When we discussed unemployment in Chapter 30, we noted that people will search a long time to find a good job. So it might only take you two weeks to find a minimum wage job, but it might take you six months to find a job paying five times the minimum wage. Let’s investigate how this simple fact might cause expansionary fiscal policy to increase the unemployment rate, at least temporarily.
In the United States, federal contracts to build roads, bridges, or buildings must pay higher-than-average wages. The law requiring this is known as the Davis-Bacon Act, or the “prevailing wage law.”
a. If the unemployment rate is 6% before a rise in government purchases, and if a rise in government purchases induces the typical unemployed person to search 10% longer in the hopes of finding a high-paying government job, what will the unemployment rate be after the rise in government purchases? Only consider the impact of this waiting-for-a-good-job effect.
b. If the government wanted to get the good aggregate-demand-stimulating effects of fiscal policy, but wanted to eliminate this extra waiting-for-a-good-job unemployment, how could it change current law to do so?