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ECON102: Principles of Macroeconomics

Unit 7: Labor Market   In microeconomics, the four factors of production are usually identified as land, capital, entrepreneurial talent, and labor.  Using macroeconomics, we will now examine the labor factor, asking how wages affect the economy and how activities such as investment, consumption, and inflation impact the real wages of labor.  In an ideal world, economies would make full use of available material and human resources.  This unit explores how certain policies and practices often prevent the full employment of capital, land, and labor.  In this unit, macroeconomics will help you study labor markets in order to determine optimum levels of employment and identify the strategies that make the best use of all available resources.

Unit 7 Time Advisory
This unit should take approximately 7.75 hours to complete.

☐    Subunit 7.1: 1 hour

☐    Subunit 7.2: 2.5 hours

☐    Subunit 7.3: 2.25 hours

☐    Assessments: 2 hours

Unit7 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Demonstrate an understanding of the microeconomic model of supply and demand in the labor market. - Describe and analyze the Classical as well as the Keynesian views on unemployment. - Explain the process of sticky wages. - Use the model of aggregate demand and aggregate supply to explain a Phillips phase, a stagflation phase, and a recovery phase. - Use the equation of exchange to explain what determines the inflation rate in the long run. - Explain why in the long run the Phillips curve is vertical. - Describe frictional and structural unemployment and the factors that may affect these two types of unemployment. - Describe efficiency wage theory and its predictions concerning cyclical unemployment.

7.1 Labor Market   - Reading: Professor Tancred Lidderdale’s Introduction to Macroeconomics: “Chapter 6: Unemployment and the Labor Market”

Link: Professor Tancred Lidderdale’s *Introduction to
Macroeconomics*: [“Chapter 6: Unemployment and the Labor
Market”](http://www.lidderdale.com/econ/economics.html) (HTML)  

 Instructions: Click on “Introduction to Macroeconomics” and then on
the “Lecture Notes” link for Chapter 6.  Scroll down to section 2A
to read the relevant material for this topic.  This reading covers
section 7.1.1 and 7.1.2.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

7.1.1 Labor Demand and Supply Curves   Note: Labor demand is based occurs when marginal resource product is greater than the marginal resource costs; it is based on a calculation of derived demand or a need for supply.  In regards to supply curves, if wages are high, then the supply curve slopes upward.  If wages are low, then the supply curve’s slope is less steep.  This is correlated to the laborer’s incentive to work; however, regarding employer incentives, the supply curve will demonstrate an incentive at the bottom of the upward slope for more labor at a lower wage and incentive for less labor at a higher wage.

7.1.2 The Labor Market (Graphical Representation)   Note: This topic is covered in subunit 7.1.

7.2 Macroeconomic Models   - Reading: The University of North Carolina at Chapel Hill: Professor William R. Parke’s “Macroeconomics Models and Issues”

Link: The University of North Carolina at Chapel Hill: Professor
William R. Parke’s [“Macroeconomics Models and
Issues”](http://www.econmacro.com/index.htm) (HTML)  

 Instructions: Click on the “Classical Models” and the “Keynesian
Models” to learn how macroeconomic models have changed over time. 
Read “Classical Models” in its entirety, and read the “Overview,”
“The Simple Keynesian Model,” and “The IS/LM Model” sections in
“Keynesian Models.”  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

7.2.1 Classical Views   Note: The classical view of unemployment is that if the wage is higher, more people will want to work, and if the wage is lower, fewer people will want to work.  If the employer needs or wants more workers, it will increase wages to act as an incentive.  If there is a great supply of workers, employers will reduce wages.

7.2.2 Keynesian View   Note: The Keynesian view of unemployment is that unemployment is a result of inadequacies in an economy and differences in aggregate supply and aggregate demand.

7.2.3 “Sticky Wages” Defined and Explained   - Reading: Professor Robert Schenk’s CyberEconomics: “Resource Markets”

Link: Professor Robert Schenk’s *CyberEconomics*: [“Resource
Markets”](http://ingrimayne.com/econ/Labor/Overview13ma.html) (HTML)  

 Instructions: Read the [“Sticky
Wages”](http://ingrimayne.com/econ/Labor/Sticky.html) article.  Be
sure to click on
[“Review”](http://ingrimayne.com/econ/Labor/review16.htm) to answer
two questions that will test your understanding of the concept.  

 Terms of Use: The linked material above has been reposted by the
kind permission of Robert Schenk, and can be viewed in its original
form [here](http://ingrimayne.com/econ/Labor/Overview13ma.html). 
Please note that this material is under copyright and cannot be
reproduced in any capacity without explicit permission from the
copyright holder.

7.3 The Relationship between Unemployment and Inflation   - Reading: Principles of Macroeconomics: Chapter 16: "Inflation and Unemployment", Sections 2-3

Link: *Principles of Macroeconomics*: [“Chapter 16, Sections 2-3:
Inflation and
Unemployment”](http://www.saylor.org/site/textbooks/Principles%20of%20Macroeconomics.pdf) (PDF)  

 Instructions: Read Chapter 16, which will teach you about the
Phillips curve, a short-run tradeoff between inflation and
unemployment.  This reading covers sections 7.3.1 and 7.3.2.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-Share-Alike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution as requested by the work’s original creator or licensee.

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7.3.1 The Philips Curve Defined   Note: This topic is covered in the material for subunit 7.3.

7.3.2 The Philips Curve Breakdown and Stagflation   Note: The Phillips curve demonstrates that there is a trade-off between inflation and unemployment.  According to the curve, when inflation is higher than expected, people will work at a lower real wage.  Employers will in turn hire more workers at the lower real wage, increasing output and reducing unemployment.  In the 1970s and 1980s, when both inflation and unemployment were continually rising (a phenomenon known as “stagflation”), many economists questioned the soundness of the Phillips curve.