Chapter 13: Labor Market in The Economy

Labor Force (LF)

The number of employed plus unemployed people.

Unemployment Rate

The number of people unemployed as a percentage of the labor force.

Frictional Unemployment

Unemployment due to normal labor market operations and short-run job/skill matching problems.

Structural Unemployment

Unemployment due to economic structural changes resulting in significant job losses in certain industries.

Cyclical Unemployment

The increase in unemployment that occurs during recessions and depressions.

Classical View of the Labor Market

The assumption that wages adjust to equate labor demand and supply, resulting in full employment with no unemployment.

Labor Demand Curve

A graph illustrating the amount of labor firms want to employ at each given wage rate.

Labor Supply Curve

A graph illustrating the amount of labor households want to supply at each given wage rate.

Efficiency Wage Theory

The theory that worker productivity increases with the wage rate, giving firms incentives to pay above-market wages.

Imperfect Information

When firms lack complete knowledge of the market-clearing wage, leading them to set non-clearing wages.

Minimum Wage Laws

Laws that set a wage floor or minimum hourly rate for labor.

Sticky Wages

The downward rigidity of wages that helps explain the existence of unemployment.

Social (Implicit) Contracts

Unspoken agreements between workers and firms stating that firms will not cut wages.

Relative-Wage Explanation

The idea that workers resist wage cuts unless they know all other workers are receiving similar cuts.

Explicit Contracts

Employment contracts that stipulate workers' wages, typically for 1 to 3 years.

Cost-of-Living Adjustments (COLAs)

Contract provisions that tie wage increases to changes in the cost of living.

Phillips Curve

A curve showing the relationship between the inflation rate and the unemployment rate.

Natural Rate of Unemployment

Unemployment occurring as a normal part of the economy, typically the sum of frictional and structural unemployment.

NAIRU

The nonaccelerating inflation rate of unemployment.