Chapter 3 Productivity, Output, and Employment. Chapter Outline. The Production Function The Demand for Labor The Supply of Labor Labor Market Equilibrium Unemployment Relating Output and Unemployment: Okun’s Law. The Production Function. Factors of production Capital ( K )
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Y = AF(K, N) (3.1)
Y = AK0.3N0.7 (3.2)
Figure 3.2 = Key Diagram 1
MPK declines as K rises
MRPN = P MPN (3.3)
Full-employment output = potential output = level of output when labor market is in equilibrium
affected by changes in full employment level or production function (example: supply shock, Fig. 3.10)Labor Market Equilibrium
Sources: Producer price index for fuels and related products and power from research. stlouisfed.org/fred2/series/PPIENG; GDP deflator from research.stlouisfed.org/fred2/GDPDEF. Data were scaled so that the relative price of energy equals 100 in year 2000.
The natural rate of unemployment ( ) (July 2012)
natural rate of unemployment; when output and employment are at full-employment levels
= frictional + structural unemployment
Cyclical unemployment: difference between actual unemployment rate and natural rate of unemploymentUnemployment
Relationship between output (relative to full-employment output) and cyclical unemployment
(3.5)Relating Output and Unemployment: Okun’s Law
Y/Y = 3 – 2 u (3.6)
Sources: Real GDP growth rate from the Federal Reserve Bank of St. Louis FRED database, research.stlouisfed.org/ fred2/series/GDPCA. Civilian unemployment rate for all civilian workers from Bureau of Labor Statistics Web site, data.bls.gov.