This document discusses different theories of unemployment, including:
1) It describes different types of unemployment including frictional, structural, and cyclical unemployment.
2) It explains the classical view that full employment is always achieved through flexible wages adjusting to clear the labor market.
3) It outlines Keynes' view that unemployment can persist if aggregate demand is insufficient, with the aggregate supply curve being horizontal in the short-run so that unemployment, not prices, adjust. Fiscal policy can be used to increase aggregate demand.
4) Wages are downwardly rigid in the short-run in the Keynesian model, so that real wages rise when prices fall during recessions even as nominal wages remain
The document summarizes the key differences between classical and Keynesian theories of employment and unemployment. The classical theory assumed full employment and explained brief periods of unemployment as frictional, while Keynes argued unemployment could persist due to insufficient aggregate demand. The document outlines the assumptions and mechanics of both theories, including Say's law, flexibility of wages and prices, and the role of money. It also compares how the two theories approach concepts like interest rates, statics vs dynamics, and the roles of fiscal and monetary policy.
Keynesian theory rejects Say's law that supply creates its own demand. It argues that the level of income and employment is determined by aggregate demand and supply in the short run, and that equilibrium could be below full employment. The key determinants of income are consumption, investment, and saving. The effective demand curve shows equilibrium between aggregate demand and supply. Keynes believed full employment could be achieved by increasing aggregate demand through policies like government spending.
This document defines inflation and unemployment and discusses their causes and costs. It also outlines ways to control inflation and policies to reduce unemployment. Specifically, it defines inflation as a continuous increase in general price levels over time. The three main ways to control inflation are monetary policy, fiscal policy, and direct controls. Direct controls include price pegging, trade union controls, and rationing. Unemployment is defined as individuals without jobs but looking for work. The three types of unemployment are frictional, structural, and cyclical. Costs of unemployment include losses to individuals and society. Policies aim to reduce unemployment through improving job information, retraining workers, and stimulating aggregate demand.
The document discusses the meaning and types of employment and unemployment. It defines employment as engaging in gainful work, and unemployment as not being engaged in work. There are different types of unemployment, including voluntary, involuntary, frictional, technical, structural, cyclical, and seasonal. The classical theory of employment from Adam Smith, Pigou, Ricardo and Mill holds that full employment is normal in the long run in a free market economy, and that involuntary unemployment should not exist except due to government or union intervention.
Meeting 8 - Keynesian model of unemployment (Macroeconomics)Albina Gaisina
The document discusses key concepts of the Keynesian model of unemployment including:
- Keynes rejected the idea of full employment and wage flexibility, instead arguing wages are rigid which can cause involuntary unemployment.
- Equilibrium in the labor market occurs at less than full employment when the demand for labor intersects the horizontal portion of the rigid wage supply curve.
- Keynes argued that government intervention through fiscal and monetary policies can help remedy unemployment by increasing aggregate demand.
- New Keynesian and neo-Keynesian models build on Keynes' ideas incorporating rational expectations and imperfect competition to explain why prices and wages adjust slowly.
This document provides an overview of the simple Keynesian model of economics. It discusses the model's key assumptions, including that it is a one-sector closed economy model with constant prices and fixed resources in the short run. Equilibrium occurs when aggregate demand (planned expenditure) equals aggregate supply (actual output). The model was developed by John Maynard Keynes to explain unemployment during the Great Depression when demand was weak and actual output fell below potential output.
This document discusses unemployment and inflation. It defines unemployment and discusses how unemployment rates can be manipulated. It also discusses the labor force survey used in Europe. It then discusses different types of unemployment including frictional, structural, and cyclical unemployment. The document also discusses the relationship between unemployment and inflation, including the Phillips curve and the natural rate of unemployment. It discusses criticisms of the relationship between inflation and unemployment and costs of both unemployment and inflation.
The classical model of employment is based on the assumptions of full employment, laissez-faire, a self-adjusting economy, a barter system, and a closed economy. It is based on Say's law that supply creates its own demand. The model assumes wages and prices are flexible and will adjust to achieve full employment equilibrium in the labor market. If unemployment occurs due to a fall in demand, a general wage cut will increase demand for labor and eliminate unemployment, restoring full employment.
The document summarizes the key differences between classical and Keynesian theories of employment and unemployment. The classical theory assumed full employment and explained brief periods of unemployment as frictional, while Keynes argued unemployment could persist due to insufficient aggregate demand. The document outlines the assumptions and mechanics of both theories, including Say's law, flexibility of wages and prices, and the role of money. It also compares how the two theories approach concepts like interest rates, statics vs dynamics, and the roles of fiscal and monetary policy.
Keynesian theory rejects Say's law that supply creates its own demand. It argues that the level of income and employment is determined by aggregate demand and supply in the short run, and that equilibrium could be below full employment. The key determinants of income are consumption, investment, and saving. The effective demand curve shows equilibrium between aggregate demand and supply. Keynes believed full employment could be achieved by increasing aggregate demand through policies like government spending.
This document defines inflation and unemployment and discusses their causes and costs. It also outlines ways to control inflation and policies to reduce unemployment. Specifically, it defines inflation as a continuous increase in general price levels over time. The three main ways to control inflation are monetary policy, fiscal policy, and direct controls. Direct controls include price pegging, trade union controls, and rationing. Unemployment is defined as individuals without jobs but looking for work. The three types of unemployment are frictional, structural, and cyclical. Costs of unemployment include losses to individuals and society. Policies aim to reduce unemployment through improving job information, retraining workers, and stimulating aggregate demand.
The document discusses the meaning and types of employment and unemployment. It defines employment as engaging in gainful work, and unemployment as not being engaged in work. There are different types of unemployment, including voluntary, involuntary, frictional, technical, structural, cyclical, and seasonal. The classical theory of employment from Adam Smith, Pigou, Ricardo and Mill holds that full employment is normal in the long run in a free market economy, and that involuntary unemployment should not exist except due to government or union intervention.
Meeting 8 - Keynesian model of unemployment (Macroeconomics)Albina Gaisina
The document discusses key concepts of the Keynesian model of unemployment including:
- Keynes rejected the idea of full employment and wage flexibility, instead arguing wages are rigid which can cause involuntary unemployment.
- Equilibrium in the labor market occurs at less than full employment when the demand for labor intersects the horizontal portion of the rigid wage supply curve.
- Keynes argued that government intervention through fiscal and monetary policies can help remedy unemployment by increasing aggregate demand.
- New Keynesian and neo-Keynesian models build on Keynes' ideas incorporating rational expectations and imperfect competition to explain why prices and wages adjust slowly.
This document provides an overview of the simple Keynesian model of economics. It discusses the model's key assumptions, including that it is a one-sector closed economy model with constant prices and fixed resources in the short run. Equilibrium occurs when aggregate demand (planned expenditure) equals aggregate supply (actual output). The model was developed by John Maynard Keynes to explain unemployment during the Great Depression when demand was weak and actual output fell below potential output.
This document discusses unemployment and inflation. It defines unemployment and discusses how unemployment rates can be manipulated. It also discusses the labor force survey used in Europe. It then discusses different types of unemployment including frictional, structural, and cyclical unemployment. The document also discusses the relationship between unemployment and inflation, including the Phillips curve and the natural rate of unemployment. It discusses criticisms of the relationship between inflation and unemployment and costs of both unemployment and inflation.
The classical model of employment is based on the assumptions of full employment, laissez-faire, a self-adjusting economy, a barter system, and a closed economy. It is based on Say's law that supply creates its own demand. The model assumes wages and prices are flexible and will adjust to achieve full employment equilibrium in the labor market. If unemployment occurs due to a fall in demand, a general wage cut will increase demand for labor and eliminate unemployment, restoring full employment.
This document provides an overview of two major theories of employment: the classical theory and Keynes' theory.
