Macroeconomics

Lecture 13

Unemployment

Questions

Quiz

1. Are you included in the labor force?

2. If 300 people are unemployed and the unemployment rate is 6%, how many people are employed?

3. What is the labor force participation rate in the U.S.?

4. If I am unemployed and become a discouraged worker, what happens to the unemployment rate?

5. Over the past 70 years has the labor force participation rate increased for decreased for men?

Quiz 4 Name__________

No

5,000

63%

Goes down

Decreased

Natural Rate of Unemployment

The normal rate of unemployment around

which the unemployment rate fluctuates

Cyclical Unemployment

The deviation of unemployment from its

natural rate

Unemployment

FrictionalSeasonalStructural

Frictional

Time to find a new job

Seasonal

Demand changes with the season

Structural

Too many workers

Change in demand for skills

What kind of unemployment

is caused by smartphones?

Structural

Creative Destruction

10% a Year

Structural

Learn a new skill

Unemployment Insurance

Government program to provide income when

workers become unemployed

Unemployment Insurance

Unintended ConsequenceMoral Hazard

May prolong unemployment

Why are wages too high?

Minimum wage lawsUnions

Efficiency Wages

Minimum Wage Laws

Government sets a minimum wage that can

legally be paid

$0

$5

$10

$15

$20

0 10 20 30 40 50 60

Supply

Demand

Wage

Workers

Equilibrium Wage

30 workers30 jobs

no unemployment

Minimum Wage40 workers

20 jobs20 unemployed

workers

Minimum Wage20 workersget a raise10 workers

lose job10 new

unemployed workers

MinimumWage

Unemployment Insurance

a government program that pays people when

they become unemployed

Union

Worker association that negotiates with

employers over wages, benefits, and conditions

Union

One contract for all employees

Strike

Conflicts between workers

Efficiency Wages

Higher wages make more productive

employees

Efficiency Wages

Employee Wage Pizzas ProductivityWage per Pizza

Bob $10 5 $2.00

Bill $20 12 $1.67

Efficiency Wages

More HealthyLower TurnoverHigher Quality

More Effort

The Monetary System

Key Termsmoneymedium of exchangeunit of accountstore of valueliquiditycommodity moneyfiat moneycurrencydemand depositscentral bankmoney supplymonetary policy

reservesfractional-reserve bankingreserve ratiomoney multiplierbank capitalleverageleverage ratiocapital requirementopen-market operationsdiscount ratereserve requirements

Two Choices

Make

or

Trade

Barter

Direct trade - stuff for stuff

No money

Double coincidence of wants

Both sides have to want what the other side has

Double coincidence of wants

Both must want what the other has at the

same time

Double coincidence of wants

Money makes trade easier

What is money?

Money

Something people use to trade with

Why would you accept a cigarette if you didn’t smoke?

Functions of Money

Medium of exchange

Unit of account

Store of value