Relationship Between Unemployment, Labor Market And Microeconomics Term Paper

Length: 10 pages Sources: 4 Subject: Economics Type: Term Paper Paper: #32712612 Related Topics: Keynesian Theory, Unemployment, Unemployment Rate, Macroeconomics
Excerpt from Term Paper :

Labor Market, Unemployment

Defining and classifying Unemployment

There is a level of unemployment in any economy, which is not automatically a bad thing, as most people would think. The presence of a level of unemployment, which usually is presented as a percentage, indicates that at any one given point in that economy, there are people looking for work and managers looking for better employees. In economics, the only important factor to look at while determining the level of unemployment is the number of employees who are eager to work but who cannot find work. Unemployment refers to circumstances where there are unwanted job losses and willing workers without jobs. The jobless are those individuals who are currently unemployed but who are actively seeking jobs. A person cannot be referred to as unemployed when they are not looking for a job. Consequently, in economics, not everyone who is not employed is referred to as unemployed (Romer, 2011).

Defining and classifying Labor Market

The market within which top management look for employees and establish the amount of earnings to pay to each employee and employees look for employment opportunities is referred to as the labor market. Smaller and interrelated markets with different skills, training and locations make local and international markets. Labor markets exchange information about employment conditions, wage rates, level of competition and working location amid workforce and job seekers. Generally, the more common jobs such as drivers, secretaries, clerks and so on act as the starting point from which the general earnings are established in a labor market and organization (Romer, 2011).

Defining and classifying Microeconomics

The branch of economics that examines the way in which companies, individuals as well as households assign the scarce resources in the society is referred to as microeconomics. On the other hand, macroeconomics analyzes the mechanisms of the national economy at large, such as output, income, developing, testing and employing models and hypothesis about the way the national economy works. The theories developed in macroeconomics are then employed to determine how economic policies will be used and also to forecast certain events that or impact the national economy either positively or negatively (Romer, 2011).

Many people view economics as a complex study of tables, statistics, charts and numbers. In actuality, economics simply studies human behavior to satisfy needs and wants, on the assumption that this behavior is rational (Romer, 2011).

The relationship between unemployment, labor market and microeconomics

Unemployment is beneficial for any economy as it keeps the levels of inflation in check. Even in very healthy economies, some level of unemployment has to be present. It is for this reason that a natural ratio of unemployment was established. The natural ratio of unemployment was created by two renowned American, Edmund Phelps and Milton Friedman, who also won the Nobel Prize in economics. The natural state of unemployment in the U.S. right now stands at around five percent (Acocella et al., 2008).

There are four different types of unemployment which leads to there being a level of unemployment in the economy. They include: frictional, structural, seasonal, cyclical and surplus unemployment. For instance, Frictional unemployment takes place when skilled workers abandon their current job and start searching or wait for a job that fits their skills in future. Workers may look for a job that pays more or one that is more fruitful compared to their current work (Acocella et al., 2008).

Structural unemployment has been considered as being more serious than frictional unemployment. Structural unemployment takes place when willing workers do not have the required skills for a certain job. Structural unemployment is affected by alterations in the customers' demands and technology both occupationally and geographically. Geographically, certain skills are required more in some areas more than in others, while occupationally, certain skills are in...


Cyclical unemployment occurs due to businesses not having enough need for labor to employ workers who are unemployed. When the business cycles are at their peak, then unemployment is low while if the cycles are low, unemployment is high (Acocella et al., 2008).

Seasonal unemployment occurs at certain times of the year, as the word suggests. An example of seasonal unemployment is what happens to fishermen. They can only fish during the fishing season. If fishing is the only job they have, they will remain unemployed until the next fishing season. Other examples of jobs whose employees experience seasonal unemployment are the forestry and construction jobs. All these are jobs which are affected by seasons and weather. Workers can avoid being jobless by planning ahead whereby they hold other part-time jobs during the low season (Acocella et al., 2008).