The classical theory states that employment is determined by the interaction of labor supply and demand in the market. It believes in full employment and that unemployment results from rigid wages or interference with free markets. Keynes' theory views employment from the demand side and says it depends on effective demand. Effective demand is driven by aggregate supply and demand. Unemployment can result from a deficiency in effective demand. The theories differ in their assumptions around flexibility of wages and prices and whether they examine things in the short or long run.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
Keynesian Theory
The document discusses economic challenges related to inflation and unemployment. It defines inflation as a general increase in prices over time which decreases purchasing power. Unemployment is defined as people who are currently not working but have actively sought work in the past four weeks. Different types of unemployment are explained such as frictional, structural, seasonal, and cyclical unemployment. Factors that cause inflation like the quantity theory, cost-push theory, and demand-pull theory are also summarized.
The Keynesian theory views employment as dependent on effective demand, which leads to output and income. Income then provides further employment. Effective demand is determined by aggregate supply and demand. Keynes focuses on increasing aggregate demand through consumption and investment to fight unemployment. Investment depends on interest rates and the marginal efficiency of capital. The equilibrium level of income and employment occurs where saving and investment are equal. Underemployment results from a lack of aggregate demand, which can be increased through investment to reach full employment.
This document discusses several topics related to inflation and unemployment:
1. It defines inflation and the Phillips curve relationship between inflation and unemployment.
2. It outlines the two main causes of inflation: demand-pull inflation from increased aggregate demand, and cost-push inflation from increased costs of production.
3. It discusses the costs of inflation, stagflation, and Okun's law relating unemployment and GDP loss.
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
This document summarizes key aspects of the Phillips curve and debates around inflation theories. It discusses how Samuelson and Solow popularized the Phillips curve as a policy tool showing a tradeoff between inflation and unemployment. However, their interpretation led policymakers in the 1960s-1970s to pursue expansionary policies, fueling the Great Inflation. Later analysis found Samuelson and Solow did not actually estimate the Phillips curve relationship but drew it by hand, and a proper estimation shows a different relationship with implications for economic policy.
This document provides an overview of classical and Keynesian theories of income and employment. It discusses key differences between the two theories, including how they determine full employment. The classical theory believes full employment is the normal state, while Keynes argued unemployment can persist due to insufficient aggregate demand. The document then explains Keynesian concepts like aggregate demand, consumption, investment and their relationship to national income and output. It also outlines Keynes' model and equilibrium conditions between markets.
How inflation and unemployment are relatedAlok upadhayay
The document discusses the relationship between inflation and unemployment. It begins by explaining the inverse correlation between inflation and unemployment based on principles of supply and demand. When demand for labor exceeds supply, wage inflation rises and vice versa. The Phillips Curve, developed by A.W. Phillips, showed this inverse relationship, though it was nonlinear. While the Phillips Curve could be used by policymakers to balance inflation and unemployment in the short run, monetarists like Milton Friedman argued it did not apply in the long run. The relationship between inflation and unemployment only works temporarily, not as a permanent policy tool.
This document provides an overview of John Maynard Keynes' theory of aggregate demand. It defines aggregate demand and its components. Keynes believed full employment is not guaranteed in a free market and that unemployment could exist in equilibrium. Equilibrium output and employment are determined by the level of aggregate demand. The government can use fiscal policy like increasing spending to shift aggregate demand outward and close the gap between actual and full employment output, achieving full employment.
John Maynard Keynes was an influential British economist born in 1883. He developed theories that challenged classical economic thought, such as arguing that saving does not equal investment and that aggregate demand, not supply, is the key driver of economic activity. Keynes published his seminal work The General Theory of Employment, Interest and Money in 1936, which revolutionized economic thinking and laid the foundation for Keynesian economics. The Keynesian view became highly influential in the post-World War 2 era.
The classical theory of employment and output assumed full employment, perfect competition, and wage-price flexibility. It was based on Say's Law that supply creates its own demand and the quantity theory of money that money only impacts prices, not output. Under these assumptions, the economy would always attain general equilibrium with full employment determined by the intersection of labor demand and supply curves. However, the Great Depression showed the flaws in these assumptions and need for government intervention.
Theories of income output and employmentakanksha91
This document presents theories of income, output, and employment from a Keynesian perspective. It introduces John Maynard Keynes and his work, including his general theory. It discusses Keynesian beliefs that markets will not automatically lead to full employment and that the level of output and national income can adjust. The main Keynesian theories are outlined, including the labor market, money market, multiplier effect, and inflation theory. The document then explains Keynes' theory of income, output, and employment determination through the intersection of aggregate demand and supply curves. It concludes that in the short run, aggregate demand determines employment, output, and income levels according to Keynes.
It includes:
CLASSICAL THEORY OF EMPLOYMENT,
SAY’S LAW OF MARKET,
Determination of Employment and Output in the Classical Model,
Keynesian Theory of Employment,
Principle of Effective Demand, and on many more topics...
Basic ideas to explain unemployment, types of inflation, the CPI and the GDP. Some slides were borrowed from others off of the web because frankly, they were too good NOT to use.
This document provides an overview of the Keynesian model of aggregate demand. It explains that aggregate demand is the total demand for final goods and services in an economy at a given price level. The AD curve is derived from the intersection of the IS curve, which shows combinations of output and interest rates that equal planned and actual expenditures, and the LM curve, which shows combinations that clear the money market. An increase in government purchases shifts the AD curve to the right, increasing both output and the price level if the aggregate supply curve is upward sloping.
This presentation summarizes Philip's curve and Okun's law. It discusses how Philip's curve shows the relationship between unemployment and inflation in an economy based on data from the UK. It also explains how Okun's law describes a negative relationship between GDP and unemployment, with the economy experiencing a 1 percentage point rise in unemployment for every 3 percentage point decrease in GDP. Graphs are presented analyzing the relationships between GDP and unemployment from 1980-2012 and between inflation and unemployment from 1980-2012 in the UK.
Classical economists believed that full employment was the normal state of the economy and any deviation from it was abnormal. They assumed a closed economy with homogeneous goods, laissez-faire policies, and a barter system. According to Say's law, supply creates its own demand so overproduction is not possible. The classical theory held that output and employment are determined by production functions and the demand and supply of labor, with diminishing marginal returns. Labor market equilibrium occurs at the wage rate where demand and supply of labor intersect.
Final powerpoint presentation, prof3 a sphiwe dladla-201221896Sphiwe Dladla
Unemployment refers to willing workers who are physically and mentally able to work but cannot find jobs. It occurs when there is an imbalance between the number of available jobs and job seekers. There are several types of unemployment, including frictional, seasonal, cyclical, structural, and voluntary unemployment. High unemployment can negatively impact individuals through loss of income and self-esteem, and negatively impact the economy through lower tax revenues and GDP. Governments aim to reduce unemployment through demand-side policies like government spending and supply-side policies like job training programs.
Unemployment is measured as the number of people willing and able to work but unable to find employment. There are different types of unemployment including cyclical, frictional, and structural. Theories of unemployment include the Keynesian and classical theories. Keynesian theory states that aggregate demand determines employment while classical theory says real wages impact employment. Unemployment has costs like reduced income and increased dependence. The NAIRU is the lowest unemployment rate that avoids inflation increases. Factors like productivity and benefits influence the NAIRU, which is important for policymakers to consider.
This document provides an overview of two major theories of employment: the classical theory and Keynes' theory.
The classical theory states that employment is determined by the interaction of labor supply and demand in the market. It believes in full employment and that unemployment results from rigid wages or interference with free markets. Keynes' theory views employment from the demand side and says it depends on effective demand. Effective demand is driven by aggregate supply and demand. Unemployment can result from a deficiency in effective demand. The theories differ in their assumptions around flexibility of wages and prices and whether they examine things in the short or long run.
Chapter 7 - inflation ,unemployment and underemployment for BBAginish9841502661
This document defines various types of inflation including low inflation, galloping inflation, and hyperinflation. It also discusses different measures used to calculate inflation rates such as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Finally, it outlines several causes of inflation including demand-pull factors related to increases in the money supply according to the Quantity Theory of Money, and cost-push factors like increases in wages or costs of raw materials.
