MacroeconomicsLesson 3 of 4 in the course Unemployment

Short-Run Unemployment: Labor Demand, Sticky Wages, and Wage-Cut Resistance

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

This lesson explains how changes in the overall economy affect firms’ demand for workers and why unemployment can rise during recessions. It also introduces the labor-market model and distinguishes voluntary from involuntary unemployment.

Over the short run—from a few months to a few years—the quantity of hours people are willing to work at a given wage is assumed not to change much. The labor supply curve therefore does not shift substantially. Economists also often hold other influences constant, such as the age structure of the labor force and labor-market laws and institutions. This is an application of the ceteris paribus assumption: considering the effect of one important change while other relevant factors are held fixed.

All flashcards

What is cyclical unemployment?
The variation in unemployment caused by the business cycle, including changes as the economy moves between expansion and recession.
How do firms’ expansion expectations affect labor demand?
Firms expecting expansion generally want to hire more workers at each wage, shifting the labor demand curve to the right.
What happens to labor demand when firms expect a recession?
Firms generally want fewer workers at each wage, so the labor demand curve shifts to the left.
What is the labor-market equilibrium condition?
At the equilibrium wage, the quantity of labor workers are willing to supply equals the quantity employers want to hire.
What are downward-sticky wages?
Wages that do not fall readily when economic conditions weaken or firms’ demand for labor declines.

Quiz questions

  1. What does cyclical unemployment describe?Answer: Unemployment that varies as the economy moves through expansions and recessions.
  2. In a competitive labor market, what condition defines equilibrium?Answer: The quantity of labor supplied equals the quantity of labor demanded at the wage.
  3. What describes a worker who will accept the going wage but cannot find a job?Answer: Involuntary unemployment.
  4. What is the adverse selection of wage cuts argument?Answer: Broad pay cuts may prompt the most employable workers to leave.
  5. During a recession, labor demand falls while wages remain sticky. What can result?Answer: Firms hire fewer workers, leaving some willing workers unable to find jobs.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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