Question

Assume that the real wage in an economy is held above equilibrium. Graphically illustrate how an increase in technology that raises the demand for labor will change the number of unemployed workers. Be sure to label the axes and the quantities of labor hired before and after the technological progress. Explain in words what happens to the number of unemployed as a result of this change. 2. a. b.

Answer 1

Answer: we must recognize that even under the best conditions there will always be some amount of unemployment. Some people will be in the process of moving between jobs. Technological change inevitably leads to job losses in some areaso economy and newjobs in other areas. It takes time for those displaced to relocate. Some degree of unemployment in the economy is thus inevitable and is not a signal that people who want jobs at current wages cannot find them. The normal level of this frictional unemployment is termed the natural rate of unemployment. Frictional unemployment does not appear in Figure 3. The supply curve SS represents only the work offered at various wages by those workers who have found desired employment--it reveals their response at various wages rates when they are fully informed about alternative opportunities. Workers in the process of becoming informed are not part of the analysis The fact that frictional unemployment does not appear in Figure 3 and play a role in the determination of the equilibrium wage rate in the economy highlights the second issue that we must address. Supply and demand diagrams, by construction, assume that every buyer decides what and when to buy at prices he/she takes as given, and every seller decides how much and when to sel at prices that are also taken as given In other words, individual buyers and sellers have no influence on the market price. Market prices are determined by all buyers and sellers together

Figure 3. The Aggregate Labour Market and Effects of Minimum Wages Real Wage Rate The Real Wage Rate is the Money Wage Rate divided by the Price Level. _ Minimum Wage Aggregate Quantity of Labour Employed Lost Jobs

But this raises a fundamental question. What is the process by which prices change? If every buyer and seller takes the price as given, there is no one in the market that performs the act of actually changing the price! The supply and demand diagram assumes that prices get bid up and down while every market participant takes them as given. Indeed, it is as though there were an auctioneer in the background calling out prices to which suppliers and demanders respond. Such an auction mechanism can, in fact, be invoked to provide a rigorous basis for the analysis.