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
Keynesian Theory
The document discusses economic challenges related to inflation and unemployment. It defines inflation as a general increase in prices over time which decreases purchasing power. Unemployment is defined as people who are currently not working but have actively sought work in the past four weeks. Different types of unemployment are explained such as frictional, structural, seasonal, and cyclical unemployment. Factors that cause inflation like the quantity theory, cost-push theory, and demand-pull theory are also summarized.
The Keynesian theory views employment as dependent on effective demand, which leads to output and income. Income then provides further employment. Effective demand is determined by aggregate supply and demand. Keynes focuses on increasing aggregate demand through consumption and investment to fight unemployment. Investment depends on interest rates and the marginal efficiency of capital. The equilibrium level of income and employment occurs where saving and investment are equal. Underemployment results from a lack of aggregate demand, which can be increased through investment to reach full employment.
This document discusses several topics related to inflation and unemployment:
1. It defines inflation and the Phillips curve relationship between inflation and unemployment.
2. It outlines the two main causes of inflation: demand-pull inflation from increased aggregate demand, and cost-push inflation from increased costs of production.
3. It discusses the costs of inflation, stagflation, and Okun's law relating unemployment and GDP loss.
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
This document summarizes key aspects of the Phillips curve and debates around inflation theories. It discusses how Samuelson and Solow popularized the Phillips curve as a policy tool showing a tradeoff between inflation and unemployment. However, their interpretation led policymakers in the 1960s-1970s to pursue expansionary policies, fueling the Great Inflation. Later analysis found Samuelson and Solow did not actually estimate the Phillips curve relationship but drew it by hand, and a proper estimation shows a different relationship with implications for economic policy.
This document provides an overview of classical and Keynesian theories of income and employment. It discusses key differences between the two theories, including how they determine full employment. The classical theory believes full employment is the normal state, while Keynes argued unemployment can persist due to insufficient aggregate demand. The document then explains Keynesian concepts like aggregate demand, consumption, investment and their relationship to national income and output. It also outlines Keynes' model and equilibrium conditions between markets.
How inflation and unemployment are relatedAlok upadhayay
The document discusses the relationship between inflation and unemployment. It begins by explaining the inverse correlation between inflation and unemployment based on principles of supply and demand. When demand for labor exceeds supply, wage inflation rises and vice versa. The Phillips Curve, developed by A.W. Phillips, showed this inverse relationship, though it was nonlinear. While the Phillips Curve could be used by policymakers to balance inflation and unemployment in the short run, monetarists like Milton Friedman argued it did not apply in the long run. The relationship between inflation and unemployment only works temporarily, not as a permanent policy tool.
This document provides an overview of John Maynard Keynes' theory of aggregate demand. It defines aggregate demand and its components. Keynes believed full employment is not guaranteed in a free market and that unemployment could exist in equilibrium. Equilibrium output and employment are determined by the level of aggregate demand. The government can use fiscal policy like increasing spending to shift aggregate demand outward and close the gap between actual and full employment output, achieving full employment.
John Maynard Keynes was an influential British economist born in 1883. He developed theories that challenged classical economic thought, such as arguing that saving does not equal investment and that aggregate demand, not supply, is the key driver of economic activity. Keynes published his seminal work The General Theory of Employment, Interest and Money in 1936, which revolutionized economic thinking and laid the foundation for Keynesian economics. The Keynesian view became highly influential in the post-World War 2 era.
The classical theory of employment and output assumed full employment, perfect competition, and wage-price flexibility. It was based on Say's Law that supply creates its own demand and the quantity theory of money that money only impacts prices, not output. Under these assumptions, the economy would always attain general equilibrium with full employment determined by the intersection of labor demand and supply curves. However, the Great Depression showed the flaws in these assumptions and need for government intervention.
Theories of income output and employmentakanksha91
This document presents theories of income, output, and employment from a Keynesian perspective. It introduces John Maynard Keynes and his work, including his general theory. It discusses Keynesian beliefs that markets will not automatically lead to full employment and that the level of output and national income can adjust. The main Keynesian theories are outlined, including the labor market, money market, multiplier effect, and inflation theory. The document then explains Keynes' theory of income, output, and employment determination through the intersection of aggregate demand and supply curves. It concludes that in the short run, aggregate demand determines employment, output, and income levels according to Keynes.
It includes:
CLASSICAL THEORY OF EMPLOYMENT,
SAY’S LAW OF MARKET,
Determination of Employment and Output in the Classical Model,
Keynesian Theory of Employment,
Principle of Effective Demand, and on many more topics...
Basic ideas to explain unemployment, types of inflation, the CPI and the GDP. Some slides were borrowed from others off of the web because frankly, they were too good NOT to use.
This document provides an overview of the Keynesian model of aggregate demand. It explains that aggregate demand is the total demand for final goods and services in an economy at a given price level. The AD curve is derived from the intersection of the IS curve, which shows combinations of output and interest rates that equal planned and actual expenditures, and the LM curve, which shows combinations that clear the money market. An increase in government purchases shifts the AD curve to the right, increasing both output and the price level if the aggregate supply curve is upward sloping.
This presentation summarizes Philip's curve and Okun's law. It discusses how Philip's curve shows the relationship between unemployment and inflation in an economy based on data from the UK. It also explains how Okun's law describes a negative relationship between GDP and unemployment, with the economy experiencing a 1 percentage point rise in unemployment for every 3 percentage point decrease in GDP. Graphs are presented analyzing the relationships between GDP and unemployment from 1980-2012 and between inflation and unemployment from 1980-2012 in the UK.
Classical economists believed that full employment was the normal state of the economy and any deviation from it was abnormal. They assumed a closed economy with homogeneous goods, laissez-faire policies, and a barter system. According to Say's law, supply creates its own demand so overproduction is not possible. The classical theory held that output and employment are determined by production functions and the demand and supply of labor, with diminishing marginal returns. Labor market equilibrium occurs at the wage rate where demand and supply of labor intersect.
Final powerpoint presentation, prof3 a sphiwe dladla-201221896Sphiwe Dladla
Unemployment refers to willing workers who are physically and mentally able to work but cannot find jobs. It occurs when there is an imbalance between the number of available jobs and job seekers. There are several types of unemployment, including frictional, seasonal, cyclical, structural, and voluntary unemployment. High unemployment can negatively impact individuals through loss of income and self-esteem, and negatively impact the economy through lower tax revenues and GDP. Governments aim to reduce unemployment through demand-side policies like government spending and supply-side policies like job training programs.
Unemployment is measured as the number of people willing and able to work but unable to find employment. There are different types of unemployment including cyclical, frictional, and structural. Theories of unemployment include the Keynesian and classical theories. Keynesian theory states that aggregate demand determines employment while classical theory says real wages impact employment. Unemployment has costs like reduced income and increased dependence. The NAIRU is the lowest unemployment rate that avoids inflation increases. Factors like productivity and benefits influence the NAIRU, which is important for policymakers to consider.
This document discusses the nature and measurement of unemployment. It defines unemployment as people who are actively looking for work but are currently without a job. The unemployment rate is defined as the number of unemployed people expressed as a percentage of the labor force. There are inflows and outflows into and out of unemployment as people transition between jobs and leaving the labor force. Disequilibrium unemployment can occur when real wages are above the equilibrium level or due to a reduction in aggregate demand. There are also types of equilibrium unemployment including frictional unemployment from job searching and structural unemployment from changes in industry demand.
Unemployment refers to willing workers without jobs who are physically fit, mentally sound, well-qualified, and willing to work at the prevailing wage rate. There are several types of unemployment including frictional unemployment from the time needed to find a job, structural unemployment due to skills mismatches, and cyclical unemployment caused by economic downturns. High unemployment is costly as it results in lost output and income for individuals and the overall economy. Governments aim to reduce unemployment through monetary and fiscal policies that seek to balance inflation and employment levels.
