chapter 30

Question 1

In the long run, increases in the labour force are __________ by increases in employment.

Answer 1

more or less matched

Question 2

In the short run, the unemployment rate _______

because ____________

Answer 2

fluctuates considerably because hanges in the labour force are not exactly matched by
change in employment.

Question 3

supply side employment trend

Answer 3

On the supply side, the labour force has grown virtually every year since the end of the Second World War.

Question 4

demand side employment trend

Answer 4

On the demand side, many existing jobs are eliminated every year,
and many new jobs are created.

Question 5

general employment trend

Answer 5

In most years, enough new jobs are created to offset the number of jobs that have been eliminated and to provide jobs for the growing labour force.

The result is a net increase in employment in most years

Question 6

during periods of rapid economic growth, the unemployment rate________

Answer 6

usually falls

short run fluctuation

Question 7

During recessions or periods of slow growth, the unemployment rate _______

Answer 7

usually rises 
(short run fluctuation)

Question 8

Over longer periods, unemployment changes more due to _________

Answer 8

structural changes in the labour force

Question 9

what is a measurement problem

Answer 9

The official data understate the full effects of recessions on unemployment because they do not include:
• discouraged workers
• underemployed workers

Question 10

two important costs associated with unemployment:

Answer 10

• lost output

- personal costs

Question 11

cyclical unemployment

Answer 11

• the difference between actual unemployment and the amount that would exist when Y = Y*

Question 12

what kinds of unemployment still exists when Y=Y*

Answer 12

• frictional

* structural

Question 13

def. cyclical unemployment

Answer 13

unemployment not due to frictional or

structural factors; it is due to deviations of GDP from Y*.

Question 14

market clearing theories

Answer 14

real GDP is always equal to Y*.

So the only unemployment is frictional and structural, and the unemployment rate is always equal to the NAIRU.

Question 15

non-market clearing theories

Answer 15

emphasizes the distinction between the unemployment that exists when real GDP is equal to Y, and unemployment that is due to deviations of real GDP from Y.

Question 16

market-clearing theories explain fluctuations in employment and real
wages as having one of two causes:

Answer 16

1. Changes in technology 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.

Question 17

what do Market-clearing theories of the labour market assume?

Answer 17

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 18

non-market clearing wages

Answer 18

When	the	wage	rate	
does	not	change	enough	
to	equate	quantity	
demanded	with	quantity	
supplied,	there	will	be	
unemployment	in	
slumps	and	labour	
shortages	in	booms.

Question 19

Why do wages not quickly adjust to eliminate involuntary unemployment?

Answer 19

1. Long-Term Employment Relationships
   -In labour markets in which long-term relationships are important,
   the wage rate does not fluctuate to continuously clear the market.
2. Economic Climate Versus Economic Weather
   - -Variations in real wages usually occur gradually and are determined by the long-term economic “climate”.
   - –Changes in the short-term economic “weather”, unless extreme, tend not to cause changes in real wages.
3. Efficiency Wages
   Firms may find it profitable to pay higher-than-marketclearing wages so that workers put forth greater effort.
4. Union Bargaining
   Wages may be more influenced by “insiders” than by “outsiders” —this may keep wages high, even in the face of declining demand.

Question 20

def. frictional unemployment

Answer 20

s unemployment that results from the
turnover in the labour market as workers move between jobs.

The normal turnover of labour causes frictional unemployment to persist, even if the economy is at potential output

Question 21

def. structural unemployment

Answer 21

unemployment caused by a mismatch in
skills, industry, or location between available jobs and unemployed workers.

Structural unemployment will increase if there is either an increase in the pace at which the structure of the demand for labour is
changing or a decrease in the pace at which labour is adapting to these changes.

Question 22

In a sense, structural unemployment is really long-term _______ unemployment

Answer 22

frictional

Question 23

describe the frictional-structural distinction

Answer 23

Suppose there was an increase in world demand for Canadian-made
car parts and at the same time a decline in world demand for
Canadian-assembled cars.

Labour would move from the car-assembly sector to the car-parts
manufacturing sector

If the reallocation were to occur quickly, we would call the unemployment frictional; if the reallocation were to occur slowly, we
would call the unemployment structural.

In practice, structural and frictional unemployment cannot be separated.

But the two of them, taken together, can be separated from cyclical
unemployment.

Question 24

describe demographic shifts and how that might affect NAIRU

Answer 24

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

Question 25

what is hysteresis

Answer 25

“lagged effect”

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

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 26

how might a heavily unionized labour force might affect NAIRU

Answer 26

In a heavily unionized labour force, people who are currently employed (insiders) may use their bargaining power to prevent new entrants to the labour force (outsiders).

If outsiders are denied access to the labour market, their unemployment will fail to exert downward pressure on wages, and
the NAIRU will tend to rise

Question 27

describe how globalization and structural change may affect NAIRU

Answer 27

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

As Canadian labour markets require more frequent and larger
adjustments to economic events occurring in other parts of the
world, the NAIRU will tend to increase.
trade liberalization might have this effect

Question 28

describe how policy and labour-market flexibility may affect NAIRU

Answer 28

Any government policy that reduces labour-market flexibility is likely
to increase the NAIRU. E.g: employment insurance or policies
designed to increase job security for workers

Question 29

different opinions on gov reducing cyclical unemployment

Answer 29

• Advocates of stabilization policy call for expansionary fiscal and monetary policies to reduce persistent recessionary gaps.

• Advocates of the hands-off approach rely on normal market
adjustments to remove recessionary gaps.

Question 30

reducing frictional unemployment

Answer 30

The turnover in the labour market that causes frictional unemployment is inevitable.

Employment	insurance	(EI)	is	one	method	of	helping	people	cope	
with	its	cost.

But EI contributes to search unemployment.

In recent years, the benefits received by eligible unemployed workers have been reduced, decreasing the likelihood that job seekers will reject early job offers.

These changes have contributed to a decline in the amount of frictional unemployment.

Question 31

reducing structural unemployment

Answer 31

The reallocation of labour among occupations, industries, skill
categories, and regions that gives rise to structural unemployment is inevitable.

There is often a conflict between the private interest of workers threatened by structural unemployment, whose interests lie in preserving existing jobs, and the social interest served by reallocating resources to where they are most valuable.

Question 32

what do most governments do with regards to managing unemployment

Answer 32

Most government policy follows a middle route.

Fiscal and monetary policies generally seek to reduce the most
persistent of recessionary gaps.

A host of labour-market policies are designed to reduce frictional and structural unemployment.

Countries that succeed in the global marketplace, while also managing to maintain humane social welfare systems, will be those that best learn how to deal with changes in the economic landscape.