chapter 15

Question 1

Long run and short run

Answer 1

long run: increases in labour force are more or less matched with increases in employment
Short run: the unemployment rate fluctuates considerably
because changes in the labour force are not exactly matched by
change in employment.

Question 2

What can’t the data measure

Answer 2

-discouraged workers
- underemployed workers

Question 3

Consequences of unemployment

Answer 3

• lost output
• personal costs

Question 4

Us is stock of unemplyment, Uo is the monthly outflow from it, average time uneployed?

Answer 4

Us/Uo

Question 5

Two possible causes of fluctuations in employment and wages of market-clearing theories

Answer 5

1. changes in tech that affect the marginal product of labour will lead to changes in the demand for labour
2. changes in the willingness of individuals to work will lead to changes in the supply of labour
   in both cases, the flexibility of real wages results in a clearing of the labour market
   Whatever unemployment exists must be caused by frictional or
   structural causes, the two components of the NAIRU.

Market-clearing theories of the labour market assume that real
wages always adjust to clear the labour market.
People who are not working are assumed to have voluntarily
withdrawn from the labour market.
There is no involuntary unemployment

Question 6

Why do wages not adjust quickly to eliminate involuntary unemployment?

Answer 6

1. long term employment relationships:
   - wage rate is influenced more by how long you’ve been at companies, adapts less to market
2. Economic climate vs weather
   - change in real wages are gradual, slow, determined by long term climate, not short term weather, unless extreme
3. efficiency wages
   - firms may pay higher than market clearing wages for workers to exert more effort
4. union bargainning
   - wages may be influence more by insiders than outsiders, may keep them high even with declining demand for labour

Question 7

What changes the NAIRU

Answer 7

Demographic shifts: higher participation in labour force from groups with high unemployment raises it, for example.

Question 8

If a recession causes a significant group to encounter unusual
difficulty obtaining their first jobs, they will be slow to acquire
important skills.

Answer 8

When demand increases again, this group of workers will take longer
to find jobs and the NAIRU will be higher than it would have been
had there been no recession.

Question 9

What can heavily unionized labour force create

Answer 9

• insiders use bargainning power to prevent new entrants to the labour force.
  Since they are denied access, their unemployment will not add to the downward pressure on wages, and NAIRU rises

Question 10

Canadian labour markets are increasingly affected by changes in
demand and supply conditions elsewhere in the world

Answer 10

Since more and bigger adjustments are required to outside effects, the NAIRU tends to increase

Question 11

2 theories to reduce cyclical unemployment

Answer 11

• stabilization: calls for expansionary fiscal and monetary policies to reduce persistent recessionary gaps
• hands-off: normal market adjustments to remove gaps