This document discusses different types of unemployment including frictional, seasonal, cyclical, structural, and disguised unemployment. It also discusses underemployment and defines unemployment rate, labor force participation rate, and discouraged workers. Additionally, it covers the relationship between unemployment and inflation including the short-run and long-run Phillips curves. Expected inflation rate is identified as a key factor that can shift the short-run Phillips curve. The natural rate hypothesis and need for disinflation policies if unemployment is kept below the natural rate for too long are also summarized.
This document discusses unemployment, including its definition, measurement, types, causes, and rates in Pakistan. It defines unemployment as people who are without work but actively seeking employment. There are four main types of unemployment discussed - frictional, seasonal, cyclical, and structural. Frictional unemployment results from transitions between jobs, seasonal from industries that vary by season, cyclical from insufficient aggregate demand in the economy, and structural from mismatch between worker skills and job requirements. Causes and measures to address unemployment are also reviewed.
This document discusses different types of unemployment including frictional, structural, seasonal, and cyclical unemployment. It also discusses Okun's law and the relationship between inflation and unemployment shown by the Phillips curve. The Phillips curve initially showed an inverse relationship between inflation and unemployment but this broke down in the late 1960s. The long-run Phillips curve is vertical at the natural rate of unemployment. Government policies can affect inflation and unemployment in both the short-run and long-run.
The document discusses different types of unemployment including voluntary, involuntary, seasonal, structural, cyclical, technological, disguised, and hidden unemployment. It explains how unemployment is measured by comparing the labor force to the number of employed individuals. The relationship between inflation and unemployment is also examined through the Phillips Curve model, which shows an inverse relationship where rising wages/inflation leads to lower unemployment. Factors like structural changes, cost-push inflation, and government transfers can impact the Phillips Curve relationship over time.
PLEASE REWORD THESE PARAGRAPHS IN YOUR OWN WORDS. PLEASE DO NOT US.docxLeilaniPoolsy
PLEASE REWORD THESE PARAGRAPHS IN YOUR OWN WORDS. PLEASE DO NOT USE THE SAME WORDS AS IN THE PARAGRAPHS. THANKS.
· 1-According to Lisa Huddlestun, "Macroeconomics is the study of behaviors and activities of the economy as a whole, looks at such areas as the Federal Reserve System, unemployment, gross domestic product (GDP), and business cycles" (Huddlestun 2015.) The Federal Reserve System's most important attribute is the regulation of the supply of money in circulation. This is important to the economy because it influences interest rates, money available for loans, and the overall price level of the economy. Unemployment could mean a loss of income for individuals and lost production for the economy. There are three type of unemployment; frictional unemployment, cyclical unemployment, and structural unemployment. Frictional includes people that have quit their jobs or have been fired causing them to be unemployed. Cyclical is related to the economy, such as being laid off during a recession. Structural unemployment is when someone hasn't been hired because they do not have the required skills or do not live in a high employment area. The gross domestic product (GDP) is determined by total economic spending. Economic spending includes consumer, business, and government spending. Lisa states, GDP is "the market value of all final products produced in a year's time" (Huddlestun 2015.) Economic performance is measured by GDP. An increase in GDP means the economy is growing. GDP also determines if there will be inflation or not. Policy makers look at past and present GDP to formulate policies to help economic growth. If we have economic growth then we could have an increase in production of goods and services. Microeconomics according to Lisa is, "the individual components of the economy, such as costs of production, maximizing profits, and the different market structures" (Huddlestun 2015.) Businesses are the suppliers of goods and services the individual wants. Most businesses want to make a profit, or maximize their profits. The level of output must be determined to help result in the greatest profit. Cost of production has a huge part in this. There are two types of cost production; variable and fixed costs. Fixed costs are costs that do not vary with the level of output, for example a rent payment. Variable costs are cost that change with level of output, like wages and raw material.
· 2-This was a great video for the theory of supply and demand. I was able to relate particularly about the housing market as someone who was a real estate investor in 2005. It was a real experience of supply and demand. Briefly in video, the breakdown of three concepts are covered supply curve, demand curve, and equilibrium. The supply curve is an illustration for supply and price relationship. When prices go up, supplies increase as well and vice versa. The demand curve is an illustration for demand and price relationship. When prices go up, dem.
The document summarizes key concepts related to business cycles, jobs, unemployment, and inflation measurement. It defines business cycles and recessions, explains how the unemployment rate, labor force participation rate, and employment-to-population ratio are calculated. It also describes how the Consumer Price Index is constructed and used to measure inflation. Charts and figures are included to illustrate trends in these economic indicators over time.
This document is a research report on unemployment in Pakistan that was submitted by four students to their professor. The report defines unemployment and discusses different types of unemployment including cyclical, structural, regional, classical, seasonal, frictional, and voluntary unemployment. It also provides examples of how unemployment rates are calculated. Additionally, the report examines reasons for unemployment in Pakistan such as low industrial growth, use of advanced technology, lack of vocational training programs, population growth, and more.
This document discusses the relationship between unemployment and inflation in India based on the Phillips curve concept. It analyzes unemployment and inflation rates from 2009 to 2017 using secondary data from the Reserve Bank of India and Ministry of Labour and Employment. The results show unemployment and inflation are inversely related in the short run, confirming the existence of the Phillips curve in India. Specifically, it found that (1) unemployment was highest in 2009 at 3.75% while inflation peaked in 2010 at 12.11%, (2) changes in unemployment and inflation moved in opposite directions from 2009 to 2016, indicating a short-run trade-off as predicted by the Phillips curve. The study concludes the Phillips curve framework is valid for analyzing inflation-unemployment dynamics
The document discusses different types of unemployment including frictional, structural, classical, seasonal, and cyclical unemployment. It defines the unemployment rate as the number of unemployed people divided by the total labor force. Structural unemployment occurs when workers' skills do not match available jobs, and can be caused by new technology, consumer demand shifts, or globalization. Cyclical unemployment rises during economic downturns as spending decreases and companies lay off workers. The document also notes the private and social costs of unemployment as well as its relationship to business cycles and taxes.
The Philip curve shows an inverse relationship between the rate of unemployment and the rate of change in money wages in the short run. Friedman argued that in the long run, there is no tradeoff between inflation and unemployment - the Philip curve becomes vertical at the natural rate of unemployment, which is the rate where expected and actual inflation are equal. Temporary reductions in unemployment below the natural rate are only possible if inflation rises above expectations, but eventually expectations will adjust and unemployment will return to the natural rate, even as inflation accelerates.
Lecture_Unemployment and Inflation (Phillips Curve Relationship) (1).pptxuobdRydh
This document discusses different types and measurement of unemployment, including frictional, structural, and cyclical unemployment. It also discusses Milton Friedman's natural rate hypothesis and the relationship between inflation and unemployment known as the Phillips curve. Friedman argued that there is a negative relationship between unanticipated inflation and cyclical unemployment in the short run, but that in the long run inflation expectations adjust and unemployment returns to the natural rate even if inflation remains higher. The Phillips curve is thus vertical in the long run. The document also discusses Keynesian and monetarist views of the inflation-unemployment tradeoff.
This document provides an overview of Keynesian theory of income determination. It discusses some key concepts:
1) According to Keynes, the equilibrium level of national income and employment is determined by the interaction of aggregate demand (C+I) and aggregate supply (C+S). This equilibrium is called the effective demand point.
2) Effective demand represents the total spending in the economy that matches aggregate supply. It is the level of income and employment where there is no tendency to increase or decrease production.
3) The effective demand point may be below full employment, indicating underemployment. Government spending can increase aggregate demand and move the economy to a new equilibrium with higher income and full employment.
This document provides an overview of Keynesian theory of income determination. It discusses some key points:
1) According to Keynes, the equilibrium level of national income and employment is determined by the interaction of aggregate demand (C+I) and aggregate supply (C+S). This equilibrium is called the effective demand point.
