How does an increase in demand affect unemployment?

When unemployment is high, the number of people looking for work far exceeds the number of available jobs. In other words, the supply of labor is greater than its demand. It is strictly decreasing in w because when w increases, the salary of producers increases, so producers become less profitable for companies. The tightness of balance is found at the intersection of aggregate supply and demand with positive consumption on the plane (c, x).

They find that labor demand crises in the form of technological shocks have no effect on the efficiency of the labor market or on the unemployment rate. Lehmann and Van der Linden (20) and Huo and Ríos-Rull (201) also propose models in which aggregate demand influences unemployment through a product market with the same frictions. We use comparative statistics to describe the response of fixed price equilibrium to shocks in aggregate demand, technology, labor supply and imbalances. This result echoes the conclusions of a large number of papers on macroeconomics, including the contributions of Barro and Grossman (197) and Blanchard and Kiyotaki (198), that aggregate demand is important in the presence of price rigidity.

The presence of money in the utility function is necessary to obtain an interesting concept of aggregate demand in a static environment, since without money, consumers would mechanically spend all their income on the good produced (Say's law). An increase in h reflects increases in labor force participation caused by demographic factors, changes in the taste for leisure and work, or changes in policies such as disability insurance. If demand only grows by 1%, then there may be an increase in excess capacity and, therefore, an increase in unemployment due to lack of demand. With fixed prices, a decrease in aggregate demand reduces the rigidity of the product market, which reduces sales made by companies and increases the downtime of employed workers.

Competitive pricing ensures that the aggregate demand curve is always in the position shown in Figure IV, where it intersects the aggregate supply curve at its peak. An increase in aggregate demand has no effect on production, the rigidity of the product market, the inactivity rate, employment, the rigidity of the labor market and the unemployment rate. The equation (implies that the rigidity of the product market responds neither to the shocks of aggregate demand nor to the shocks of aggregate supply, exactly as occurs in competitive equilibrium). This parameterization leads to less clear results because the shock due to mismatch affects both labor demand and labor supply.

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