1. Unemployment Chapter 7

2. 2 ©1999 South-Western College Publishing Figure 7.1 The supply of labor is a flow into the labor market. Stock of unemployed The demand for labor is a flow out of the labor market. Unemployment is the stock of workers who are not matched with firms.

3. 3 ©1999 South-Western College Publishing Figure 7.2A Y (Net output produced by the firm after paying its search costs) Search cost C Real Wage =  1 Y1Y1 L1L1 B A Profit  1 L (Quantity of labor employed by a single firm) The Labor Demand Curve in a Market with Search Costs Panel A

4. 4 ©1999 South-Western College Publishing Figure 7.2B Y (Net output produced by the firm after paying its search costs) Search cost C Real Wage =  2 Y2Y2 L2L2 C A Profit  2 L (Quantity of labor employed by a single firm) The Labor Demand Curve in a Market with Search Costs Panel B

5. 5 ©1999 South-Western College Publishing Figure 7.2C 11 22 L1L1 L2L2  (Real wage) The Labor Demand Curve in a Market with Search Costs Panel C L D (Quantity of labor employed by a single firm)  2 >  1 11

6. 6 ©1999 South-Western College Publishing Figure 7.3A  (Real wage) EE ** 11 ** L (Employment) L1L1 L*L* LELE Labor supply U * (Natural rate of unemployment) Labor demand Profit, the Real Wage, and the Natural Rate of Unemployment Panel A

7. 7 ©1999 South-Western College Publishing Figure 7.3B Panel B  (Real wage) EE **  (Profit) ** EE ** This is how profit would vary with  if there were no search costs This is how profit varies with  when there are search costs Profit, the Real Wage, and the Natural Rate of Unemployment

8. 8 ©1999 South-Western College Publishing Figure 7.4A  * = (w 1 /P 1 ) (w/P) (Real wage) (w1/P2)(w1/P2) Panel A L (Employment) L2L2 L*L* Labor demand Labor supply U*U* U2U2 Sticky Wages and the Labor Market

9. 9 ©1999 South-Western College Publishing Figure 7.4B  * = (w 1 /P 1 ) (w/P) (Real wage) (w1/P3)(w1/P3) Panel B L (Employment) L3L3 L*L* Labor demand Labor supply U3U3 U*U* Sticky Wages and the Labor Market

10. 10 ©1999 South-Western College Publishing Figure 7.5 Aggregate Supply in the Short Run and the Long Run Y (Aggregate quantity of commodities supplied) P (Price of commodities) P1P1 P3P3 P2P2 Aggregate supply (short run) Quantity of output that will be produced when unemployment is at the natural rate Y3Y3 Y*Y* Y2Y2 Aggregate supply (long run)

11. 11 ©1999 South-Western College Publishing Figure 7.6A Moving from the Short Run to the Long Run L (Employment) Panel A L3L3 L*L* L2L2 (w/P) (Real wage) (w1/P3)(w1/P3) (w1/P1)(w1/P1) (w1/P2)(w1/P2) Labor demand Labor supply U3U3 U*U* U2U2

12. 12 ©1999 South-Western College Publishing Figure 7.6B Panel B  (Profit) ** 22 33  (Real wage) 22 ** 33 Moving from the Short Run to the Long Run

13. 13 ©1999 South-Western College Publishing Box 7.1 Okun’s Law Percentage unemployment Percentage deviation of GDP from trend -30 -10 -20 0 10 20 30 40 101520253050 According to Okun’s law, a 1% rise in unemployment causes GDP to fall 3% below trend.

14. 14 ©1999 South-Western College Publishing Figure 7.7A P (Price level) P3P3 P1P1 Y (Quantity of commodities demanded and supplied) Y3Y3 Y*Y* The Response to a Reduction in the Money Supply Predicted by the Search Model AD 1 : Aggregate demand before money supply contracts AD 2 : Aggregate demand after money supply contracts LR aggregate supply SR aggregate supply Panel A

15. 15 ©1999 South-Western College Publishing Figure 7.7C Y (Aggregate supply) Y*Y* L (Employment) L*L* The production function Panel C The Response to a Reduction in the Money Supply Predicted by the Search Model L3L3 Y3Y3

16. 16 ©1999 South-Western College Publishing Figure 7.7D L (Employment) L*L* Panel D Labor demand Labor supply U3U3 U*U* (w/P) (Real wage) (w1/P3)(w1/P3) (w1/P1)(w1/P1) L3L3 The Response to a Reduction in the Money Supply Predicted by the Search Model

17. 17 ©1999 South-Western College Publishing Box 7.2A Index number 11 12 13 14 15 10 Nominal price of commodities Nominal wage 1929’30’31’32’33’34’35’36’37’38’39 Wages and Prices in the United States During the Great Depression Panel A Time

18. 18 ©1999 South-Western College Publishing Fraction of labor force Employment as a fraction of the labor force (left scale) Real wage (right scale) 1929’30’31’32’33’34’35’36’37’38’39 Panel B Time Real wage index 0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.090 0.105 0.100 0.095 0.085 Box 7.2C Wages and Prices in the United States During the Great Depression

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