How does an increase in labor demand affect unemployment?

If the economy is booming, employers will push harder for workers, which means that the demand for labor is increasing at an accelerated rate (that is, this study analyzes how certain favorable changes in labor demand affect job search). While all shifts increase reserve salaries, they do not necessarily decrease the expected duration of the unemployment period or increase expected salaries after unemployment, so that short-term Phillips curves may appear with an upward slope. The result obtained by Chamberlain is used to demonstrate that if the distribution of wage supply is restricted to being concave logarithmic, two of the changes guarantee Phillips curves with a downward slope. For one of these two changes, previous research by Flinn and Heckman used the logarithmic concavity in a different way to achieve Phillips curves with the proper shape.

The evidence presented here suggests general guidelines that allow policy makers to have an overview of the direction and, in some cases, the sizes of the impacts of proposed increases in labor costs on outcomes, such as employment and hours. The figure also implicitly underlines the importance that what matters is the fraction of workers whose salaries are low enough that an increase in the legal minimum could affect demand for their services. Therefore, a good way to generalize about differences in how employers respond to increases in labor costs for multiple workers is to consider how qualified workers are. To address the question of causality, some studies focus on specific examples of the impact of crises that alter the number of workers available to employers or that consider externally imposed changes in labor costs.

You know from chapter 3 that the substitution effect of a wage increase (which leads to choosing more working hours and less free time) can be offset by the effect on income. Other policies that affect labor supply include policies to improve employment opportunities for women, such as subsidized child care and the reduction of discrimination against disadvantaged minorities. The profit margin chosen by the company when setting its price to maximize its profits is determined by the amount of competition the company faces, so it is not affected by increased productivity. The few studies that exist indicate that the responses to changes in the cost of labor through these more drastic channels do not differ, on average, much from those resulting from plant expansions or contractions.

Similarly, if employers pay taxes on a small amount of a worker's annual wage, as is the case in the United States with the tax that finances unemployment insurance, labor costs are not reduced if the hours per worker are reduced if the hours per worker are reduced. For the adjustment from B to X to occur, companies across the economy have to adjust wages and prices downward and, in response, businesses and households have to increase their demand for goods and services enough to restore demand across the economy (or aggregate) to its level at point X. This raises the question of whether it is rising labor costs that causes employment to fall, or if an increase in demand for workers causes employers to increase wage rates. We saw that if an economy has low aggregate demand with high cyclical unemployment, then the automatic adjustment to return to equilibrium could occur through a process of wage and price cuts.


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