Encore
Presentation on
Unemployment
Additional types of
unemployment
You remember the three
types we talked about
last time right Rubber
Duck Boy?
What are they young
man?
Unemployment when
we are not at potential
GDP
 The three types of
unemployment we
discussed last class all exist
even if the economy is at the
full employment level of
GDP. But what kinds of
unemployment exists when
we are in a recessionary
gap?
Real Wage
Unemployment
 This type of unemployment
occurs when there is a
disequilibrium in the labour
market. It appears when the
actual real wage is greater than
the equilibrium real wage giving
rise to a labour surplus.
 How can this happen Ms. Yeung?
Real Wage
Unemployment
Artificially high wage rates
leads to a decrease in SRAS
How to fix this
problem?
 The artificially high wage
rates can be reduced if we
destroy unions and lower or
eliminate minimum
wage….but you can’t force
firms to pay workers
less….but some would
argue that SRAS would shift
to the right
Economic Cat Fight
 During the Great
Depression, classical
economists argued the high
unemployment rate was
caused by artificially high
wages. Keynes of course,
thought they were ignorant
Keynes’ Explanation
 Keynes argued that there was
insufficient aggregate demand in
the economy, caused by
pessimistic business
expectations which led to a
virtual standstill in private
investment. When the animal
spirits are quiet, so is the
economy.
Cyclical
Unemployment
 Keynes’ argument against
real wage unemployment
led to the idea of cyclical
unemployment, aka
demand-deficient
unemployment….but some
still argue that
unemployment is caused by
high wages
Cyclical
Unemployment
 Cyclical Unemployment occurs
when the economy is in a
recessionary gap caused by a
decline in AD. Eliminate the
recessionary gap and you
eliminate Cyclical
Unemployment, leaving just the
other three types of
unemployment.
Keynesian solution to
Cyclical Unemployment
Keynesian solution to Cyclical
Unemployment from the
Neoclassical side
So what types of
unemployment can we have
during a recessionary gap BS
man?
So what types of
unemployment can we have
at full employment Head Boy?
What do we know about
unemployment if we are in an
inflationary gap Mung Lok?
Government Policies
 So what can the government
do to reduce the natural rate
of unemployment?
 Express your answer with
reference to either the AD,
SRAS or LRAS curves.
Government Policies
 So what can the government
do to reduce real wage
unemployment?
 Express your answer with
reference to either the AD,
SRAS or LRAS curves.
Government Policies
 So what can the government
do to reduce cyclical
unemployment?
 Express your answer with
reference to either the AD,
SRAS or LRAS curves.
Lucky people who didn’t get
their photos shown
Let’s not forget
Last but not least