2) The effective demand point may be below full employment, indicating under-employment. Government spending can increase aggregate demand and raise income to the full employment level.
3) Determinants of income are aggregate demand, influenced by consumption and investment, and aggregate supply, influenced by the level of employment. The equilibrium between these curves determines the effective demand point and income level.
The document discusses the relationship between inflation and unemployment as depicted by the Phillips curve. It explains that demand-pull inflation is caused by increases in aggregate demand, while cost-push inflation stems from increases in costs of production. The Phillips curve shows an inverse relationship between inflation and unemployment in the short run, but this relationship breaks down in the long run as inflation expectations rise. The natural rate of unemployment is the rate at which inflation remains stable in the long run.
The document discusses the natural rate of unemployment, which is the average rate of unemployment around which the economy fluctuates. It is affected by factors like the rates of workers losing jobs and unemployed workers finding jobs. There are two main types of unemployment: frictional unemployment due to the time it takes workers to search for jobs, and structural unemployment caused by wages being rigid above market levels due to things like minimum wages and unions. The document analyzes trends in U.S. unemployment over time and potential factors influencing the natural rate, such as demographics, sectoral shifts in the economy, and social policies.
This document discusses unemployment in Europe. It notes that unemployment rates have risen substantially in countries like France and Germany from around 2% in 1960 to over 10% recently. This rise can be traced to the interaction between long-standing generous unemployment benefits and a recent technological decline in demand for unskilled labor. Remedies discussed include reducing unemployment benefits, accepting lower-wage jobs, and incentivizing people to find work rather than remain unemployed. The document also compares unemployment variations between different European markets and notes differences in culture, policies, institutions and the role of unions.
This document discusses efficiency wage theories of unemployment. It presents a model where firms pay higher than market-clearing wages because the benefits of higher wages, such as increased worker effort, outweigh the costs. The model is solved to show that firms set the real wage rate so as to minimize the cost per effective labor unit. This optimal real wage can result in unemployment if the number of workers exceeds the total labor demand at that wage. The model implies real wages do not increase with aggregate demand, since the efficiency wage is determined by the effort function alone.
This document discusses nominal and real rigidities in economics. It begins by explaining the differences between the New Classical and New Keynesian schools of thought regarding price flexibility and unemployment. It then distinguishes between nominal rigidities, where prices and wages do not adjust, and real rigidities caused by factors in goods, credit, and labor markets. The document focuses on nominal rigidities, explaining menu costs and how they can rationalize price stickiness according to models by Mankiw and others. It also briefly discusses how real rigidities may reinforce the effects of nominal rigidities.
This document provides an overview of search theory and unemployment. It discusses:
1) Search theory models unemployment as arising due to frictions in the matching of workers' skills to job vacancies, representing a form of frictional unemployment. This allows unemployment to exist in equilibrium even with perfectly competitive labor markets.
2) A historical overview traces how search theory developed from Pigou's early ideas on frictional unemployment to formal models in the 1970s-1980s that used search theory to explain unemployment within a Walrasian general equilibrium framework.
3) The document goes on to present a specific search and matching model and alternative models before summarizing the significance of search unemployment concepts and theories.
This document provides an overview of real business cycle theory and New Classical business cycle theory. It discusses how economic fluctuations can naturally occur due to supply shocks under real business cycle theory, with shocks coming from changes in technology and tastes. Under New Classical business cycle theory, fluctuations arise from changes in the structure of the division of labor in response to price changes. The document uses examples of economies with specialized production of goods to illustrate how business cycles can emerge from individuals specializing in different sectors. It also notes the role of money and financial systems in facilitating exchange needed to generate cycles within these theoretical frameworks.
This document discusses traditional theories of business cycles proposed by Schumpeter, Goodwin, Kalecki, and Minsky. It summarizes:
- Richard Goodwin developed a model where the power of workers varies inversely with unemployment, generating cycles through the interaction of these factors and wages/investment.
- Michal Kalecki emphasized monetary factors and central banks accommodating business investment, incorporating early monetary elements into cycle theories.
- Hyman Minsky argued that financial factors are central to business cycles, with fluctuations in connected real and financial activities.
In a standard two-period overlapping generations model of exchange, money facilitates transactions by allowing individuals to exchange current consumption for future consumption. Without money, individuals cannot reach the socially optimal outcome. The introduction of money as a medium of exchange enables people to save current endowments by exchanging them for money, then use that money to buy future consumption and reach their optimal lifetime utility. At the aggregate steady state equilibrium, the rate of deflation equals the population growth rate, allowing individuals' budget constraints to coincide with their optimal consumption choices.
The document summarizes the overlapping generations model. It describes the structure of the model where individuals live for two periods and there are always two generations alive at each point in time. The model examines the dynamic efficiency of the economy and whether social security can eliminate dynamic inefficiency. It outlines the key aspects of the model including household optimization, macroeconomic equilibrium conditions, and how the capital labor ratio changes over time according to a dynamic equation. The model can exhibit multiple steady states and local stability depends on where the dynamic equation intersects the 45 degree line.
This document summarizes the Ramsey model of optimal economic growth. It explains that the model involves maximizing social welfare over an infinite time horizon, subject to resource constraints. The model can be formulated as either a central planner problem or a decentralized market problem. In both cases, the optimal growth path leads to a steady state with positive capital and consumption. Key conditions for the optimal path include setting the marginal product of capital equal to the discount rate plus population growth at the steady state (the modified golden rule).
This document discusses theories of intertemporal consumption decision-making, including the life-cycle hypothesis and permanent income hypothesis. The life-cycle hypothesis, developed by Modigliani and Brumberg, suggests that consumption in any period is determined by an individual's total lifetime income, which they aim to distribute evenly over their lifetime through consumption smoothing. As such, changes in current income have a limited impact on current consumption and a greater impact on current savings. The permanent income hypothesis, developed by Friedman, similarly views consumption as determined by lifetime rather than current income alone.
This document discusses Robert Lucas' critique of using traditional macroeconomic models to evaluate policy. Lucas argued that models based on historical data and relationships will provide inaccurate forecasts if policy changes alter the underlying economic structure or behaviors. The document explains Lucas' critique and its implications, including the need for macro models to have strong microeconomic foundations that allow behaviors and relationships to change based on policy rules rather than one-time changes. It also discusses how Lucas' critique influenced the development of rational expectations theory and models based on policy rules rather than discretionary changes.
Keynes' theory of expectations is summarized in 3 sentences:
Keynes believed that long-term expectations cannot be based on objective probability distributions due to uncertainty about the future. Instead, economic agents form expectations based on prevailing conventions, but their level of confidence in these conventions can vary depending on psychological factors like optimism and pessimism. As a result, expectations and investment are volatile and subject to waves of optimism and pessimism not based on economic fundamentals alone.
The document summarizes key aspects of the Solow growth model and endogenous growth theory. It discusses how the Solow model predicts economies will reach a steady state of constant per capita output and capital determined by exogenous factors. While saving rates affect steady state levels, growth rates are independent of economic parameters in the long run. The document also examines the concepts of absolute and conditional convergence predicted by the Solow model and empirical studies testing convergence. It then assesses limitations of the Solow model, leading to the development of endogenous growth theory which aims to explain long-term growth through factors like human capital and R&D.
1) The document describes the Solow growth model, which explains economic growth through capital accumulation, population growth, and technological progress.
2) The model assumes an aggregate production function with capital, labor, and technology as inputs. It features diminishing returns to capital and constant returns to scale.
3) The model reaches a steady state where the rate of investment equals the rate of capital depreciation, so the capital stock and output level remain constant over time.
This document provides an overview of the Neoclassical Synthesis model in macroeconomics. It discusses:
1) The Neoclassical Synthesis aimed to combine Keynesian and classical ideas by bringing together the real and monetary sectors of the economy. It recognizes both demand-driven output as well as price/wage adjustments.
2) Investment depends on the interest rate and the marginal productivity of capital. The investment function is downward sloping as higher interest rates reduce investment.
