Chapter 15 - Unemployment Fluctuations and the NAIRU Flashcards
What happens to employment and unemployment when real GDP rises?
Employment ↑, unemployment ↓ (short run)
What are the 3 main types of unemployment?
- Cyclical – from output gaps
- Frictional – short-term, job-search
- Structural – mismatch in skills/location vs. job demand
What is the NAIRU?
The Non-Accelerating Inflation Rate of Unemployment — unemployment rate when real GDP = potential (Y = Y*) and inflation is stable
What types of unemployment make up the NAIRU?
Frictional + Structural
When does cyclical unemployment exist?
When real GDP ≠ potential output (Y ≠ Y*)
What causes the NAIRU to change?
Demographics, labor market flexibility, EI policies, globalization, tech change, union power, etc.
What is the formula for average duration of unemployment?
Average Duration = Stock of unemployment/Flows out of unemployment
This tells you how long, on average, someone stays unemployed, based on how many people are currently unemployed (stock) and how many are leaving unemployment each month (flow out).
What does “gross flows” in the labor market mean?
The total number of people entering/leaving jobs or unemployment monthly — it shows the true activity level, not just the net change.
Why might the unemployment rate underestimate real job issues?
It excludes discouraged workers, underemployment, and doesn’t show job searchers who are still technically employed.
Why are wages “sticky”?
Long-term contracts
Menu costs
Efficiency wages
Union bargaining
Firms avoid constantly renegotiating
What is one major benefit of the gig economy for macro stability?
Faster wage adjustment → more responsive to economic shocks → could help lower the NAIRU
What’s the policy solution for cyclical unemployment?
Expansionary fiscal or monetary policy to close the output gap
What policies help reduce structural unemployment?
Retraining programs
Mobility support
Better job market info
EI reform to reduce dependency
What made the 2020 pandemic recession unique?
It was caused by shutdowns, not demand drops. No downward wage pressure, recovery driven by vaccines, not just macro policy.
What is the role of expectations in wage setting and unemployment?
If inflation is expected, workers demand higher wages. This can lead to stickiness and delay real wage adjustments, prolonging unemployment.
