CH15 - Unemployment fluctuations and the NAIRU Flashcards
What are the 2 characteristics of the labor force common to most developed countries?
- Long-term growth in employment
- Short-term fluctuation in unemployment
Why does the unemployment rate fluctuates in the short run?
Because changes in the labor force are not matched by changes in employment
What determines the actual amount of employment? (2)
The demand for labor and
The supply of labor
What are the 3 causes of the increase in Canada’s labor force?
- Rising population
- Increase in labor participation from groups (e.g., women)
- Net immigration of working-age persons
From the demand side, what is the “net increase in employment”?
The difference between all the jobs created and all those that are lost
In the 1980s, the Canadian unemployment rate went from ______ in 1983 to _______ in 1988?
12% to 7.5%
During the recession in the early 1990s, what was the Canadian unemployment rate?
11.3%
During the worldwide recession of 2008, what was the Canadian unemployment rate?
Only 8.7%, it fared much better than others
During Covid, the unemployment rate in Canada went immediately from 5.8% to ______?
13.7
During periods of rapid economic growth, what happens to the unemployment rate?
It usually falls
How is the amount of activity in the labor market better reflected?
By the flows into and out of unemployment rate rather than by the unemployment rate
Why does the official unemployment data understate the full effect of recessions? (2)
- Discouraged workers
- Underemployed workers
What are underemployed workers?
People who take on a low-paying/no qualifications required job while actively looking for a better job. They rather work and make little money than to be unemployed.
What are 2 important costs associated with unemployment?
Lost output
Personal costs
What is the assumption of market-clearing theories?
Actual GDP = Y*
In market-clearing theories, the unemployment rate changes due to what?
Due to changes in structural or frictional unemployment
What is cyclical unemployment?
Unemployment not due to frictional or structural factors, it’s due to deviations of GDP from Y*
What are 2 major characteristics of market-clearing theories?
Firms and workers optimize continuously
Markets clear continuously
In market-clearing theory, what are the 2 causes explaining fluctuations in employment and real wages?
- Changes in technology affect productivity
- Changes in the willingness of workers to work
In market-clearing, whatever unemployment exists must be caused by ______ or _______ causes.
frictional or structural
What is assumed of people who are not working in market-clearing theories?
That they voluntarily do not work
Market-clearing theories of the labour market assume that _______ always adjust to clear the labour
market.
real wages
In non market-clearing theories, why do wages not quickly adjust to eliminate involuntary unemployment? (4)
- Long-term employment relationships
- Menu costs
- Efficiency wages
- Union bargaining
Why do many firms prefer to keep their wage structures and price lists constant?
Because changing them in response to fluctuations is costly and time consuming
What is frictional unemployment?
Unemployment resulting from the normal turnover of labor
What is structural unemployment?
Unemployment caused by the mismatch between available jobs and unemployed workers
Some of the large increase in unemployment during Covid-19 was
a) structural
b) frictional
c) cyclical
structural
What are the 2 reasons why the Employment-Insurance contributes to structural unemployment in Canada?
- Encourages people to stay in high-unemployment regions (benefits for more weeks)
- Workers are eligible only if they have worked a given number of weeks in the previous year
In a sense, ______ unemployment is really just a long-term _______ unemployment
structural
frictional
If the reallocation were to occur quickly, we would call
the unemployment _________
frictional
if the reallocation were to occur slowly, we would call the unemployment _________
structural
Why does the NAIRU change? (2)
Altering the amount of adjustment required
Altering the ability of the labor force to adjust
Greater labour force participation by groups with high
unemployment rates ______ the NAIRU.
increases
Any government policy that reduces labour-market
flexibility is likely to ________ the NAIRU.
increase
What is the effect of monetary and fiscal policies on cyclical unemployment?
it reduces it
What is one thing that helps alleviate the suffering caused by frictional unemployment?
Employment Insurance
What are the 2 basic approaches to addressing structural unemployment?
- Resisting change
- Assisting adjustment
What is the goal of policies to increase restraining and improve the flow of labor-market information?
To reduce the amount of structural unemployment
