Macroeconomics

Lecture 9: UNEMPLOYMENT
TOPICS TO BE DISCUSSED

1. Unemployment
➢Natural unemployment
➢Frictional unemployment
➢Wage Rigidity and Structural Unemployment

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NATURAL UNEMPLOYMENT

➢The average rate of unemployment around which the economy

fluctuates
➢The rate of unemployment toward which the economy gravitates in the
long run

L=E+U

Labor force Number of

unemployed
workers

Number of
employed
workers
Source: MACROECONOMICS, 7th. Edition N. Gregory Mankiw
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UNEMPLOYMENT RATE

Number of Unemployed

Rate of Unemployment =

Labour Force

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TYPES OF UNEMPLOYMENT

➢Natural rate of unemployment is the rate of unemployment to

which the economy tends to return in the long-run

➢Frictional unemployment results because of the time it takes

workers to search for jobs that suit their skills and tastes

• It is caused by sectoral shift- a change in the composition of

demand among industries or regions is called sectoral shift.

• It takes time for workers to change sectors and hence, there is

always frictional unemployment

➢Structural unemployment results because the number of jobs

available in some labour markets is insufficient to provide a job to
every worker who wants the job
Wage rigidity is the failure of wages to adjust until labor supply
equals labor demand.

Real S
wage Unemployment resulting from wage
U rigidity is called structural
unemployment.
Workers are unemployed not because
they can’t find a job that best suits their
skills, rather, at the going wage, the
supply of labor exceeds the demand.
Rigid
real
wage D

Labor

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CAUSES OF WAGE RIGIDITY

➢Minimum Wage Legislation- Government causes wage rigidity when it

prevents wages from falling to equilibrium levels

➢Monopoly Power of Trade Unions- Unions set wages above the

equilibrium level and allow the firm to decide how many workers to employ
which results in a decrease in the number of workers hired
➢Efficiency-Wages- suggest that high wages make workers more
productive. Secondly, efficiency-wage theory contends that high wages
reduce labor turnover.

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RECAP

➢Natural rate of unemployment

➢Frictional unemployment
➢Sectoral shift
➢Wage rigidity leads to Structural unemployment
➢Trade Union & Minimum Wage Legislation cause wage rigidity

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THANK YOU ☺