3) Demand for money has transactionary, precautionary, and speculative components according to Keynes. Equilibrium in the money market occurs when money supply equals total demand for money.
This document introduces key concepts in macroeconomics including aggregate supply, aggregate demand, and equilibrium output and price levels. It discusses the classical and Keynesian approaches to determining these levels. The classical approach assumes flexible prices and wages allow full employment is always maintained. The Keynesian approach recognizes short-run rigidities that can cause unemployment during recessions when aggregate demand falls.
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
A toxic combination of 15 years of low growth, and four decades of high inequality, has left Britain poorer and falling behind its peers. Productivity growth is weak and public investment is low, while wages today are no higher than they were before the financial crisis. Britain needs a new economic strategy to lift itself out of stagnation.
Scotland is in many ways a microcosm of this challenge. It has become a hub for creative industries, is home to several world-class universities and a thriving community of businesses – strengths that need to be harness and leveraged. But it also has high levels of deprivation, with homelessness reaching a record high and nearly half a million people living in very deep poverty last year. Scotland won’t be truly thriving unless it finds ways to ensure that all its inhabitants benefit from growth and investment. This is the central challenge facing policy makers both in Holyrood and Westminster.
What should a new national economic strategy for Scotland include? What would the pursuit of stronger economic growth mean for local, national and UK-wide policy makers? How will economic change affect the jobs we do, the places we live and the businesses we work for? And what are the prospects for cities like Glasgow, and nations like Scotland, in rising to these challenges?
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TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
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Dr. Alyce Su Cover Story - China's Investment Leadermsthrill
In World Expo 2010 Shanghai – the most visited Expo in the World History
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China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
Every business, big or small, deals with outgoing payments. Whether it’s to suppliers for inventory, to employees for salaries, or to vendors for services rendered, keeping track of these expenses is crucial. This is where payment vouchers come in – the unsung heroes of the accounting world.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
1. [ UNIT 13 TRADITIONALTHEORIES
Structure
13.0 Objectives
13.1 Introduction
13.2 Types of Unemployment
I
I 13.3 Classical View on Unemployment
13.4 Keynesian view on Unemployment
13.5 Phillips Curve
13.6 Costs of Unemployment and Inflation
I 13.7 Non-Accelerating Inflation Rate of Unemployment (NAIRU)
I 13.8 Let Us Sum Up
I
I
13.9 Key Words
I
13.10 Some Useful Books
t 13.11 Answers1Hints to Check Your Progress Exercises
I
I
13.0 OBJECTIVES
After going through this unit you should be able to:
identifydifferenttypes of unemployment;
1 explain the classical and Keynesian views on unemployment;
b
I establish a relationshipbetween unemployment and inflation; and
identify the costs of unemployment and inflation.
13.1 INTRODUCTION
Labour is demanded by firms as it contributes to production of goods and
services. In return of its contribution, labour is rewarded with wages. In the
market for labour the wage rate is determined at a level where supply of and
demand for labour are equal. While human beings supply more labour at higher
wage rate, firms demand lower quantity of labour when wage rate is high. Thus
supply of labour has a positive relationship with wage rate (implying upward
sloping supply curve) while demand for labour has a negative relationship with
wage rate (implying downward sloping demand curve).
A fact that has perturbed everyone, no less economists, is that total labour force
is not fully employed at the prevailing wage rate. Certain percentage, which
fluctuates over time, of the labour force remains unemployed at.any point of
time. The nature of and the reasons behind unemployment in the economy have
been put to much debate in economics. Economists have come up with varied
explanationsof unemployment, which we will consider in this unit.
13.2 TYPES OF UNEMPLOYMENT
A person can be either in the labour force or not in the labour force of an
economy. The person not included in the labour force includes those who are
retired, too ill to work, keeping the house, or simply not looking for work. On
the other hand, persons counted under the category labour force includes those
who are employed or unemployed. By employed persons we mean those who
perform any paid work (thus housewives are not included) and those who have
jobs. On the other hand, the unemployed as a category includes people who are
2. Unemployment
6
not employed but are actively looking for work. Thus while considering
unemployment we do not take into account those who are not in the labour
force.
There are three kinds of unemployment, viz., frictional, structural and cyclical.
Fictional unemploymenttakes place because people switch over from onejob to
another. In many cases the tenure of job gets over and workers remain
unemployed till they get another job. In other cases workers migrate from one
region to another in search of better jobs or opt to remain out of job for short
time periods. Frictional unemployment takes place because in an economy with
imperfect information job search and matching is not smooth and there are
frictions in the economy. Structural unemployment, on the other hand, results
from the mismatch between supply and demand for different kinds of jobs. For
example, in India in early 1990s, when the information technology sector
witnessed a surge in growth, there was a scarcity of computer professionals. In
recent years, in response to policy changes, a number of private airlines have
come up in India and there is an acute shortage of pilots. Structural
unemployment takes place largely due to structural shifts in an economy and
adjustments,to such shifts take time. Cyclical unemployment arises due to
fluctuations in aggregate demand. When aggregate demand declines, there is
simultaneous decline in the demand for labour and consequent increase in
unemployment. On the other hand, a general boom in the economy increases
demand for labour and unemployment decreases. Thus overall employment is
pro-cyclical in nature.
Empirical data shows that the labour force in an economy is much less than the
total population in the working age group. In the US, for example, for which
data are readily.available, labour force constitutes about two-third of the adult
population. The percentage of population in the labour force, however, varies
across countries and depends upon the level of development and social
traditions. The rate of unemployment u is defined as the ratio of unemployed
persons to total labour force. The rate of unemployment varies across countries
and for a country, over time.
13.3 CLASSICAL VIEW ON UNEMPLOYMENT- - - --
The classical economists. as we observed in Unit 1 of this course, were of the
view that full employment prevailed in the economy all the time. This was
consistent with the view that whatever amount of labour was supplied got
demanded by firms. A basic assumption in the classical framework was the
flexibility in wage rate and prices. Thus the gap between supply of and demand
for labour got wiped out through adjustments in wage rate.
L I w
0 L* labour
Fig. 13.1: Equilibrium Level of Employment
In Fig. 13.1 we measure real wage rate (w) on y-axis and quantity of labour (L)
on x-axis. The equilibrium wage rate reached through interaction of supply of
3. labour (L,) and demand for labour (Ld)is W* and quantity of labour employed is
L*, which represents full employment.
As we learnt in Unit 1, the aggregate supply curve according to classical
economists is a vertical straight line at the full employment output level. At the
equilibrium wage rate everyone seeking employment gets engaged. If the wage
rate is above w (see Fig.13.1) there is excess supply of labour compared to its
demand. In their efforts to get employed some of the currently unemployed
workers will be willing to work at a wage lower than the prevailing one and in
the process will bring down the wage rate till it reaches w*. On the other hand,
when wage rate is below w* there will be excess demand compared to supply.
Due to shortage of labour firms will compete with each other and will be willing
to pay higher wage, as a result of which wage rate will increase. Remember that
classical economists were concerned with real wage in the economy, which is
W
defined as the ratio of nominal wage (W)to price level (P) such that w = -.
P
Thus flexibility in real wage assured that a rise in price level is accompanied by
a proportionate rise in nominal wage. In fact the dichotomy between real and
monetary sectors of the economy, as envisaged in classical model, ensures such
proportional changes. The classical economists did not rule out the possibility of
decrease in nominal wage rate. Nonetheless, it was always in response to
decrease in money supply and price level.
In theory, the classical model appears to have a sound base. When compared
with reality, however, it does not explain the obvious phenomenon of
unemployment in the economy. As we will see below, there is much rigidity in
the economy, which does not allow smooth and instantaneous changes in wage
rate. Moreover, some amount of frictional unemployment is always present in
an economy as workers switch over from one job to another. The neoclassical
economists recognized the limitations of classical model and made amendments
to the classical position of zero unemployment. They assumed that the economy
in normal times has certain minimum unemployment called 'natural rate of
unemployment'.
