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BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT
 Weblinks
http://www.economicsonline.co.uk/Managing_the_economy/Unemployment_types_and_causes.
html

http://www.eoearth.org/view/article/156591/

http://www.econlib.org/library/Enc/NewKeynesianEconomics.html

https://www.boundless.com/economics/unemployment/understanding-unemployment/impact-of-
unions-on-unemployment/

http://www.youtube.com/watch?v=nYKCq8z6Umk

Suggested Readings

1)Macroeconomics: International Edition, 4th edition by Olivier Blanchard, 2006, Pearson Education

2) Principles of Macroeconomics, 2nd edition by Soumyen Sikdar, 2011, Oxford University Press

3) Macroeconomics, 7th edition, N. Gregory Mankiw, 2010, Worth Publishers

BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT
 4) Macroeconomics,Rudiger Dornbusch, Stanley Fischer, Richard Startz, Publisher McGraw Hill
Education India Pvt Ltd; 10 edition (22 May 2012)

Glossary

Collective Bargaining: A system where trade union and firms negotiate to set wages, hours of work
and service conditions of workers in a firm.

Cyclical unemployment: Unemployment when the economy is in a recessionary phase of

the business cycle. It can be cured by expansionary policies.

Diminishing Marginal Product: successive extra units of input to a productive process

generates smaller increases in output, when other factors are held constant.

Efficiency wages: wages which firms pay to keep workers motivated even when they are
willing to work for less.

Frictional Unemployment: the unemployment that exists when people change jobs. It can
arise when economy is at full employment.

BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT
 Full employment: A situation where everyone who is available and looking for job is getting
one.

Insiders and Outsiders: those who are presently employed are insiders and those who are
not are outsiders.

Involuntary Unemployment: when a person does not wish to be unemployed.

Labour force: the number of people available for work.

Labour turnover: the inflow and outflow of workers employed in an enterprise.

Long run: A time period long enough for everything to change, which can ever be changed
at all.

Nominal wages: wages measured in money terms.

Potential Output: the maximum output which could be produced with the given factors of
production.

Real Wage: money wage deflated by an appropriate price index.

Search unemployment: unemployment which occurs when unemployed workers search for
jobs which are acceptable to them.

Short run: A period when certain things cannot be changed, which could be changed when
given more time.

Structural unemployment: it arises when unemployed workers lack the necessary skill
which is needed to produce goods for which there is a market.

BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT
 Unemployment benefits: income support payments for unemployed workers to help them
overcome their financial difficulties.
V

Voluntary unemployment: The unemployment deliberately chosen by a person who is

unemployed but looking for a better option

Wage rigidity: a tendency when wages do not change in response to changing economic
conditions. This is applicable in the short run.

Title of Value Addition

Does raising minimum wage cause unemployment?

We have learnt that minimum wages cause unemployment. Does it depict the real world? It is often
argued that minimum wages are given to unskilled workers such as teenagers who are not so much in
need of employment as other workers do; therefore, a case is made to do away with minimum wages.
In practice, minimum wage earners are very often the poor and the downtrodden, who are the main
breadwinners of their families and need a decent amount of earnings to keep their families out of
poverty. In America, a large number of workers are employed in low paying industries such as retail
and food preparation. Recently, Seattle increased the minimum wage to $15. Such a move has been
lauded in the anticipation that it would increase the purchasing power of a vast number of workers,
generate more demand and consequently more jobs.

Robert Reich in his post writes: “Seattle's businesses will adapt without any net loss of employment.
Seattle's employers will also have more employees to choose from -- as the $15 minimum attracts into
the labor force some people who otherwise haven't been interested. That means they'll end up with
workers who are highly reliable and likely to stay longer, resulting in real savings.” He also cites the
work of Michael Reich and ArindrajitDube to confirm the result – “they examined employment in
several hundred pairs of adjacent counties lying on opposite sides of state borders, each with different
minimum wages, and found no statistically significant increase in unemployment in the higher-
minimum counties, even after four years. They also found that employee turnover was lower where
the minimum was higher.”

This is one instance of theory not fitting with reality.

Source: Post by Robert Reich, Chancellor's Professor of Public Policy, University of California at

BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT
 Berkeley; author, 'Beyond Outrage’ http://www.huffingtonpost.com/robert-reich/seattle-minimum-
wage_b_5453966.html

BUSINESS ECONOMICS PAPER NO.: 5, MACROECONOMICS ANALYSIS AND POLICY

MODULE NO. : 18, THEORIES OF UNEMPLOYMENT