Key Terms

adverse selection of wage cuts argument: if employers reduce wages for all workers, the best will leave

cyclical unemployment: unemployment closely tied to the business cycle, like higher unemployment during a recession

discouraged workers: those who have stopped looking for employment due to the lack of suitable positions available

efficiency wage theory: the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more

frictional unemployment: unemployment that occurs as workers move between jobs

implicit contract: an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong

insider-outsider model: those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires

labor force participation rate: this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job

natural rate of unemployment: the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time

out of the labor force: those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”

relative wage coordination argument: across-the-board wage cuts are hard for an economy to implement, and workers fight against them

structural unemployment: unemployment that occurs because individuals lack skills valued by employers

underemployed: individuals who are employed in a job that is below their skills

unemployment rate: the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

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