15.3 What Determines the NAIRU and 15.4 Reducing Unemployment Flashcards
When is the unemployment rate eequal to potential output? What kind of unemployment exists in this situation?
When real GDP is equal to potential output, the unemployment rate is equal to the NAIRU. In this situation there is only frictional and structural unemployment.
Definition of Frictional Unemployment.
Frictional unemployment
Unemployment that results from the turnover in the labour market as workers move between jobs.
What are some sources of frictiona unemployment?
- Young people who enter the labour force and look for jobs.
- People who leave their jobs. Some may quit because they are dissatisfied with the type of work or their working conditions; others may be fired because of incompetence or laid off because their employers go out of business.
- Others may lose their jobs because the jobs themselves are eliminated by the introduction of new technologies.
What is search unemployment?
People who are unemployed while searching for jobs are said to be frictionally unemployed or in search unemployment.
What does the normal turnover of labour cause?
The normal turnover of labour causes frictional unemployment to persist, even if the economy is at potential output.
Why is some amount of frictional unemployment desirable?
Some amount of frictional (search) unemployemnt is desirable because it gives unemployed people time to find an available job that makes the best use of their skills.
What is Structural unemployment?
Structural unemployment
Unemployment caused by a mismatch in skills, industry, or location between available jobs and unemployed workers.
Defined as a mismatch between the current structure of the labour force—in terms of skills, occupations, industries, or geographical locations—and the current structure of firms’ demand for labour.
What do changes that accompany economic growth do tothe structure of the demand for labour?
Changes that accompany economic growth shift the structure of the demand for labour.
Demand might rise in such expanding areas as British Columbia’s Lower Mainland or northern Alberta and might fall in parts of Ontario and Quebec.
Demand rises for workers with certain skills, such as computer programming and electronics engineering, and falls for workers with other skills, such as paralegal services, assembly line work, and middle management.
How do we meet changing demands?
To meet changing demands, the structure of the labour force must change.
Some existing workers can retrain and some new entrants can acquire fresh skills, but the transition is often difficult, especially for older workers whose skills become economically obsolete.
What are some sources of structural unemployment?
Technological changes
or
Increases in international competition
When wil structural unemployment increase/decrease?
Structural unemployment will increase if there is either an increase in the pace at which the structure of the demand for labour is changing or a decrease in the pace at which labour is adapting to these changes.
What kinds of policies tend to reduce the rate at which unemployed workers are matched with a vacent job?
Some countries, including Canada, have adopted some policies that discourage movement among regions, industries, and occupations.
These policies may be desirable for other reasons, but they tend to reduce the rate at which unemployed workers are matched with vacant jobs, and thus tend to raise the amount of structural unemployment.
For two specific reasons, the Canadian employment-insurance (EI) program contributes to structural unemployment…
First, the EI system ties workers’ benefits to the regional unemployment rate in such a way that unemployed workers can collect EI benefits for more weeks in regions where unemployment is high than where it is low. this encourges the unemployed to stay in these regions.
Second, workers are eligible for employment insurance only if they have worked for a given number of weeks in the previous year—this is known as the entrance requirement.
Policies designed to enhance workers’ job security may also tend to increase structural unemployment. How?
Specifically, policies that make it difficult or costly for firms to fire workers also make employers more reluctant to hire workers in the first place.
Such policies, which are common in the European Union, reduce the amount of turnover in the labour market and are believed to be an important contributor to the amount of long-term unemployment in those countries.
In practice, can structural and frictional unemployment be separated?
In practice, structural and frictional unemployment cannot be separated. But the two of them, taken together, can be separated from cyclical unemployment.
Specifically, when real GDP is at its potential level, then, by definition, the only unemployment is frictional and structural and thus the unemployment rate is equal to the NAIRU.
Why Does the NAIRU Change?
The NAIRU can change for two broad reasons. First, anything that alters the amount of adjustment required between firms, occupations, sectors, or regions will cause a change in NAIRU.
Second, anything that alters the ability of the labour force to make these adjustments will cause a change in NAIRU.
Four specific reasons for a change in the NAIRU
Demographic Shifts
Hysteresis
Globalization and Structural Change
Policy and Labour-Market Flexibility
Why do young people typically have higher unemployment rates then older?
Because young people usually try several jobs before settling into one for a longer period of time, young workers have more labour-market turnover and therefore higher unemployment rates than older, more experienced workers.
How has the age of the demographic in the work force changed since the 70s?
The proportion of young workers in the labour force rose significantly as the baby-boom generation of the 1950s entered the labour force in the 1970s and early 1980s. This trend had the effect of increasing the NAIRU during the 1970s and 1980s. But as the baby-boom generation aged, and the fraction of young workers in the labour force declined in the late 1990s and early 2000s, the opposite effect was observed and tended to reduce the NAIRU.
A second demographic trend relates to the labour-force participation of women.
During the 1960s and 1970s women tended to have higher unemployment rates than men. Since this was true at all points of the business cycle, the higher unemployment was higher frictional and structural unemployment.
Thus, when female labour-force participation rates increased dramatically in the 1960s and 1970s, the NAIRU increased.
In recent years, however, female unemployment rates have dropped below the rates for men, and so further increases in female participation will tend to decrease the NAIRU.
How does great labour-foce participation by groups with high unemployment rates effect the NAIRU?
Greater labour-force participation by groups with high unemployment rates increases the NAIRU.
Graph of Canadian Unemployment Rates by Demographic Groups, April 2021