BU204 Unit 9 Seminar Chapter 8 Labor Markets, Unemployment, and Inflation

 There is always a positive amount of unemployment in the economy: job search leads to frictional unemployment.  There may also be structural unemployment, which is the result of factors that include minimum wages, unions, efficiency wages, and side effects of government policies. Chapter 8

 Frictional plus structural unemployment make up the natural rate of unemployment.  It’s a rate that can and does shift over time. At any given time, the actual unemployment rate fluctuates around the natural rate because of the business cycle. Chapter 8

 Cyclical unemployment is linked to the output gap: when the output gap is positive, cyclical unemployment is negative; when the output gap is negative, cyclical unemployment is positive.  Swings in cyclical unemployment are, however, smaller than swings in the output gap, a fact captured by Okun’s law (for every one percentage point by which the actual unemployment rate exceeds the so-called “natural” rate of unemployment, real gross domestic product is reduced by 2% to 3%). Chapter 8

 Unlike many markets, the labor market doesn’t move quickly to equilibrium.  This may, in part, reflect misperceptions on the part of workers and employers about the state of the market.  Sticky wages (resistant to change) also appear to play a role, slowing the adjustment of wages even in the absence of misperceptions.  Prices (including the wage rate) are also slow to adjust in some cases, in part reflecting the menu costs of changing prices. Chapter 8

 The short-run Phillips curve shows a negative relationship between the unemployment rate and inflation rate.  The short-run Phillips curve is related to, but not the same thing as, the short-run aggregate supply (SRAS) curve.  Today, macroeconomists believe that the short- run Phillips curve shifts with changes in the expected rate of inflation. Chapter 8

 Because expectations change with experience, attempts to keep the unemployment rate persistently low lead not only to high inflation but also to constantly accelerating inflation.  The nonaccelerating inflation rate of unemployment, or NAIRU, is the rate of unemployment at which inflation is stable. It is equal to the natural rate of unemployment.  The long-run Phillips curve is vertical because there is no trade-off between the unemployment rate and the inflation rate in the long run. Chapter 8

Chapter 8 conclusion This concludes our coverage of key points from Chapter 8 This concludes our coverage of key points from Chapter 8 Are there any questions? Are there any questions?