What will happen to Unemployment?
Economist had tackled the reason to unemployment for years. But economist agrees that it had to do with a basic demand and supply problem. Refer to the image, Economist believed that unemployment is caused when demand doesnt equal to supply. Well, more specifically when there are more workers then job available. Labour Supply that have no surprise are the workers of the economy. Labour demand is the firms that needs worker in order to produce, and arguably it is just the 1st partial derivative of the production function in respect to labour, which is called marginal product of labour. So, here is the problem, given the production function: Y= ln(KL), where Y = real GDP, K = Physical Capital like materials and L = Physical labour, find the labour demand function. The economy already had 5% of unemployment and suppose there was an earthquake hitting the country and destroyed 50 % of their physical capital K. What will happen to the unemployment rate?
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1 solution
Capital stock will determine the rate at which Labour is absorbed in the economy. If capital stock is destroyed then the capacity of the economy to absorb (ie the level of employment) will decrease. This implies an obvious increase in the level of unemployment.