“When unemployment rises, it puts downward pressure on the money wage rate as there is an excess supply of labor at the current rate. Conversely, if the economy is temporarily operating at above full-employment levels, there will be upward pressure on the money wage rate.” I’m not understanding this. If unemployment rises (ie there are less workers), wouldn’t that mean a shortage in the supply of labor causing upward pressure on the money wage rate? Can someone please clarify for me? Thanks.
“If unemployment rises (ie there are less workers)” - Topher if unemployment rises there is decrease in labor working but increase in workers looking for job i.e. demand is less but supply is more (as more workers are unemployed and looking for job)
Put it differently, unemployment rate impacts the money wage rate throught changes in the labor negotiation position: (i) When unemployment rises, the labor negotiation position becomes worse: labor supply (at current rate) exceeds demand -> downward pressure on wages. (ii) When employment rate rises, the labor negotiation position becomes better: labor demand (at current rate) exceeds supply -> upward pressure on wages. Thus, if unemployment rises = a shortage of the supply of work -> more job-seeking workers -> downward pressure on the money wage rate.
Thanks guys. I think I get it now. when unemployment rises, businesses are laying people off, so the demand for workers is less. this also means there are more people looking for jobs, so there is a greater supply of job-seekers. This induces businesses to reduce wages. eventually equilibrium will be reached again when there are just the “right amount” of workers employed and potential workers unemployed and money wages become stable. Is this right?
Yes.