The neoclassical labor philosophy proposes that the labor market functions just like other marketplaces where there are commodities to be bought with a price. The major good within the labor marketplace is labor. Labor, in economic theory is seen as one of the four elements of effective production be it the neoclassical theory or even the Keynesian theory. The approach assumed by the neoclassical theory relating to the examination of the labor market is that of assessing the microeconomic stage. It utilizes the methodological apparatus of microeconomics to decide how much salary to pay for which level of work (Acocella et al., 2008).

The neoclassical philosophy views unemployment as voluntary. It goes on to explain that voluntary unemployment occurs because a person decides to stay unemployed because he is not willing to be paid the low wages that are on offer in the market with the hope that soon a better paying job will come his way. Unemployment which is deliberate is also as a result of an employer refusing to employ a well qualified worker because his salary cannot be lowered owing to government agreements. Both of these situations showcase the inability of the labor market to function in a perfect competition environment, because workers have insufficient information about vacancies or because of inflexibilities in the market. The result of lack of proper information regarding vacancies and the rigidity brought about by monopolistic tendencies in the market such that the wages for certain skills cannot be lowered is an unbalanced labor equilibrium whereby there is permanent unemployment in the market. The solution suggested by the neoclassical philosophy is the establishment of conditions that promote perfect competition. This way, it will be easier for the price-salaries to bring the labor market to stable equilibrium, consequently eliminating unemployment (Acocella et al., 2008).

In line with the informal contracts paradigm (Azariadis 1975; Barlevi, 2001) the inflexibility of wages are calculated from the micro level. In most cases, money wages are agreed upon between the company and employees in an environment typified by improbability. In periods of economic predicament, employees have to agree with the employers to be paid lower wages (Acocella et al., 2008).

The efficient wages theory proposes that when deciding the salary to pay to an employee, both the quantity and the quality of work that the employee is expected to do should be put into consideration. The quality is calculated by the level of labor intensity, labor productivity and so on (Acocella et al., 2008).

The classical view proposes that the rate of wages always adjust to clear unemployment because to them wage rate can be variable. To the classical economists, unemployment does is non-existent. They illustrate their views through the labor supply curve which shows the amount of labor that households wish to supply and the labor demand curve which shows the amount of labor that firms want to employ at certain wages. If firms require few workers, the labor curve shifts to the left. The wage rate will eventually decline when fewer workers are required by the firm. The classical economists believe the labor market might reach its best levels if it's left to regulate itself. This means that individuals who happen to be unemployed are those who do not want to work at the wages on offer in the labor market, and not necessarily owing to the non- availability of jobs for them in the marketplace (Acocella et al., 2008).

The theory of negotiations is another effort by neoclassical economists to clarify why the labor marketplace is devoid of any competitive. It also tries to explain why trade unions as well as collective bargaining deals have developed in capitalist countries. In line with this theory, these talks that involve the union members and the employer lead to unemployment as the members are sheltered by their unions from being exploited by employers, which creates inflexibility in the labor market on wages and employment (Blundell and MaCurdy, 2008).

The labor market is not unique in its structure and form. This is the view of the theory of imperfections in the labor marketplace. There are institutional factors in the labor market, which led the neoclassical economists to link unemployment to the dual nature of the labor market. Two sectors of the…

Sources Used in Documents:


Acocella, N., Bartolomeo, D., and Hibbs, DA., (2008), Labor market regimes and the effects of monetary policy, in: Journal of Macroeconomics, 30: 134-56.

Arestis, P., (1986), Wages and Prices in the UK: the post Keynesian view, Journal of Post Keynesian Economics, 8, 3, p339

Azariadis, C., (1975), Implicit contracts and unemployment equilibria, Journal of Political Economy 83, 6, 1183-1202.

Barlevi, G., (2001), Why Are the Wages of Job Changers so Procyclical? Journal of Labor Economics, 19, 837-878

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