Page 50 - 6727

Economic Theory

types of employment such as frictional, structural or voluntary
employment. Thus, full employment is a situation in which the economy’s
resources are being used fully. In other words, it is zero deflationary
unemployment i.e., a situation in which all those who want to work at the

current rate of wages are, in fact, employed. A worker is said to be
voluntary unemployed when he refuses to work at the current wage rate.

Economists have a term to describe the remaining level of
unemployment that occurs even when the economy is healthy: it is called
the natural rate of unemployment. The natural rate of unemployment is
defined as the amount of unemployment we expect in an economy that is

operating at full employment – that is, it is the level of unemployment that
we expect once we have removed cyclical considerations.
The natural rate of unemployment can seem like an odd concept

because it says that it is normal to have unemployment even when the
economy is booming. But it makes sense because all economies
experience some frictional unemployment as a result of the ongoing
process of matching workers with jobs. Government policies that affect the

flows in and out of employment lead to changes in the natural rate of
unemployment.

3. Wages. Nominal, Real and Minimum Wages
In economics the price paid to labor for its contribution to the process
of production is called wages. Economists have differentiated between

nominal wages and real wages.
The labor market equilibrium is depicted in Figure 1. “Price” on the

vertical axis is the real wage. It tells us how much you can obtain in terms
of real goods and services if you sell an hour of your time. Recalling that
the price level can be thought of as the price of a unit of the real gross
domestic product (real GDP), you can equivalently think of the real wage

as the value of your time measured in units of real GDP.
At a higher real wage, households supply more labor. There are two
reasons for this. First, a higher real wage means that, for the sacrifice of an

hour of time, households can obtain more goods and services than before.
Households are therefore induced to substitute away from leisure to work
and ultimately consume more. Second, as the wage increases, more
individuals join the labor force and find a job. Embedded in the upward-

sloping labor supply curve is both an increase in hours worked by each
employed worker and an increase in the number of employed workers.

50