13.4 KEYNESIAN VIEW ON UNEMPLOYMENT
Keynes in his General Theory presented a view that fluctuations in aggregate
demand (AD) influences the equilibrium level of output. Thus the economy is
not necessarily at the full employment output level all the time and equilibrium
can be realized at a level of output below full employment and correspondingto
that level, part of the labour force remains unemployed. Recall that the
Keynesian view emerged on the aftermath of the Great Depression when there
was widespread unemployment in the economy accompanied by declining
prices and output. At this point Keynes analysed the problem in the short run
context and assumed that the aggregate supply (AS) curve is horizontal. It
implies that AS is infinitely elastic and any level of output can be supplied
without increase in prices so long as unemployment persisted. Keynes
diagnosed the problem during the Great Depression to be a result of demand
deficiency and suggested that AD should be increased, may be through
increases in government expenditure. In fact, fiscal policy through appropriate
designing of tax rates and government expenditure emerged as a major policy
instrument largely due to the pioneering work of Keynes.
In Fig. 13.2 we present an infinitely elastic AS curve and a downward sloping
AD curve, the intersection of which provides us with equilibrium output (f)
and prices (P*).In response to a decliae in aggregate demand there is a
downward shift in AD to ADI.Corresponding to this shift there is a decline in
-
'raditionalTheorks
4. equilibrium output from (Y*)to (Y,'). Note that price level remains unchanged
in the above model. In synchronization with the level of output, the quantity of
labour used in production varies. For example, corresponding to a decline in
equilibrium output the quantity of labour decreases. Simultaneously there is an
increase in unemployment.
Fig. 13.2: Equilibrium Output in Keynesian Model
On the behaviour of wage rate, Keynes assumed that there is downward rigidity
in nominal wage in the sense that workers oppose decline in the money wage, as
they perceive it to be a decline in their income. During periods of recession
when there is a decline in price level, real wage increasesin spite of the fact that
W
nominal wage remains fixed. Recall that we defined real wage as w =-;hence
P
decline in P would increase w when W is constant. The basic idea behind the
simplest Keynesian model is that w varies inversely with P as W remains fixed.
Thus in periods of boom, when there is an increase in prices, real wage tend to
decline. Consequently, firms hire more labour and unemployment in the
economy is lower.
<
In Fig. 13.2 we discussed the extreme Keynesian case where AS curve is
horizontal. On the basis of Keynesian ideas, economists analyse the
unemployment issue by resorting to an upward sloping AS curve. As mentioned
above, real wage falls when prices increase, as a result of which more labour is
demanded. The outcome of such an increase is production of more output. Thus
as price level increases we have increasing level of output, implying an upward
sloping AS curve. The change in level of employment due to change in price
level can be explained through the following diagram.
Fig. 13.3 comprises three segments. In panel-a we have described a production
hction such that corresponding to each level of output we can find out the
level of employment. Thus when output produced is at full employment level
(QJ we have corresponding level of employment at Lj In panel-b we plot the
AS curve which depicts the output supplied (Q)at each price level (P). Thus
when Qfis the output produced prevailing prices is Pj.In panel-c we depict real
wage (W/P)on y-axis and employment level on x-axis. Note that we assume
nominal rigidity in prices so that W is fixed. Thus real wage (w)increases as P
decreases. Through the interactionof L,and Ldwe have full employment (Lj)in
the economy corresponding to real wage Wf W/PjThus we assume the initial
position of the economy to be full employment corresponding to Qj;Lj,Pfand
W/Pj
5. Fig. 13.3: Unemployment in Keynesian Model
Suppose there is a decline in AD (not given in the figure). Consequen;ly, there
is a decline in equilibrium output fiom QIto Ql and decline in prices fiom Pjto
PI (see Fig. 13.3 (b)). Corresponding to the new output level Ql, the level of
employment is Ll, which is less then Lf. In fig. 13.3(c) we see that a decrease in
prices from P, to PIleads to an increase in real wage from W/P, to W/P1. At this
level of real wage there is excess supply of labour compared to its demand.
Thus unemployment to the extent 'U' (as shown in Fig. 13.3(c))takes place.
In Fig. 13.2 where we assumed the short runAS curve to be horizontal, upward
shift in AD resulted in increase in output, keeping prices unchanged. In Fig.
13.3, on the other hand, AS is assumed to be upward-sloping and shift in AD
influenced both output and prices.
We observe that nominal wage is not completely sticky in an economy. Keynes
in fact recognized that nominal wage would adjust to the requirement of labour
market equilibrium. However, such adjustments would be too slow so that full
employment may not prevail always. Adjustments in nominal wage in response
to price changes is always with a lag. For example, if nominal wage adjusts in
period 2 but prices increase in period 1, there is a decline in real wage in period
1.In period 2, however, nominal wage can be increased proportionately and real
wage at the previous level be maintained. Salary indexation followed in India
on a six-monthly basis is an example of such a lag in wage adjustments.
When we compare the classical and Keynesian positions we find that rigidity in
wage rate gives rise to unemployment in the economy. We will learn more
about real and nominal rigidities and their implications on unemployment in
Unit 15.
Check Your Progress 1
1) Under certain basic assumptions the classical economists could rule out
the possibility of unemployment. Elaborate.
Traditional Theories
9
6. Unemployment
2) In the Keynesian model why does unemploymenttake place?
PHILLIPS CURVE
The Phillips curve, named after A. W. Phillips, describes the relationship
between unemployment and inflation. In 1958 Phillips, then professor at
London School of Economics, took time series data on the rate of
unemployment and the rate of increase in nominal wage rate for the United
Kingdom for the period 1861-1957 and attempted to e'stablish a relationship. He
took a simple linear equationof the followingform:
where w is the rate of wage increase, a and b are constants and u is the rate of
unemployment. He found that there exists an inverse relationship between w
and u, with the implication that lower rate of unemployment is associated with
higher rate of wage increase. The policy implication of such a result was
astounding - an economy cannot have both low inflation and low
unemployment simultaneously. In order to contain unemployment an economy
has to tolerate a higher rate of wage increase and vice versa.
Subsequent to the publication of the results by Phillips, economists followed
suit and attempted similar exercises for other countries. Some of the studies
carried out refinements to the simple equation estimated by Phillips such as the
use of inflation (the rate of increase in prices) instead of wage rate increase. 1n/
many cases the scatter of plot of variables appeared to be a curve, convex to the/
origin. As empirical studies reinforced the inverse relationship between the rate:
of inflation and the rate of unemployment the Phillips curve soon became an:
important tool of policy analysis. The prescription was clear: during periods of?
high unemployment the government should follow an expansionary monetary
policy which leaves more money in the hands of people. It may accelerate the
rate of inflation while lowering unemployment.
13.6 COSTS OF UNEMPLOMENT AND
INFLATION
In an economy both unemployment and inflation have adverse effects and
policy makers formulate policy instruments to contain both the problems. The
costs of unemployment at the macro level could be loss of potential output and
wastage of valuable resources (manpower). At the household level it is a loss of
income and consequent deterioration in standard of living of the household. It is
difficult to measure the human cost of unemployment with precision as social
stigma and psychological trauma of the problem are also involved. On the
whole, policy makers and political leaders see to the fact that the cost of
unemployment is minimal. Ideally the economy should not have a rate of
unemploymenthigher than the natural rate of unemployment.
7. Inflation is defined as a situation of persistent price rise. While the rate of
inflation varies over time and across countries there is much debate on
permissible rate of inflation. While inflation rate has been moderately high in
certain countries, there are instances of hyperinflation in some countries where
rate of inflation has been more than 1,000per cent per year (for example, Latin
American countries in 1980sand formersocialisteconomies in 1990s).
