Tuesday, April 5, 2011

Something I've been thinking about for a little while now...

Which of these labor markets is in a recession? What is the reason for your answer? (Sorry for the blurriness).


  1. Well, in the first one, we see a labour shortage. The businesses have hired all the people they could possibly hire, and at the lowest wages those people could ever want. They could try to raise wages, but it won't increase the number of skilled personnel available for their vacancies.

    In the third one, we see unemployment in which only the best and most productive candidates at the highest wages they could ever ask have been hired, and everyone else is redundant.

    So I guess the third one is a recession?

  2. I agree that the third one has unemployment, because there is an excess supply of workers at the given wage. Just because there's some unemployment doesn't necessarily mean that there's a recession... how often is there full employment? It's also important to question how the supply and demand curves are derived. It's interesting to me that Prateek thinks raising wages won't increase the number of skilled workers available while the graph is actually showing that that is exactly what would happen. As wages increase people make themselves available to work (or so the graph implies with an upward sloping supply curve) In my opinion, graph one is not stable, firms will increase wages as long as hiring more workers is profitable for them (the worker's marginal output is not less than the wages they're paid), the second is in equilibrium and stable given stable costs and prices etc and the third one is not stable but persists because wages are more difficult to move down than they are to move up (sticky). That being said, Keynes believes decreasing wages won't necessarily reduce unemployment. But I don't think I'll get started on that...

  3. I'm going to give my take tomorrow - any more thoughts from anyone?

    I have no problem with the price floor and ceiling being either stable or temporary. That's not really essential to what I'm thinking of.

  4. Speaking of HARD questions...

    have you seen the Harvard entrance examination from 1870?


  5. Well, I'm not sure that I "agree" with the way you've separated diagrams one and three, Daniel... My take is that they are just opposite sides of the same coin; the relevant idle resources are not able to find willing counter-parties. There appears to be a structural mismatch and unemployment either way.

    An analogy would be the deadweight loss from any tax, which creates the wedge between consumers and suppliers... The question here is what creates this wedge in the above labour market -- search theory? -- and what determines whether the clearing wage is high or low? I imagine that a possible answer is that for 1) workers can only "find" the low-paying employers, while for 3) suppliers can only "find" the high-wage demanding workers.

    Having said all that, I immediately thought of Dutch Disease when I saw the third diagram.


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