Chapter 28

Question 1

Labor Force Statistics

Answer 1

• produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
o this is the same office that calculates CPI
• based on a regular survey of households in the
U.S. - the “Current Population Survey”
• the BLS surveys 60,000 households - works out to 110,000 people.
• respondents are geographically disbursed - 800 different geographic are in the U.S. are surveyed.
• based on “adult population” (16 or older)

BLS divides the adult (over 16) population into 3 groups:
•Employed: paid employees, self-employed, and unpaid workers in a family business.
• Unemployed: people not working AND who have looked for work during previous 4 weeks.
•Not in the labor force: everyone else > not working AND not looking for work
The labor force is the total # of workers, including the employed and unemployed. It does NOT count people not in the labor force.

Question 2

Unemployment rate and labor force participation rate

Answer 2

unemployment = % of the labor force that is unemployed

100 x # of unemployed rate.
/labor force

Labor force=% of the adult population that is in the labor force

participation rate=100x labor force
—————-
adult pop

Question 3

Another important statistic

Answer 3

• the labor force participation rate -> the % of the adult population in the labor force.
• in other words, the ratio of [employed + unemployed] to the adult population.

Question 4

Labor Force Statistics for
Different Groups

Answer 4

• these data reveal widely different labor market experiences for different groups.
• the BLS publishes these statistics for demographic groups within the population.

Question 5

There are different “flavors” of unemployment

Answer 5

• three main types:
o cyclical o frictional
• Structural
• the differences boil down to
why the person is unemployed.
• it can sometimes be tricky to distinguish between frictional and structural.

Question 6

Cyclical unemployment vs. the Natural Rate

Answer 6

There’s always some unemployment, though the unemployment rate fluctuates from year to year.
Natural rate of unemployment -
• the normal rate of unemployment around which the actual unemployment rate fluctuates
• this “natural rate” implies that there will always be SOME unemployment.

Question 7

The duration of unemployment

Answer 7

Most periods of unemployment are short:
• typically 1/3 of unemployed people are only unemployed for a short time -> they find a job pretty quickly (within 5 weeks)
• 2/3 of all workers remain unemployed under 14 weeks.
• only 20% remain unemployed over 6 months.

Question 8

The Duration of Unemployment

Answer 8

Interestingly, most observed unemployment is long term.
• the small group of long-term unemployed persons has fairly
little turnover.
• once you’re out of work for a long time, you tend to remain unemployed.
• LT unemployed account for most of the unemployment observed over time.
Knowing these facts helps policymakers design better policies to help the unemployed.

Question 9

Long term unemployment is extremely harmful

Answer 9

People who are out of work for six months or more tend to have:
• lower well-being not only for themselves, but also for their families and their communities.
• lower earnings when they eventually find jobs (and this loss of income persists for a long time - up to 20 years).
• poorer health and higher levels of depression.
• lower levels of human capital - leading to lowered productivity.
• kids with lower academic performance.
• higher rates of crime and violence in their communities.

Question 10

Explaining the Natural Rate

Answer 10

Even when the economy is doing well, there is always some unemployment, including:
Structural unemployment
• occurs due to shifts in the economy (even when things are booming - in fact, structural unemployment may arise
because things are booming).
• usually longer-term.

Question 11

Explaining the Natural Rate

Answer 11

Even when the economy is doing well, there is always some unemployment, including:
Frictional unemployment
• occurs because of people who are in the process of moving from one job to another.
• often, workers spend time searching for the jobs that best suit their skills and preferences.
• the economy is always changing, so some frictional unemployment is inevitable, but it’s usually short-term, because people find the right job pretty quickly.

Question 12

How can the gov help unemployed people

Answer 12

• workers have different preferences and skills, and jobs have different requirements.
• it may take some time for these two to meet!
• job search is the process of matching workers with appropriate jobs.
• sectoral shifts are changes in the composition of demand across industries or regions of the country.
• such shifts displace some workers, who must search for new jobs appropriate for their skills and tastes.

Question 13

How can public gov policies affect job searches

Answer 13

• government employment agencies - provide information about job vacancies to speed up the matching of workers with jobs.

