explaining business cycle fluctuations with the classical model outline: 1.the business cycle:...
TRANSCRIPT
Explaining Business Cycle Fluctuations with the Classical Model
Outline:
1. The business cycle: again.
2. Cyclical fluctuations as an equilibrium phenomenon
• Shifts of labor supply
• Shifts of labor demand
3. Cyclical fluctuations as a disequilibrium phenomenon
• Labor union truculence
• Wage legislation
Recessions are shaded
Recessions are shaded
Recessions are shaded
Recessions are shaded
Recessions are shaded
Our next slide will illustratea recession that results from a shift of the labor supply (LS) schedule.
Notice this is an equilibrium situation in that both actual and
potential GDP change.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LD
LS1
100
100
R
$15
$7 Trillion
0
0
B$17
Z
LS2
92
92
$6.5 Trillion
Some economists believe that fluctuations of real
GDP and employment can be explained by shifts in the supply of labor—but they
are in the minority.
Our next slide will illustratea recession that results from a shift of the labor supply (LD) schedule. Again notice this is an equilibrium
situation in that both actual and potential GDP change.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LD1
LS1
100
100
R
$15
$7 Trillion
0
0
$13
Z
LS
2
92
92
$6.5 Trillion
B
LD2
Economists of the 1930’s viewed the Depression as a
“non-market clearing”, disequilibrium
phenomenon. That is, “frictions” in the labor
market were causing the wage to get stuck above its
equilibrium value.
$ Real Wage
Employment(millions)
Employment(millions)
$ Real GDP
A
LS
LS1
100
100
R
$15
$7 Trillion
0
0
Wage is stuck at $17
Now we Have a GDP Gap = $.5 Trillion
$17
92 108
92
$6.5 Trillion
Excess Supply
•Firms may have to pay minimum starting wages and benefits under the terms of collective bargaining agreements with the UAW, Teamsters, UMW, USW, UTW, or other major unions.
•Federal law stipulates minimum wages and contributions for social insurance.