Deck 14: The Labor Market in the Macroeconomy

Question 1

What is the labor supply curve?

Answer 1

It is a graph that illustrates the amount of labor that households want to supply at each particular wage rate.

Question 2

Using the above graph, if labor becomes less productive what can we expect will happen in the labor market?

Answer 2

This will cause the labor demand curve to shift to the left and this will lower the equilibrium wage rate and the level of employment.

Question 3

Based on the classical view of the labor market, explain the characteristics of the aggregate supply curve.

Answer 3

Because the labor market adjusts so quickly to changes in demand and supply, the labor market also adjusts quickly to changes in the price level. If there is an increase in the price level, the wage (nominal) will quickly adjust to this change in P. In this case, wages would adjust completely to any changes in the price level. Because wages adjust to changes in the price level, the aggregate supply curve, based on the classical view, would be vertical. Specifically, changes in the price level will have no effect on the level of output.

Question 4

Assume that the percentage of the labor force covered by labor contracts that set wages for a predetermined period of time increases. How will this impact the effectiveness of fiscal and monetary policy?

Question 5

Assume that wages are sticky in a downward direction. Show with the use of a graph what will happen when there is a decrease in labor demand.

Question 6

Define cyclical unemployment.

Question 7

Using the above graph, if the labor demand curve were to shift to the left as depicted and firms enter into social, or implicit, contracts with workers not to cut wages what will be the wage rate and the level of employment.

Question 8

According the Classical view what are the only types of unemployment that exist in any economy?

Question 9

What school of thought would be consistent with the following statement: "Anyone who is willing to work at the current market wage but is unable to find work is unemployed."

Question 10

Using the above graph, what is the equilibrium wage and the equilibrium number of workers that will be employed?

Question 11

Differentiate between frictional unemployment, structural unemployment, and cyclical unemployment.

Question 12

According to the Classical view, what are the factors that are used by the household in determining how much labor to supply? Why might some members of the household decide not to be part of the labor force?

Question 13

Use a graph to demonstrate how the Classical view of the labor market will respond if there is a decrease in the demand for labor.

Question 14

Why do the Classical economists argue that excessive unemployment won't persist in an economy for very long?

Question 15

Using the above graph, if the labor market is initially in equilibrium at a wage rate of $8 and suddenly people start to value leisure more highly what will happen in the labor market?

Question 16

Using the above graph, suppose there is a decrease in the fertility rate and this causes some men and women to place a lower value on their time spent in non-market activities. How will this affect the labor market?

Question 17

Using the above graph, if the wage rate is $12 what does the Classical view argue will happen in this labor market?

Question 18

Briefly discuss the classical view of the labor market. Specifically, to what extent can unemployment occur based on the classical view? Explain.

Question 19

Using the above graph, if the labor demand curve were to shift to the left as depicted and wages are sticky what will be the result in the labor market?

Question 20

If firms start offering more employment benefits, such as more stock options, and a better dental plan, how will this affect the labor market?

Question 21

Classical economists argue that when the labor market is in equilibrium, those people who are not working are those who have CHOSEN not to work at that market wage. Why might an individual choose not to work at the market wage? Do you agree with the classical view of the labor market? Why or why not?

Question 22

What does the social contract explanation for sticky wages focus on?

Question 23

Assume that the percentage of the labor force covered by labor contracts that set wages for a predetermined period of time decreases. How will this impact the effectiveness of fiscal and monetary policy and why?

Question 24

What is the labor demand curve?

Question 25

Explain how social or implicit contracts might result in sticky wages.

Question 26

Explain how incomplete or imperfect market information may contribute to unemployment.

Question 27

Use the Economics in Practice titled "Long Recession Ignites Debate on Jobless Benefits" to answer the following question. What was at the heart of the debate concerning extending the unemployment benefits during the 2008 recession? What does the empirical evidence seem to suggest?

Question 28

Why do Classical economists believe that the labor market always clears?

Question 29

Explain the efficiency wage theory. Why would a firm be willing to pay an efficient wage?

Question 30

What would be the definition that classical economists would use for unemployment?

Question 31

Explain how the minimum wage laws may cause unemployment. What age group is most adversely affected by the minimum wage law?

Question 32

What explanations do those economists who do not hold the classical view of the labor market offer for the existence of unemployment?

Question 33

Explain how a decline in the demand for labor does not necessarily mean that unemployment will rise.

Question 34

Graphically illustrate an increase in the labor supply curve and explain its impact on the equilibrium wage rate and quantities. On a separate graph, illustrate an increase in the labor demand curve and explain its impact on the equilibrium wage rate and quantities.

Question 35

Graphically illustrate and describe the principle of sticky wages. What are some causes of inflexible or sticky wages?

