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The document discusses different types of unemployment including frictional unemployment from job searching or industry shifts, and structural unemployment from minimum wages, unions, or efficiency wages. It also provides a practice problem calculating the effects of a minimum wage increase on wages, employment, output, and total earnings.

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Azowad Abrar Jaheen
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37 views

Topic 2

The document discusses different types of unemployment including frictional unemployment from job searching or industry shifts, and structural unemployment from minimum wages, unions, or efficiency wages. It also provides a practice problem calculating the effects of a minimum wage increase on wages, employment, output, and total earnings.

Uploaded by

Azowad Abrar Jaheen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Unemployment and Labor Market

March 3, 2024

Unemployment and Labor Market March 3, 2024 1/6


Job Loss, Job Finding, and the Natural Rate of
Unemployment

The rate of unemployment


U 1
= f
L 1+ s

Any policy aimed at lowering the natural rate of unemployment must


either reduce the rate of job separation or increase the rate of job
finding.
Any policy that affects the rate of job separation or job findings also
changes the natural rate of unemployment.

Unemployment and Labor Market March 3, 2024 2/6


Frictional Unemployment

Unemployment due to job search


Sectoral shift: change in the composition of labor demand among
industries or regions
Unemployed insurance: collecting a fraction of wages after losing the
job.

Unemployment and Labor Market March 3, 2024 3/6


Structural Unemployment

Minimum Wage Laws


Unions and Collective Bargaining
Efficiency Wages
raising productivity
reducing labor turnover
adverse selection
moral hazard

Unemployment and Labor Market March 3, 2024 4/6


Practice Problem
Consider the following Cobb-Douglas Production function:
1 2
Y = 5K 3 L 3

Derive the equation describing labor demand in this economy as a


function of the real wage and the capital stock.
The economy has 27000 units of capital and a labor force of 1000.
Assuming that the factor prices adjust to equilibriate supply and
demand, calculate the real wage, total output, and total amount earned
by workers.
Suppose, the government is concerned about the welfare of the
working class. They pass a new law to set a minimum wage that is 10
percent above the equilibrium wage, derived in the last part. Assuming
the government cannot dictate how many workers are hired at the
mandated wage, what are the effects of this law? Specifically, calculate
what happens to the real wage, employment, output, and the total
amount earned by workers.
Unemployment and Labor Market March 3, 2024 5/6
Practice Problem

Does the Government succeed in its goal of helping the working class?
Explain.
Do you think that this analysis provides a good way of thinking about
a minimum wage law? Why or why not?

Unemployment and Labor Market March 3, 2024 6/6

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