Real-wage unemployment and NRU

wages too high, surplus of workers, disequilibrium in labour market, equilibrium shows full employment in market,

Causes of Real-wage unemployment

in a recession=>if you cut wages=>fall in spending due to less income=>less AD=>lower economic growth=>less demand for labour

Why do Keynesians stress the need for governments to boost AD rather than relying on wages cuts?

labour markets are perfectly competitive, but irl there are many labour market imperfections(i.e. monopolistic labour market)=>cutting wages may not boost demand for labour

What is an assumption that classical economists make?

UK government pursued deflationary fiscal policy and kept interest rates high to keep the pound artificially high during the 1920s when the UK experienced deflation, but the newly unionised workforces resisted nominal wage cuts

Application for real wage unemployment

13%

In the 1920s, there was also a __ fall in the normal working week without any compensating adjustment in the weekly wage.

Natural Rate of unemployment(NRU)

The difference between those who would like a job at the current wage rate — and those who are willing and able to take a job

availability of job info., flexibility of labour market, degree of labour mobility, level of benefits, hysteresis, skills and education

causes of NRU

equilibrium unemployment

• this is equal to the NRU

• the rate of unemployment when the aggregate labour market is in equilibrium

Non-Accelerating Inflation Rate of Unemployment, NAIRU

• The unemployment rate at which inflation remains stable

• The Uk natural rate of unemployment is not a fixed number and its precise value is debated among economists

• Some studies suggest it remains relatively stable over time while other argue that it may not fluctuate in response to labor market shocks and other factors

long-run equilibrium

it represents the long-run, sustainable level of unemployment that the economy can maintain without causing inflation to accelerate or decelerate

demographic shifts, changes in labour market policies, or technological advancements

No single value: The NAIRU is not a fixed number but rather an estimate that can change over time due to factors like

frictional unemployment, acceptable trade-off?(inflation), incentive for productivity, lower costs for firms

Generally we consider unemployment to be bad…There are a few exceptions…