Lecture 16Outline of Last Lecture I. UnemploymentII. Three Categories of UnemploymentIII. Unemployment Rate EquationA. Critiques of the ModelIV. Labor Market Outline of Current Lecture I. Cyclic UnemploymentII. Sticky WagesIII. Explicit ReasonsIV. Implicit ReasonsCurrent LectureThis lecture continues on with the chapter 8 topic of unemployment. We will continue on by looking at short-run changes in unemployment. These short-run changes are known as cyclic unemployment. Cyclic unemployment follows patterns of real GDP business cycles. It is assumed by economists that the supply of labor is fixed in the short run. This is also assuming the preferences for a person’s work don’t change in the short run. It also assumes that a person’s education and/or skill level doesn’t change in the short run either. The labor market equilibrium is determined by changes in the labor demand. The labor market model discussed in the previous lecture is meant to predict short run changes in worker wages. Critics of this model have said that this is unrealistic. This is due in part to wages being “sticky”. That is, wages tend to be easier to move one way than the other because they are either stuck at the higher or lower. Wages can be sticky downwards, meaning they are stuck higher up and it is harder to lower the wages than to increase them. Below are some reasons for why wages can be sticky downwards, broken into two categories. The first category is explicit reasons. These are institutional and mandated reasons. One example is the minimum wage law. This makes it illegal to reduce a worker’s wage below the minimum wage. Another example is any sort of wage contracts. The most common example is a union contract.Implicit reasons are the other category of reasons. This includes implicit contracts. Implicit contracts are not law-binding but an understood contract between the employer and employee. This type of contracts states that: when the labor demand is decreasing, an employer will not lower the employee’s wages, but in return, when the labor demand increases, the employee will be okay with their wages not increasing. Another example is efficiency wages. This means an employer will pay a worker a wage a little above the market equilibrium wage. This means the worker will be happy, less likely to leave, and will be willing to work harder. On the employee end, they will have lower turnover and lower search costs. The final example is called adverse selection in wage cuts. This means that workers with good ability will leave when wages are cut, AGEC 217 1nd Editionbecause they know they have the ability to be paid higher elsewhere. This leaves the employer stuck with workers who aren’t that good, because they are willing to stay and afraid to leave. Economists believe it is better to choose some of the bad workers to fire, instead of lowering
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