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Explaining Business Cycle Fluctuations with the Classical Model

Explaining Business Cycle Fluctuations with the Classical Model. Outline: The business cycle: again. Cyclical fluctuations as an equilibrium phenomenon Shifts of labor supply Shifts of labor demand Cyclical fluctuations as a disequilibrium phenomenon Labor union truculence

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Explaining Business Cycle Fluctuations with the Classical Model

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  1. Explaining Business Cycle Fluctuations with the Classical Model • Outline: • The business cycle: again. • Cyclical fluctuations as an equilibrium phenomenon • Shifts of labor supply • Shifts of labor demand • Cyclical fluctuations as a disequilibrium phenomenon • Labor union truculence • Wage legislation

  2. Quarterly GDP, 1996 Dollars, Annual Rate Recessions are shaded www.economagic.com

  3. Employment in Manufacturing Industries, Monthly, in Thousands Recessions are shaded www.economagic.com

  4. Housing Starts, Monthly, Annual Rate, in Thousands Recessions are shaded www.economagic.com

  5. Monthly Consumer Durable Goods Sales, 1996 Dollars, Annual Rate Recessions are shaded www.economagic.com

  6. Our next slide will illustratea recession that results from a shift of the labor supply (LS) schedule. Notice this is an equilibrium situation in that both actual and potential GDP change.

  7. LS2 $ Real Wage LS1 B $17 $15 A LD 0 $ Real GDP 92 100 Employment(millions) $7 Trillion R $6.5 Trillion Z 0 92 100 Employment(millions)

  8. Some economists believe that fluctuations of real GDP and employment can be explained by shifts in the supply of labor—but they are in the minority.

  9. Our next slide will illustratea recession that results from a shift of the labor supply (LD) schedule. Again notice this is an equilibrium situation in that both actual and potential GDP change.

  10. LS2 $ Real Wage LS1 $15 A $13 B LD1 LD2 0 $ Real GDP 92 100 Employment(millions) $7 Trillion R $6.5 Trillion Z 0 92 100 Employment(millions)

  11. Economists of the 1930’s viewed the Depression as a “non-market clearing”, disequilibrium phenomenon. That is, “frictions” in the labor market were causing the wage to get stuck above its equilibrium value.

  12. $ Real Wage Excess Supply LS1 Wage is stuck at $17 $17 $15 A LS 0 $ Real GDP 92 100 108 Employment(millions) $7 Trillion R Now we Have a GDP Gap = $.5 Trillion $6.5 Trillion 0 100 92 Employment(millions)

  13. Why does the labor market fail to clear? • Firms may have to pay minimum starting wages and benefits under the terms of collective bargaining agreements with the UAW, Teamsters, UMW, USW, UTW, or other major unions. • Federal law stipulates minimum wages and contributions for social insurance.

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