Managing Aggregate Supply and Aggregate Demand
Chapter 5 of Volume I lays out the conditions under which the market for labor clears: Firms hire labor up to the point where the marginal product of labor equals the real wage rate. Workers, in turn, expand their provision of labor until the marginal rate of substitution of leisure for labor income equals the after-tax real wage rate. This brings about an outcome called “full employment.” Corresponding to this state is full-employment GDP or potential GDP.
We can take full employment to be a condition in which the number of job openings just equals the number of workers who want jobs. This does not mean that everyone who wants to work has a job. Unemployment will never be zero. There will ...
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