Ch 14 Labor force participation rate is the ratio of the labor force to the total population 16yrs old or older Labor force is the number of people employed plus the number of unemployed and it does not include the military Also people under the age of 16 institutionalized or retired are not part of the labor force Cyclical unemployment during recessions or depressions Frictional unemployment due to the normal working of the labor market Used to denote short run job skill matching problems Structural unemployment due to changes in the structure of the economy that results in a significant loss of jobs in certain industries Classical economists assume the wage rate adjusts to equate the quantity of labor demanded with the quantity of labor supplied thereby implying that unemployment above the frictional and structural does not exist According to classical view of labor market excess supply of labor will lead to lower wage or people leaving the labor market According to the classical view of the labor market fiscal and monetary policy have little or no effect on employment and real GDP Monetary and fiscal policies shift AD curve When AS curve is vertical these shifts have no effect on employment or output According to sticky wage theory wages are not as likely to be stuck in the upward direction as they are in the downward direction The term sticky wages refers to the downward rigidity of wages as an explanation for existence of unemployment Relative wage explanation of unemployment holds that workers are concerned about their wages relative to the wages of other workers in other firms industries Explicit contracts are employment contracts that stipulate workers wages usually for a period of one to three years Wages set this way do not fluctuate with economic conditions Cost of living adjustments tie wages to changes in the cost of living and thus protect workers from unanticipated inflation Labor supply curve illustrates the amount of labor that households want to supply at each given wage rate Labor demand curve illustrates the amount of labor that firms want to employ at each given wage rate Efficiency wage theory holds that the productivity of workers increases with the wage rate Paying workers more than the market clearing wage includes benefits such as lower turnover higher morale and reduced shirking of work Philips Curve models the relationship between inflation and unemployment negatively The price for lower unemployment is higher inflation In long run Phillips curve corresponds to the natural rate on unemployment Increase in expected inflation will shift the Philips Curve to the right If both AD and AS are shifting there is no systematic relationship btwn price level and aggregate output Other factors affect inflation other than unemployment Sub minimum wage for teenagers is 4 25 for 90 days Events that shift the SRAS curve will shift the SRPC and PP curves in the opposite direction
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