Assignment:
Subject: Productivity and Unemployment
This is a pretend memo for economics. I need to address the memo as if I was working on this campaign for someone running for senator. The memo reads about my last assignment and what the pretend senator is now looking for from me.
MEMO: Great work on the savings rate! Mr. Mallon found your memo very informative and will include it in his notes for the debate.
Now I'd like you to examine a particular policy change in more detail. Mr. Mallon is a big supporter of hi-tech industry, and he wants to propose legislation that will reward companies for developing innovative products. The goal of this legislation is to improve workplace productivity, allowing improved production at a lower cost.
However, some concerns have been raised about this proposal. It has been noted that the labor unions are big potential supporters of Mr. Mallon's candidacy—the unions may not be in favor of any legislation that could reduce jobs. This is especially important now, as the consensus in the economic group is that the economy is already operating below full-employment. Increasing unemployment is not a good political outcome at this time. We need you to look at the issue a bit deeper. What are the likely effects of increasing productivity on equilibrium GDP? Is the increase in productivity likely to move the economy closer to full-employment or farther away?
Another concern involves inflation—we need to know how price levels are likely to change. Given the high levels of unemployment, many workers aren't getting wage raises very easily. Will the change in productivity likely increase or reduce prices in the economy?
Please write another memo for Mr. Mallon addressing these issues. Remember, he needs this information for the debates, so try to be as clear in your explanation as possible.
• Please describe the concepts of full employment, inflationary gaps, and recessionary gaps.
• Please identify and describe the current level of unemployment in terms of current and potential GDP.
• Following the change in productivity, describe the likely changes to equilibrium output, prices, and the unemployment level.