MacroeconomicsI_working_version (1)

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Labour Market, Unemployment 73 8. Labour Market, Unemployment Contents: 8. LABOUR MARKET, UNEMPLOYMENT .................................................................... 73 8.1. SUPPLY OF LABOUR........................................................................................................ 74 8.1.1. Substitution Effect vs. Income Effect ...................................................................... 74 8.1.2. Individual vs. Aggregate Labour Supply Curve..................................................... 76 8.2. LABOUR DEMAND, REAL WAGES AND PRODUCTIVITY................................................... 77 8.2.1. Shifts in the Demand for Labour............................................................................ 78 8.3. LABOUR MARKET EQUILIBRIUM .................................................................................... 79 8.4. INTERPRETATION OF UNEMPLOYMENT ........................................................................... 81 8.4.1. Rate of Unemployment ........................................................................................... 81 8.4.2. Involuntary Unemployment and Real Wage Adjustment........................................ 82 8.4.3. Types of Unemployment ......................................................................................... 84 8.4.3.1. Frictional Unemployment ............................................................................... 84 8.4.3.2. Structural Unemployment ............................................................................... 84 8.4.3.3. Cyclical Unemployment.................................................................................. 85 8.4.4. Definition of “Full Employment” .......................................................................... 85 8.4.5. Costs of Unemployment.......................................................................................... 85
74 Chapter 8 This chapter is dedicated to the examination of the labour markets and related variables. Let’s first define labour as one of the primary factors of production. Literature offers many definitions of labour 1 . All of them are, however, just the modifications of the essential meaning – the primary factor of production. Labour is a wide term for all the mental and psychical talents of individuals engaged in producing of goods and services in the economy. Labour belongs among the primary inputs (primary factors of production). Labour represents the time spent in a production process. It covers thousands of occupations and tasks corresponding with all skill levels. Labour is considered the most crucial and most conversant factor of production in modern and high-developed economy of these days. Labour, as a factor input, involves relationship of demand and supply. 8.1. Supply of Labour People can divide all their disposable time between time spent in work and their leisure time. Labour supply refers to the amount of time (number of hours) that people are willing to dedicate to working. The labour supply is determined by the size of population and people’s individual preferences – how people want to spend their disposable time. 8.1.1. Substitution Effect vs. Income Effect One of the most frequently examined issues in analysing labour supply is the relationship between change in wages and changes in number of hours supplied. The question is how a rise in wages influences the labour supply – number of hours people want to spend by working in producing GDP. The question is answered in Figure 8.1 where the labour supply curve is depicted. The supply curve rises at first in a north-easterly direction until the critical point C. The slope and the relationship between wages and labour supply is positive in that phase. From the point C, the curve is bent back in north-westerly direction. The relationship is negative. These two parts of labour supply curve refer to substitution and income effect of increasing wage. In lower levels of wages the substitution effect overweighs. The worker is intended to work longer because each hour spent in work is now better paid. The leisure time has become more expensive and workers are motivated to substitute additional hours of working for leisure. The income effect acts against the substitution effect. With the higher wages, worker’s income rises. Thus, he can afford to buy more final goods and services to consume. In addition to that, he will also acquire more leisure time because he can afford it. The result 1 To find more definitions, explore the textbooks named in the list of used literature.
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2 Chapter 1 To understand the funda
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The Phillips Curve 99 ∆P/P ∆W/W
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The Phillips Curve 101 10.3. Moving
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