8 Unemployment & Economic Growth Flashcards
What does the labor market consist of for supply & demand?
Supply - price of labor (real wages)
Demand - qty (employment)
Demand for labor is a derived demand meaning?
Strong demand for output by worker means strong demand for labor
2 factors that demand for labor depend on?
- Productivity of worker
- Price of worker’s output
Both increase - increase employment
What is diminishing returns to labor?
Assuming non-labor (factories & machines) inputs held constant - adding one worker increases output but by LESS than the previous worker added
What is Value of Marginal Product (VMP)? Formula?
Extra revenue that an added worker generates
(Demand for labor)
Marginal product x Price
Hire when MB (VMP) >/= MC (wage). The lower the wage, the more workers employed. True or False?
True - Demand curve for labor. Employment (x), wage (y)
What to do if want more employment and let workers have higher wage?
Shift labor demand to the right. 2 factors that determine demand (VMP) for labor:
- Price of company’s output
- Productivity of workers
What is reservation wage?
Lowest wage a worker would accept for a given job
Opportunity cost - leisure time (to take up job, wage must be as valuable as leisure u enjoy)
Other things equal, higher wage induces individuals to supply longer working hours (higher wage $10 - more costly leisure $15 - indiv need supply longer working hours)
What is the aggregate labor supply?
- Size of working age population
-domestic birthrate
-immigration and emigration
- ages when people enter workforce and retire - Share of working-age population willing to work
Why is supply of labor upward sloping curve?
Higher wage, more people willing to work
What causes shift in labor supply? 2 factors
- Increase in working-age population
- baby boom
- higher net immigration
- increasing age at retirement - Increase in share of working-age population willing to work eg women
What is the effect of productivity change?
Increases demand for labor - demand curve shifts right - real wage and employment increases
Productivity increases due to technological progress & increase in capital (machines)
Effects of Globalization?
Expansion of markets to worldwide supply
Benefits: increased specialization and efficiency
Disadv: some goods produced domestically no longer competitive
When wages in importing industries fall and wages in exporting industries rise, wage inequality increases or decreases?
Increases - low-skill industries face the toughest international competition
Technological change can also be a source of increasing wage inequality - favoring higher-skilled workers
What is worker mobility?
Movement of workers between jobs, firms, industries
Eg market incentives move workers out of textiles and into software
What does skill-biased technological change affect?
It affects the marginal products of higher-skilled workers differently from lower-skilled workers
Demand for unskilled workers decrease/ skilled workers increase
Wages & unemployment decrease/ increase
3 classifications of unemployment?
- Employed (16+ age)
- Unemployed (willing and able to work, spent time searching but still no job)
- Out of labor force (choose not to work)
Formulas for
1. Labor force
2. Unemployment rate
3. Participation rate
- Labor force = employed + unemployed
- Unemployment rate = (unemployed/labor force) x 100%
- Participation rate = (labor force/working age population) x 100%
*working age population = labor force + not in labor force
3 costs of unemployment?
- Economic costs
- lost wages and productivity, decreased taxes and increased transfers - Psychological costs
- Social costs
Does long-term or short-term unemployment have higher cost?
Long-term - may lead to permanent unemployment
Short-term - can rely on savings then find permanent job - job may be better fitting and match workers’ ability which is beneficial
What are discouraged workers?
Would like to have a job but have not looked for work in the past 4 weeks
Counted as out of labor (willing and able but gave up on job search)
Could be counted as unemployed but are not
What are involuntary part-time workers?
People who like to work full-time but cannot find a full-time job
Counted as employed
3 types of unemployment? and what are each about?
- Frictional unemployment - workers are between jobs eg just graduated (may increase economic efficiency if find a job that allows u to contribute more)
- Cyclical unemployment - increase during recession (longer time, more economic costs aka decline in real GDP)
- Structural unemployment - long-term, chronic unemployment in well-functioning economy eg lack of skills, language barriers, discrimination (results in high economic, psychological, social costs)
Barriers to employment: minimum wages, unions, unemployment insurance
How does setting minimum wage laws (structural barriers) affect unemployment?
Setting it above equilibrium creates surplus of people (people wiling to work > people employed)
Once wage is fixed - will forever have surplus
Benefits & Costs of labour union?
Benefits: reduced worker exploitation, increase productivity
Costs: increase labour costs and introduces inefficiency, increase labor supply in non-labor sector, decreases wages for non-union workers
What are the x & y-axis for employment demand & supply curve? Curve or straight line graph?
(x) employment
(y) wage
Curved
What are unemployment benefits & government regulations?
Unemployment benefit is a GOVERNMENT TRANSFER to unemployed workers
-reduce costs of unemployment
-however may be exploited since unemployed have an incentive to search longer and less intensely
-hence unemployment benefits shd be for limited time and less than income received when working
What is economic growth? Formula?
% change in real GDP
- real GDP of economies tend to increase over time due to improvement in technology & increase in qty & quality of resources
Does small growth in GDP per capita have small or very large effect over a long period?
Large effect (small increase in interest rate can have huge effect eg in compound interest)
Formula for Years to Double?
72 / interest rate
(Number of years for an initial amount to double)
Higher the growth rates, shorter time needed to double amt
Formula for GDP per capita?
GDP per capita = output per worker x share of total population working
Y = real GDP
N= no. of people employed
POP = population
(Y/POP) = (Y/N) x (N/POP)
Understanding growth - when does GDP per capita increase?
Output per worker (Y/N) increases (more common reason) OR
Share of population employed (N/POP) increases
In the long run, increases in output per person arise primarily from INCREASES or DECREASES in average labor productivity?
Increases
What are the 6 determinants of average labor productivity?
- Human capital (talents, education, training)
- Physical capital (machines and factories to produce - but may have diminishing returns to capital)
- Land (farming) and other natural resources
- Technology (single most impt source of productivity improvement - growth seen in industries that produce technology & industries that use them)
- Entrepreneurship and management
- Polititcal and legal environment
3 ways to promote growth?
- Human capital (govt support education & training programs - positive externalities)
- Savings & Investment (CPF, govt can invest directly in capital formation)
- Research & Development (R&D)
Why do countries need institutions to support growth? (hint: promoting economic growth in least developed)
- Corruption
- Regulation discourages entrepreneurship
- Taxes discourage risk-taking
- Lack of political stability discourages foreign investment
Costs of economic growth?
Opportunity cost of producing more CAPITAL goods is fewer CONSUMER goods
- reduced leisure time
- possible risks of health & safety from rapid capital production
- cost of R&D to improve technology
- cost of education to develop and use new capital
Why growth may not be sustainable?
- Depletion of some natural resources
- Environmental damage & global warming
- Can promote SUSTAINABLE growth through technology & market system (higher income pay for better production method to promote environmental quality)
