[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

full-employment model, the real wage—the nominal rate adjusted for the price
level—always adjusts to ensure that the labor market clears: that is, labor demand
and labor supply are equal. If, for whatever reason, the demand for labor were to
fall, the real wage should simply decline to maintain full employment. In the real
world, this rarely seems to happen. In the Great Depression of the 1930s, for example,
when unemployment rose dramatically, real wages in the manufacturing sector
for those who remained employed actually rose. 1 More recently, from 2000 to 2002,
unemployment rose from 4 percent to 5.8 percent, yet real hourly earnings rose
by 2.6 percent. Figure 29.4 shows little connection over the past forty years between
the large fluctuations in the unemployment rate that the United States has
experienced and movements in the real wage.
When the real wage fails to adjust in the face of a decline in the demand for labor,
the labor market no longer clears: labor demand is less than labor supply. People
are willing to work at the going wage, but the work is not there. Because firms
demand fewer workers, they stop hiring and even lay off existing employees. As a
result, unemployment rises.
Figure 29.5 illustrates what happens if there is a shift in the demand curve for labor
with no corresponding fall in the real wage. The labor market is stuck in disequilibrium:
demand does not equal supply. At the real wage w 0 /P, the amount of labor
that workers would like to supply remains L 0 . But as the demand for labor shifts,
the number of workers hired at w 0 /P falls from L 0 to L 1 . The difference,
10.00
REAL WAGES (1982 DOLLARS)
9.50
9.00
8.50
8.00
7.50
7.00
3 4 5 6 7 8 9 10
UNEMPLOYMENT RATE (%)
Figure 29.4
REAL WAGES AND UNEMPLOYMENT, 1964–2003
When real wages and unemployment are plotted on a graph, no pattern emerges.
Apparently large changes in unemployment may be accompanied by relatively small
changes in real wages.
SOURCE: Economic Report of the President (2004), Tables B-42, B-47.
1 Nominal wages did fall during the Great Depression, but prices fell even more; consequently, the real
wage rose.
644 ∂ CHAPTER 29 INTRODUCTION TO MACROECONOMIC FLUCTUATIONS