Question 14

How can public gov policies affect job searches

Answer 14

• public training programs - aim to equip workers displaced from declining industries with the skills needed in growing industries.

Question 15

Unemployment Insurance

Answer 15

Sometimes, despite everyone’s best efforts, people can’t find a job. So government has a role here, too.
• Unemployment insurance (UI): a government program that partially protects workers’ incomes when they become unemployed.

Question 16

Unemployment Insurance

Answer 16

1 - if you know you can collect UI when you leave a job, you are more likely to leave that job.

• some economists argue that UI increases frictional unemployment.
Why? Recall one of the Ten Principles of Economics:
People respond to incentives.

question: what can we call this phenomenon?

#3- the prospect of losing UI benefits gets people’s attention, so they tend to get jobs when they see that their
UI benefits are about to run out.

Question 17

What is unemployment Insurance

Answer 17

But there are benefits of Ul:
• reduces uncertainty over incomes
• gives the unemployed more time to search, resulting in better job matches and thus higher productivity

Question 18

Why might there be structural unemployment

Answer 18

Structural unemployment usually occurs when industries are changing.
But it can also occur when wages are kept above equilibrium.
Mankiw argues that there are three reasons for this.

Question 19

Minimum wage laws

Answer 19

• the minimum wage may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment.
• but this group is only a small part of the labor force, so the minimum wage doesn’t explain most unemployment.
• question: so what does this tell us about the minimum wage?
Does it cause unemployment or not?

Question 20

Unions

Answer 20

• Union: a worker association that bargains with employers over wages, benefits, and working conditions
• because workers act together, they have more bargaining power to negotiate highèr wages and better benefits.
• more effective to negotiate collectively than individually.
• the typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work.

Question 21

There are “right to work” states and
“union shop” states.

Answer 21

? “union shop” - workers must join a union or at least pay to support their union as a condition of employment.
• “right to work” - workers are not so required. Sounds better, right?

Question 22

Unions are they bad? Or good?

Answer 22

are unions good or bad? Economists disagree.
• critics: Unions are cartels. They raise wages above equilibrium, which causes unemployment and/or depresses wages in non-union labor markets.
• advocates: Unions counter the market power of large firms, make firms more responsive to workers’ concerns. They also force a more equitable sharing of output and productivity gains -> profits are shared more equally between workers and owners.

Question 23

What happened during the factory fire

Answer 23

What happened there
• the factory made “shirtwaists”
- what
we now call women’s blouses.
• it employed about 500 people, > mostly immigrant women and girls
• they worked 9 hours a day on weekdays and 7 hours on Saturdays
• average salary was between $191 and $327 per week (in 2018 dollars).

Question 24

Deadliest Industrial accident in NYC history

Answer 24

• doors leading from the factory floor were locked -> to prevent workers from stealing and from taking unauthorized breaks.
• a fire started in a trash can on
Saturday, March 25, 1911 at 4:40
pm.
• because doors were locked, people couldn’t escape.

• because doors were locked, people couldn’t escape.
• 146 fatalities:
0123 women (youngest was 14)
023 men
• people died from fire, smoke inhalation or jumping from an upper floor window.

Question 25

Efficiency Wages

Answer 25

3. Efficiency Wages
   • the theory of efficiency wages -> firms voluntarily pay above-equilibrium wages to boost worker productivity.
   • different versions of efficiency wage theory suggest different reasons why firms pay high wages.
4. Worker health -> in less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, which makes them healthier and more productive.
5. Worker turnover -> hiring & training new workers is costly.
   Paying high wages gives workers more incentive to stay, reduces turnover.
   • Worker quality -> offering higher wages attracts better job applicants, increases quality of the firm’s workforce.
6. Worker effort > workers can work hard or shirk [goof off. Shirkers are fired if they are caught. Isn’t being fired a good enough deterrent?
   Maybe, maybe not.
   • if you simply work for the equilibrium wage, it should be easy to get a replacement job.
   • but if your wage is above equilibrium wage, you may not be able to get a replacement job that pays as well. You have an incentive to work hard and not to shirk. There is a wage penalty to being fired!