MacroeconomicsI_working_version (1)

Labour Market, Unemployment 81
Supply
Supply
Real wage
Real wage
Demand
Demand
Labour hours
Labour hours
Figure 8.7 Shifting labour demand and supply. When labour demand increases (panel a), for example
because of aditional capital or technological progress, the real wage and employment level both increase.
When labour supply increases instead (panel b) – because of new entries into the labour force, for instance -
employment rises but the real wage declines.
8.4. Interpretation of Unemployment
The situation described in Figure 8.6 presents a kind of optimal situation in the economy.
Labour market reaches equilibrium at point A, where labour demand equals labour supply.
Let’s assume that total (potential) labour force available in the economy is denoted by L’.
The distance between L and L’ refers to voluntary unemployment. Such unemployment is
a result of voluntarily made decisions about working at given wage rate. The amount of
voluntarily unemployed force in Figure 8.6 relates to the equilibrium wage rate w, which is
likely too low to persuade the voluntarily unemployed labour to reduce their leisure or
other non-market activities and take a job. Some unemployed might wish not to work at all.
However, it should be stressed that character of unemployment depends also on the
decision of the firms, which examine the wage rate as well. There is no labour (hours)
involuntarily unemployed at the real wage w, in the figure.
8.4.1. Rate of Unemployment
The previous example showed the optimum situation of its kind in the labour market.
However, in real world, economies often suffer from involuntary unemployment. The
International Labour Organization (ILO) and The Organisation for Economic Cooperation
and Development (OECD) define an individual as unemployed if he or she does not have a
job during the reference period and is actively looking for a job and is ready to work. Let’s
characterise the labour force as the part of the population that is either working (L) or
unemployed (U). The part of population excluded from labour force involves children,
students at schools, retired people and persons that are not actively seeking for a job.