Taking a Look at the Causes of Unemployment

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The causes of unemployment fall into board categories: equilibrium unemployment and disequilibrium unemployment.

Disequilibrium unemployment 26.3

Shows the aggregate demand for labor and the aggregate supply of labor. That is, the total demand and supply of labor in the whole economy. The real average wage rate is plotted on the vertical axes. This is the average rate expressed in terms of its purchasing power. in other words after taking inflation into account.

The aggregate supply of labor curve (AS) shows the number of workers willing to accept the jobs at each wage rate. This curve is relatively inelastic since the size of the workforce at any one time cannot change significantly. Nevertheless it is not totally inelastic (a) because a higher wage rate will encourage some people to enter the labor market and the (B) the unemployed will be more willing to accept jobs offers rather than continuing to search for a better paid job.

The aggregate demand for labor curve (AD) slopes downward. The higher the wage rate, the more will firms will attempt to economize on labor and to substitute other factors of production for labor.

The labor market is in equilibrium at a wage We in figure 1 where the demand of labor equals to the supply. If the wage were above We the labor market would be in state of disequilibrium. At a wage rate of W1 there is an excess supply of labor A-B. This is called disequilibrium unemployment.

For disequilibrium unemployment to occur, two conditions

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