in the Reins
||Aggregate Supply, Natural Rate of
||Aggregate Supply, Inflation, Natural Rate of Unemployment
| Key Words
||Wage increases, unemployment rate
| News Story
When the unemployment rate falls to levels of 4.6 to 4.7 percent
we would expect there to be a lot of pressure on wages to increase.
So far this year, this has not been the case; employers have been
successful in holding back wage increases. As the unemployment rate
falls, the labor market gets tighter; that is, it gets progressively
more difficult to hold on to current workers and to recruit new
ones. The last time the unemployment rate fell below 5% in the early
1970s, employers had to increase wages to attract and retain workers.
This time is different.
Employers have expanded their recruitment efforts in ways and areas
that were not attempted before. For example, the Walt Disney Company
is recruiting in Puerto Rico where the unemployment rate is three
times that of the US. Companies are looking at areas of the country
and targeting demographic groups that have relatively high unemployment
rates. Jobs are being listed on the Internet. Firms are offering
bounties to employees that recruit individuals to the firm. Some
firms are reducing their standards for jobs that are difficult to
In the past, paying high wages was not as much of a problem as
it is today. Firms could pass the burden of the higher wages to
its customers. Competition, however, has made raising prices while
maintaining profits more problematic. Although firms have to date
been successful in holding down wage increases, many question whether
this can continue.
- What is the natural rate of unemployment?
- Draw a labor demand and labor supply curve carefully noting
the equilibrium wage and employment. Show on this diagram the
impact of an increase in labor demand on the equilibrium wage
- According to the article, what are some of the ways that firms
have moderated the increase in wages? How would you show this
on the above diagram?
- What is the impact on the short-run aggregate supply curve of
an increase in wages? On the long-run aggregate supply curve?
- What is the relationship between the natural rate of unemployment
|| Louis Uchitelle, "Employers Hustle
to Fill Job Rolls, Without Pay Rises," The New York Times,
April 6, 1998.
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