💼 Labor Market Dynamics

The main types are: frictional unemployment (workers between jobs, searching for better matches — unavoidable and often short-term), structural unemployment (skills or location mismatches between available workers and vacancies — requires retraining or relocation), cyclical unemployment (due to insufficient aggregate demand during recessions), and seasonal unemployment. The natural rate of unemployment is the sum of frictional and structural rates when the economy is operating at full capacity.

The Beveridge curve plots the unemployment rate against the job vacancy rate at each point in time. It typically slopes downward: when unemployment is high, vacancies are low (recession), and vice versa (boom). Outward shifts of the curve indicate declining matching efficiency — more unemployed workers and more vacancies co-existing, suggesting skills mismatches or search frictions have increased.

In a competitive market, a minimum wage above the equilibrium wage would reduce employment. However, when employers have monopsony power (ability to set wages below competitive levels), a minimum wage can increase both wages and employment simultaneously. Empirical evidence (Card and Krueger, 1994) found little employment effect from moderate minimum wage increases, shifting the consensus toward recognising widespread monopsony in labour markets.

A monopsony is a labour market dominated by a single (or small number of) buyer(s) of labour. Like a monopoly in product markets, a monopsonistic employer can set wages below the competitive equilibrium because workers have limited alternative employers. This results in lower wages and lower employment than in a competitive market. Hospital systems, school districts, and Amazon in some regions have been analysed as potential labour market monopsonists.

Efficiency wages are wages paid above the market-clearing rate to boost worker productivity. Mechanisms include: reducing shirking (workers fear losing a well-paying job), reducing turnover (high wages make workers less likely to quit, lowering hiring and training costs), attracting higher-quality applicants, and improving worker morale and health. Efficiency wages can cause persistent unemployment because firms refuse to lower wages even when unemployed workers offer to work for less.