CH15 - Unemployment fluctuations and the NAIRU

Question 1

What are the 2 characteristics of the labor force common to most developed countries?

Answer 1

1. Long-term growth in employment
2. Short-term fluctuation in unemployment

Question 2

Why does the unemployment rate fluctuates in the short run?

Answer 2

Because changes in the labor force are not matched by changes in employment

Question 3

What determines the actual amount of employment? (2)

Answer 3

The demand for labor and
The supply of labor

Question 4

What are the 3 causes of the increase in Canada’s labor force?

Answer 4

1. Rising population
2. Increase in labor participation from groups (e.g., women)
3. Net immigration of working-age persons

Question 5

From the demand side, what is the “net increase in employment”?

Answer 5

The difference between all the jobs created and all those that are lost

Question 6

In the 1980s, the Canadian unemployment rate went from ______ in 1983 to _______ in 1988?

Answer 6

12% to 7.5%

Question 7

During the recession in the early 1990s, what was the Canadian unemployment rate?

Answer 7

11.3%

Question 8

During the worldwide recession of 2008, what was the Canadian unemployment rate?

Answer 8

Only 8.7%, it fared much better than others

Question 9

During Covid, the unemployment rate in Canada went immediately from 5.8% to ______?

Answer 9

13.7

Question 10

During periods of rapid economic growth, what happens to the unemployment rate?

Answer 10

It usually falls

Question 11

How is the amount of activity in the labor market better reflected?

Answer 11

By the flows into and out of unemployment rate rather than by the unemployment rate

Question 12

Why does the official unemployment data understate the full effect of recessions? (2)

Answer 12

1. Discouraged workers
2. Underemployed workers

Question 13

What are underemployed workers?

Answer 13

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.

Question 14

What are 2 important costs associated with unemployment?

Answer 14

Lost output
Personal costs

Question 15

What is the assumption of market-clearing theories?

Answer 15

Actual GDP = Y*

Question 16

In market-clearing theories, the unemployment rate changes due to what?

Answer 16

Due to changes in structural or frictional unemployment

Question 17

What is cyclical unemployment?

Answer 17

Unemployment not due to frictional or structural factors, it’s due to deviations of GDP from Y*

Question 18

What are 2 major characteristics of market-clearing theories?

Answer 18

Firms and workers optimize continuously
Markets clear continuously

Question 19

In market-clearing theory, what are the 2 causes explaining fluctuations in employment and real wages?

Answer 19

1. Changes in technology affect productivity
2. Changes in the willingness of workers to work

Question 20

In market-clearing, whatever unemployment exists must be caused by ______ or _______ causes.

Answer 20

frictional or structural

Question 21

What is assumed of people who are not working in market-clearing theories?

Answer 21

That they voluntarily do not work

Question 22

Market-clearing theories of the labour market assume that _______ always adjust to clear the labour
market.

Answer 22

real wages

Question 23

In non market-clearing theories, why do wages not quickly adjust to eliminate involuntary unemployment? (4)

Answer 23

1. Long-term employment relationships
2. Menu costs
3. Efficiency wages
4. Union bargaining

Question 24

Why do many firms prefer to keep their wage structures and price lists constant?

Answer 24

Because changing them in response to fluctuations is costly and time consuming

Question 25

What is frictional unemployment?

Answer 25

Unemployment resulting from the normal turnover of labor

Question 26

What is structural unemployment?

Answer 26

Unemployment caused by the mismatch between available jobs and unemployed workers

Question 27

Some of the large increase in unemployment during Covid-19 was
a) structural
b) frictional
c) cyclical

Answer 27

structural

Question 28

What are the 2 reasons why the Employment-Insurance contributes to structural unemployment in Canada?

Answer 28

1. Encourages people to stay in high-unemployment regions (benefits for more weeks)
2. Workers are eligible only if they have worked a given number of weeks in the previous year

Question 29

In a sense, ______ unemployment is really just a long-term _______ unemployment

Answer 29

structural
frictional

Question 30

If the reallocation were to occur quickly, we would call
the unemployment _________

Answer 30

frictional

Question 31

if the reallocation were to occur slowly, we would call the unemployment _________

Answer 31

structural

Question 32

Why does the NAIRU change? (2)

Answer 32

Altering the amount of adjustment required

Altering the ability of the labor force to adjust

Question 33

Greater labour force participation by groups with high
unemployment rates ______ the NAIRU.

Answer 33

increases

Question 34

Any government policy that reduces labour-market
flexibility is likely to ________ the NAIRU.

Answer 34

increase

Question 35

What is the effect of monetary and fiscal policies on cyclical unemployment?

Answer 35

it reduces it

Question 36

What is one thing that helps alleviate the suffering caused by frictional unemployment?

Answer 36

Employment Insurance

Question 37

What are the 2 basic approaches to addressing structural unemployment?

Answer 37

1. Resisting change
2. Assisting adjustment

Question 38

What is the goal of policies to increase restraining and improve the flow of labor-market information?

Answer 38

To reduce the amount of structural unemployment