs raise their orders for raw materials. Millers demand more raw wheat from granaries. Granaries, in turn, raise their demands for raw wheat from farmers. In both cases, the demand for the particular kind of work used by these entrepreneurs will rise.

101 Conclusion The effects on unemployment are inconclusive because the reduced demand for particular kinds of work is offset by an increased demand for other particular kinds of work.

102 Effects On Employment Other Consumer Goods Industries The effects on employment in other consumer goods industries depend on whether consumers as a whole spend more or less money on the consumer good that falls in price because of the technological advance. Suppose that the technological advance is in TV sets.

103 Effects On Employment Other Consumer Goods Industries The technological advance shifts the marginal cost from mc 1 to mc 2. The completely coordinated market price of the good falls from 1000 to 500. The completely coordinated market quantity rises from 100 to 200. Special characteristic: the total money spent before the technological advance equals the total money spent afterwards. Thus consumers do not change their spending for other goods. Whatever unemployment occurs is due to the change in demand for work in this industry.

104 A Model Of An Industry Where There Is A Technological Advance (Figure 9-14) Market for TV sets

105 Three Cases Of Effects On Employment In Other Consumer Goods Industries Demand for the product produced with the lower priced resource is D a. Demand for the product produced with the lower priced resource is D b. Demand for the product produced with the lower priced resource is D c.

106 Three Cases Of Effects On Employment In Other Consumer Goods Industries Figure 9-15

107 Case 1 Demand is D a. Because there is no change in spending on TV sets, there is no increase or decrease in demand for other consumer goods. Employment in other consumer goods industries is not affected.

108 Case 2 Demand is D b. Because spending on TV sets decreases, there is an increase in demand for other consumer goods. The increase in demand causes an increase in the derived demand for work to produce the other consumer goods. The result is an increase in employment.

109 Case 3 Demand is D c. Because spending on TV sets increases, there is a decrease in demand for other consumer goods. The decrease in demand causes a decrease in the derived demand for work to produce the other consumer goods. The result is unemployment.

110 Consumer Gains From A Technological Advance We can show that consumers gain from a technological advance. They gain from the lower price. Two groups of beneficiaries: – Consumers who would have paid a higher price. – Consumers who would not buy unless the price is reduced.

111 Figure 9-16

112 Explanation Of Figure 9-16 Benefits to consumers who would have bought TV sets at the completely coordinated price before the technological advance are represented by the area A. Benefits to consumers who would not have bought TV sets but who would buy them at the lower completely coordinated price after the technological advance are represented by the area B.

113 Capital-Saving Technological Advance The technological advance may be capital saving as well as labor-saving. If so, it may decrease the demand for the capital goods from upstream producers. An example: computer memory modules. A decrease in demand for the capital goods will decrease the demand for the work needed to produce them. It will cause unemployment. It may cut across several supply chains. On the other hand, if the technological advance is not capital saving, the demand for capital goods will rise. The technological advance will cause an increase in demand for work and an increase in employment.

114 A More General Technological Advance Technological advances are usually spread over more than one industry. A lower-cost capital good can usually be used to produce more than one type of consumer good. To fully trace the effects on unemployment and consumer benefits, we would have to build a much more complicated image of effects than we have done in this discussion.

115 Effects On Unemployment Of A Decrease In Resources (1) Examples of catastrophes: flood, earthquake, volcano, tsunami, fire, disease, war. Effects of a catastrophe: unexpected decreases in natural resources, capital goods, labor, and human capital. Each catastrophe is different. Some resources are unaffected, some are affected greatly, others are affected to a lesser extent.

116 Effects On Unemployment Of A Decrease In Resources (2) A catastrophe obviously changes the completely coordinated quantities and prices of each consumer good and resource. The new prices and quantities must first be discovered and then communicated by the intermediary entrepreneurs. The producing entrepreneurs must appraise the remaining resources and proceed to shift resources so that they are used in the ways that result in the maximization of utility.

117 Effects On Unemployment Of A Decrease In Resources (3) Unemployment is a logical outcome, since many entrepreneur-employers will be reappraising all resources. As the entrepreneur-employers come to adjust to the new circumstances, the unemployment will tend to gradually disappear.

118 Effects Of An Increase In The Price Of A Complementary Resource Examples: – Price of farm land and farm workers. – Price of fuel and flight attendants. – Cost of mining and mine workers. Consequences: the employer may lay off workers.

119 A Natural Rate Of Unemployment There is practically always some amount of unemployment in a market economy for two reasons: 1. Entrepreneur-employers are always reappraising work in light of changes in market conditions. 2. Laid off workers do not immediately accept new jobs or drop out of the work force.

120 The Statistician Who Measures Unemployment When the statistician measures unemployment at different times, he always finds some amount. Thus it appears that there is always some amount of unemployment. When she compares the rate at one time with the rate at other times, she may be inclined to think that some quantity is normal and that other quantities are abnormal. She may regard the average amount as normal.

121 Natural Unemployment Estimate

122 A Natural Rate? The idea of a natural rate is based on the notion that the observed, or measured rate of unemployment tends toward an average rate. Natural rate of unemployment: a rate of unemployment toward which some economists believe the measured unemployment rate is tending.

123 Policies To Alleviate Unemployment That Is Above The Natural Rate People who have this idea often recommend policies that they believe will bring the measured rate closer to the natural rate. Policies: – Unemployment compensation. – Training programs or subsidies to individuals who cause training to occur. – Public works jobs. – Other macroeconomic policy (see Chapter 13).

124 Comments On The Natural Rate Hypothesis 1. Economists who adopt this idea have made the error of not realizing that there are different markets for work and that market conditions are always changing. 2. Under ordinary circumstances, government agents are not in a good position to determine the effects of their policies on unemployment. Conclusion: The idea that government agents could succeed in reducing unemployment without reducing the consumer benefit from consuming goods seems like wishful thinking.


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