Video Transcript: Lesson 20

Okay, welcome back. We're continuing here, Unit Seven. So we're in Lesson  Two now. We'll discuss theories of unemployment. So, where do we want to go  from here? Right. One natural approach is to start from the figure that we  discussed in the last video, the labor market, but look for circumstances in which we would see unemployment. So the figure that we'll find here on this page,  you'll see that unemployment in the labor market shows us that there will be  unemployment if the real wage in the market is too high. That is above the  equilibrium wage. If this is the case, the amount of labor that workers want to  sell is greater than the amount the firms want to buy. So some workers will want  a job, but they'll be able to unable to find one. So therefore, they'll be  unemployed. So if the real wage is sticky, it may be higher than the equilibrium  real wage. So if it's artificially too high, it may be if the real wage is artificially too  high, which is known as being sticky, it may be higher than the equilibrium real  wage. So that means that some workers who want to work are still unable to find a job because the prices for employment is too high, and employers are not  looking to pay that much for labor at that time. So because the real wage in the  market for a particular job is too high, and these firms don't want to pay that,  they'll not hire, and so that'll force the demand for labor down. So, in the  previous figure here, unemployment in the labor market. This shows us what the labor market must look like for there to be unemployment, but it's hardly an  explanation of unemployment. Okay, economists typically expect markets to look like this figure. This figure here, okay, but that is if they think that the price in a  market is in the real wage terms able to ensure that supply equals demand. If  we want to explain unemployment with a picture like this, okay, where prices are artificially too high or sticky, then unemployment will also need to understand  why real wages are that way, right? So they remain above equilibrium wage. So  if prices are too high, we need to figure out why they're so high. Okay. Over the  years, economists have offered several stories about why wages might be too  high, stickier, inflexible. Okay. One story is that the wage is not able to decrease  by law, right? So there's a standard minimum wage, right? So you can't  decrease that by law. Many economies have a minimum wage, right? So this  could explain some unemployment for some jobs. They may not. Some  employers may not want to spend the minimum wage, so they'll freeze where  they are and maintain current wages. A difficulty with this is the explanation that  the minimum wage affects only low-income workers. Most workers in the  economy actually earn a wage above the legal minimum wage and are  unaffected by this legislation. But as minimum wage laws increase the price for  wage for labor, some employers that typically hire low wage workers as the  minimum wage legally increases, they some of these low employer low you  know some of these employers that hire low skilled workers or low wage  workers may decide to cut back further because the minimum wage increases.  They have a budget on labor, and if the minimum wage laws increase, then 

they're going to have to pay more money out towards that labor, and then  therefore they'll be over budget, and they're not going to meet their profit  margins, and therefore they'll start cutting labor. This is just the reality of  business and how it works. It may not be fair all the time, but there are  employers. That operate like this, so we need to make sure that as a socially  responsible employer, we need to make sure that we're not always worried  about the profit margins, but about the employee itself and their well-being.  Profit margins aren't always, you know, the end all. But in the corporate world, at times, it is the end all. So, unfortunately, we are affected by these things in the  market where people will lay off low-income workers because the wages rise too high. That's unfortunate. But this is the business environment that most of the  world operates under, especially in capitalism. All right, another possibility is that firms find it difficult to adjust wages downward. The market for people's time is  not like the market for bread. Right, pay cuts are very visible to workers and are  likely to meet a great deal of resistance. If a firm tries to cut wages, it's likely to  find its workers become less motivated, and that its workers start looking for  other jobs at other companies. Right, so people can see that pay cuts are  coming. Right, people are gonna, you know, maybe just leave that altogether  and go find another job. So, you know, a lot of these, a lot of people that work  are operating on fixed budget, and you know they have a family to provide for.  So, if firms start cutting back or start cutting wages, you know, they're gonna  have no choice but you know but to sustain their way of life, so they'll have to  start looking for other jobs. So as you see, both of these stories are really just  explanations of why nominal wages may be unable to adjust. There's market  factors outside of just wage laws and you know market wages that affect and  impact you know employers' willingness to hire and employers' willingness to  grow their labor force. Employers need to cut back. So all of those factors factor  into why you know real wages can deter the demand for labor. Even if the  nominal wage is fixed, real wages decrease when the price level increases. It  follows these rigidities in the nominal wage, and it translates into real wage only  if the price level is sticky too, right? So prices in an economy may indeed be  sticky or artificially above equilibrium price in the short run, so sticky wages or  artificially high wages and prices do provide one explanation for short periods of  unemployment. Such unemployment is sometimes called cyclical  unemployment. Okay. In the long run, however, we would expect the labor  market to return to an equilibrium with zero unemployment in the real world, that usually doesn't happen with zero unemployment. It's very, very, very, very rare. I  don't know if there's any point in American history where there has been zero  unemployment, or potentially world history where there's been zero  unemployment, but you know economists use these models as ability as tools to foresee the future and predict how things are cyclical in a market. So on a  economist model, zero unemployment would be the ultimate basis for where 

they want to end up. Actually, so they base everything back onto a return to  equilibrium with zero unemployment. That all factors in the market are perfect,  which is never true. So cyclical unemployment is the component of  unemployment that depends on the business cycle. So during a recession,  cyclical unemployment is relatively high. Right, we experienced that 2007, 2008, 2009 in the United States and then across the world as the financial crisis was  underway, and this was a relatively high level unemployment that of  unemployment at that time. So, but also conversely, you'll see in periods of  economic expansion that cyclical unemployment is low or non-existent. So you  see in 2018 in the. States that the economy is expanding quickly, and  unemployment is relatively very low or non-existent. I think in America, I think it's October 2018 right now. We're seeing 3.8 unemployment, so that's very very low and very favorable for a growing market. But we always observe some  unemployment, which tells us that sticky or artificially high nominal wages and  prices cannot be the whole story for unemployment.