Inflation is widely considered as a social evil. Policy makers are always on the
look out for price trend so that high inflation can be checked through
appropriate policy measures. General public also are widely vigilant about price
movements so that pressure can be exerted on the government if there is
accelerationin inflation rate. During inflation money loses its purchasing power
and nominal costs of goods and services increase. Moreover,there is a reduction
in real income of fixed income groups (salaried class, for example), as their
income does not change at the same pace as price rise. When there is a price rise
borrowers gain in fixed interest rate environment as the value money they return
is lower than anticipated at the time of borrowing. On the other hand, lenders
stand to lose as the value of money they receive after a lapse of time gets
eroded.
During periods of high inflation,there is fair chance that governmentrevenue is
much less than government expenditure resulting in huge fiscal deficits. In order
to finance the deficit the government has three options: borrow from public, run
down on foreign exchange reserve, and print money. Usually a government
running huge deficit is already under heavy debt and paying a high amount of
interest. Hence, further borrowing becomes difficult. Moreover, such
governments also have low foreign exchange reserve and therefore, printing
money becomes an easy option which fuels the rate of inflation fiuther. You can
recall the Indian condition in 1990-91 when it was loaded with heavy debt,
foreign exchange reserve was abysmally low and there was double-digit
inflation. In general, high inflation put the economy out of gear aid it becomes
difficultto maintain economic stability.
When inflation is anticipated correctly then individuals take precaution and
adjust their future paymentslreceipts keeping the rate of inflation in mind.
However, unexpected inflation provokes incomere-distribution between income
groups. Usually the wage earning class who have a fixed nominal wage are the
looser as real wage gets deteriorated due to price rise while profit earning class
gain handsomely.
13.7 NON-ACCELERATING INFLATION RATE OF
UNEMPLOYMENT
TraditionalTheories
-- - - - - - - - ----- -
During 1970s economists encountered a puzzle in the sense that inflation and
unemployment data did not fit into the Phillips curve for many developed
economies. In fact many countries witnessed 'stagflation' - a combination of
stagnation (a situation of high unemployment)and high inflation. The instability
in the Phillips curve prompted economists to look into the possible reason of
high inflation in spite of high unemployment in the economy.
A limitation of the Phillips curve is that both workers and employers take
decisions on the basis of real wage, not nominal wage. As we mentioned earlier
when we enter into a contract on a hture date we incorporateexpected inflation
into it. Milton Friedman and Edmund Pheips suggested that since real wage is
what matters, the change in nominal wage has to be corrected by inflationary
expectations. In the short-run the Phillips curve is stable but in the long run it
shifts from one level to another, which makes the long run. Phillips curve a
8. vertical-straight line. We explain the process through which shifts in Phillips
curve takes place in Fig. 13.4.
Fig. 13.4: Shift in Phillips Curve
In order to explain the long runPhillips curve (LRPC) we take an examplefrom
Samuelson (2005). Let us assume an economy which is operating at the natural
rate of unemployment (u*). The economy is operating at point A with low
inflation rate I1as in Fig. 13.4. People expect inflation rate to continue at I, in
the next period also.
In the second period suppose the government follows an expansionary policy so
that unemployment declines and is lower than u*. In this environment firms
compete with each other to hire workers as a result of which wage rate
increases. With little scope for further expansion in output the expansionary
policy results in an increase in wage rate and prices so that the economy moves
to point B on SRPCl in Fig. 13.4. We note that inflation expectation has not
changes so far and the economy is operatingon SRPCI.
In the period 3 workers and employers perceive that there is an unexpected
increase in inflation rate. Such a surprise prompts them to revise their
inflationary expectations and they incorporate inflation at the rate I2 into their
decisions. This results in an upward shift in the short run Phillips curve from
SRPCnto SRPC2.Note that we have drawn SRPCzwith inflation rate 13 which
is equal to 12. With inflation at the rate 4, there is a declinein demand for labour
the unemployment rate starts increasing and the economy moves to point C in
Fig. 13.4.
The outcome of the above process-is that the economy ends up with higher
inflation rate although the rate of unemployment remains the same. Real GDP
of the economy remains unchanged while nominal GDP is higher.
The natural unemployment rate mentioned above is called non-accelerating
inflation rate of unemployment (NAIRU). When unemployment is equal to
NAIRU there will be stability in the rate of inflation. When unemployment
departs from NAIRU, there is acceleration or deceleration in inflation rate. Thus
if actual unemployment is less than u*, inflation will continue to accelerate-
higher and higher in subsequentyears. The concept of NAIRU and expectations
formation explains the hyperinflation witnessed by some Latin American
countries. Unless unemployment returns to its natural rate inflation spiral will
keep on accelerating. The recessionary trend can also be explained by NAIRU.
When unemployment is more than u*, inflation will tend to fall as long as
unemployment is above u*. You have already read about expectations formation
in Unit 5, Block 3 of this course. The details of inflation-unemployment trade
off under adaptive and rational expectations have been given there. We have
recapitulated the basic results in this Unit.
9. Researchers have attempted to estimate NAIRU for certain couniries. It is
observed that NAIRU varies across countries, and over time for the same
country.
Check Your Progress 2
1) What are the policy implications of Phillips curve?
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2) What do you mean by NAIRU? What are its implications?
13.8 LET US SUM UP
Unemployment results in loss of not only potential output at the macro level but
also in income at the individual level. Many a time widespread unemployment
culminates into a crisis situation in the economy. The social sigma and
psychological trauma associated with unemployment often compels policy
makers to cut down on the rate of unemployment.
The classical economists assumed flexibility in real wage and prices, which
ensured h l l employment in the economy for all the time. Keynesian
economists, however, contest such an assumption and speak about rigidities in
wage rate and prices. In case of sticky prices there is a possibility of
unemployment as per the Keynesian model.
'
Phillips curve describes the inverse relationship between i~flation and
unemployment. It shows the possibility, or rather the compulsion on the part of
policy makers, that unemployment can be reduced at the cost of higher inflation.
Empirical observation from some economies, however, shows that Phillips
curve is not stable in the long run. Due to change in inflationary expectations on
the part of workers and employers there is a possibility of shifts in the Phillips
curve. While short run Phillips curve is convex to the origin, the long run
Phillips curve is vertical straight line at an unemployment rate equal to NAIRU.
13.9 KEY WORDS
Aggregate Demand: It tantamount to the sum of expenditure on consumption,
investment, government expenditure and net exports. In symbols, AD = C' + I +
G + (X-M).
Fiscal Policy: The policy of a government with respect to government
expenditure and taxation.
Traditional
-Theories
Labour Force: The sum of population who are willing to work, and either
employed or unemployed.
10. NAIRU: It is the abbreviation for non-accelerating inflation rate of
unemployment. It is an unemployment rate that is consistent with a constant
inflation rate. The NAIRU is the uilemployment rate at which the long-run
Phillips curve is vertical.
Phillips Curve: It is a graph named after A. W. Phillips, which shows the trade
off between unemployment and inflation.
Real Wage: Nominal wage divided by price level.
13.10 SOME USEFUL BOOKS
Dombusch, R., S. Fischer and R. Startz, 2004, Macroeconomics, Ninth Edition,
Tata McGraw-Hill,New Delhi.
Sachs, Jeffrey. D. and Felipe Larrain B., Macroeconomics in the Global
Economy, Prentice Hall lnc., New York.
Samuelson, P. A. and W. D. Nordhaus, 2005, Economics, Eighteenth Edition,
Tata McGraw Hill, Delhi.
1cl1 *NS=R/HINTS TO CHECK YOUR
PROGRESS EXERCISES- - -
Check Your Progress 1
1) The basic assumptions underlying classical approach is flexibility in real
wage and prices. Elaborate on the classical model based on Section 13.3
2) Keynes assumes rigidity in nominal wage rate. In the even of decline in
prices, the're is an increase in real wage, which does not clear the market
for labour. Excess supply of labour compared to demand results in
unemployment. Go through section 13.4.
Check Your Progress 2
1) Go through Section 13.5 and answer. You have to explain the nature of
trade-off between inflation and unemployment.
2) Go through Section 13.7and answer.