Chapter 15 - Unemployment Fluctuations and the NAIRU Flashcards
What happens to unemployment rate in these examples. Is unemployment rate a good measure of what is happening in the labor market?
A - Tony lost his job and begins looking for a new one.
B - Shoushan, has been out of work since her daycare closed last year, becomes discouraged and gives up looking for a new job.
C - Nina quit her job as a full time research scientist and took a part time job at jean coutu.
A - u rate rises. This gives the impression that the labor market is worsening, and that is correct.
B - u rate falls. This gives the impression that the labor market is improving, which is incorrect. That discrepancy is because Shoushan is unemployed but isn’t counted as unemployed when calculating the unemployment rate if she’s not actively looking for a job.
C - u rate is unchanged. This gives the impression that nothing changed because nina is still employed. But things are worse on the market because she went from full-time to part-time and u-rate fails to show that.
What are the three types of unemployment?
1- Cyclical unemployment: associated with normal business cycles.
2- Frictional unemployment: when workers spend time looking for jobs that better suits their skills and needs.
3- Structural unemployment: when there are fewer jobs than workers.
is cyclical unemployment good or bad?
Cyclical unemployment is generally considered to be a bad thing, because it indicates that the economy is not functioning at full capacity. Cyclical unemployment occurs when the demand for goods and services decreases, leading to a decrease in the demand for labor. This can result in workers losing their jobs and can have a negative impact on the overall economy.
is frictional unemployment good or bad?
This type of unemployment is generally considered to be a natural and inevitable part of the economy and is not necessarily a bad thing. In fact, some level of frictional unemployment is necessary for an economy to function properly because it allows workers to move between jobs and find the best fit for their skills and abilities.
is structural unemployment good or bad?
Structural unemployment can be a bad thing because it indicates that the economy is not functioning efficiently and that some workers may not be able to find jobs that match their skills and abilities. But it is still natural, not always bad.
What is the main assumption in the “market clearing” theory and whats its implications?
real GDP = Potential GDP. (Y=Y*)
Therefore, the only unemployment is frictional and structural, and the unemployment rate is always equal to the NAIRU.
Why is there no cyclical unemployment under market clearing theory?
Because cyclical unemployment is a result of deviations of GDP (Y) from Y. Since we assumed that Y=Y, we cannot have cyclical unemployment
What is the importance of NAIRU?
The NAIRU is only concerned with the inflation rate at which there is 0 cyclical unemployment. That is because that’s when the inflation rate stops accelerating. There will still be inflation, but it will not increase.
What determines the NAIRU?
Frictional unemployment, Structural unemployment, pace of economic change, policies that influence that change.
Give a practical example of what can change the NAIRU
- Greater labor force participation by groups with high unemployment rates increases the NAIRU.
- When female labor force participation rates increased in the 1960-1970s, the NAIRU increased.
- In more recent years, female unemployment rates have dropped below the rates for men, so further female participation will decrease the NAIRU.