Question 36

According to Classical economists, how will the economy respond to an increase in the demand for output?

Question 37

Explain why Classical economists argue that the unemployment rate is not a very accurate indicator of whether the labor market is working properly.

Question 38

Using the Classical view, draw a graph which illustrates the impact of a decline in the demand for labor on the wage rate and the equilibrium level of employment.

Question 39

Explain how the value that people place on the time they spend on nonmarket activities affects their decisions with respect to participation in the labor force.

Question 40

Explain the relative-wage explanation of unemployment.

Question 41

Compare and contrast the impact of minimum wages on high skilled workers and teenage workers.

Question 42

Using a labor supply and demand curve demonstrate the effect of a decline in the demand for labor assuming wages are "sticky" in a downward direction.

Question 43

What is the social contract explanation for the existence of downwardly sticky wages? Why do you suppose that firms and workers behave this way?

Question 44

What do economists mean when they refer to "sticky wages?"

Question 45

Using the graph above, if a minimum wage of $12 is imposed on this labor market identify the quantity of labor supplied, the amount of labor actually hired, and the total level of unemployment.

Question 46

Using the graph above, what will happen in the labor market if a minimum wage of $8 is imposed?

Question 47

How does the efficiency wage theory help explain the existence of unemployment?

Question 48

If firms set wage rates on the basis of imperfect information and overestimate worker productivity, what is the likely impact on wages and the unemployment rate?

Question 49

Using the graph above, provide three reasons why a firm might be willing to offer a wage rate above $10.

Question 50

Discuss the relative-wage explanation of unemployment.

Question 51

Intel Corporation, a major manufacturer of microchips, saw the demand for its product drop by 25%. Even though the demand for its product decreased, Intel did not cut the wages of its non-unionized workers. What is this an example of?

Question 52

What might be the potential benefit that firms are likely to receive if productivity increases as wages increase and firms pay a wage that is above the market clearing wage? Why is this benefit so important?

Question 53

What are social contracts?

Question 54

Explain efficiency wage theory.

Question 55

What are minimum wage laws?

Question 56

What are explicit contracts?

Question 57

Explain how explicit contracts might help explain sticky wages. Also, briefly explain why workers and firms would enter explicit contracts.

Question 58

It is well known that Henry Ford's payment of his workers of five dollars a day was higher than his competitor for a short while. Why did Ford do this and what were the advantages to him of doing so? What wage theory does this appear to be in accord with?

Question 59

What are cost-of-living adjustments?

Question 60

List several potential benefits firms receive from paying efficiency wages which empirical studies have revealed.

Question 61

If aggregate demand increases and expectations regarding inflation remain constant, what impact if any does this have on the short-run Phillips curve?

Question 62

During the 1960s, the Phillips curve relationship was relatively stable. During the 1970s, the Phillips curve relationship was unstable. Based on your understanding of the aggregate supply and aggregate demand model, explain why this was so.

Question 63

Explain what the Phillips curve represents.

Question 64

Explain what the Phillips Curve shows.

Question 65

Explain what role import prices play in determining the Phillips curve.

Question 66

Show with the use of a graph why minimum wage laws can cause unemployment.

Question 67

What sequence of events results from a decrease in aggregate demand? Explain the impact on the price level, inventories, output and employment.

Question 68

Use the above graph to answer the following question. Suppose the economy is at Point A, what will be the effect in the short run of an increase in money supply? Where will this move the economy?

Question 69

What would the Phillips curve look like if every year there was a regular shift in the aggregate supply curve to the left but with no corresponding change in the aggregate demand curve, that is, aggregate demand remained constant.

Question 70

Use the above graph to answer the following question. Suppose the economy is at Point C, what could possibly move the economy to Point D?

Question 71

What is the short-run relationship between the unemployment rate and the price level?

Question 72

Suppose that empirical evidence demonstrated that at a 10% inflation rate the unemployment rate was 4% and that every 2% decline in the inflation rate translated into a 1% increase in the unemployment rate. Draw a graph showing this relationship. Place the inflation rate on the vertical axis.

Question 73

What sequence of events results from an increase in aggregate demand? Explain the impact on the price level, inventories, output and employment.

Question 74

What is the short-run relationship between the unemployment rate and output?

Question 75

If the AS curve shifts from year to year, but the AD curve does not, then what kind of relationship would we expect between inflation and unemployment?

Question 76

Explain how the minimum wage laws account for a percentage of unemployment.

Question 77

Using the above graph, how does an unemployment rate of U₁ compare to the natural rate of unemployment?

Question 78

Draw a graph of the Phillips Curve.

Question 79

Explain what role expectations play in determining the Phillips curve.

Question 80

If the economy experiences both inflation and unemployment when aggregate supply decreased, then what must have happened to aggregate demand?