Consider the economy of a small nation which is currently in equilibrium with no
ID: 1123764 • Letter: C
Question
Consider the economy of a small nation which is currently in equilibrium with no unemployment. Its labor supply is given by Ls = -2,000,000+300W and its labor demand by Ld = 22,000,000-100W. Denote yearly wages by W and the number of workers by L. Suppose a global recession causes structural unemployment in this particular nation: labor demand falls while wages are downward sticky and there is no population change. The new labor demand is: Ld = 18,000,000-100W.
1.) Find the number of unemployed workers after the negative shock.
2.) Find the unemployment rate.
Explanation / Answer
(1) In labor market equilibrium, Ld = Ls
22,000,000 - 100W = - 2,000,000 + 300W
400W = 24,000,000
W = 60,000
Since this is downward sticky, this will be the prevailing wage rate even after negative shock. With new demand curve,
Ld = 18,000,000 - (100 x 60,000) = 18,000,000 - 6,000,000 = 12,000,000
Ls = - 2,000,000 + (300 x 60,000) = - 2,000,000 + 18,000,000 = 16,000,000
Number Unemployed = Ls - Ld = 16,000,000 - 12,000,000 = 4,000,000
(2)
Unemployment rate = Number unemployed / Ls = 4,000,000 / 16,000,000 = 0.25 = 25%