chapter 30 Flashcards
In the long run, increases in the labour force are __________ by increases in employment.
more or less matched
In the short run, the unemployment rate _______
because ____________
fluctuates considerably because hanges in the labour force are not exactly matched by
change in employment.
supply side employment trend
On the supply side, the labour force has grown virtually every year since the end of the Second World War.
demand side employment trend
On the demand side, many existing jobs are eliminated every year,
and many new jobs are created.
general employment trend
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
during periods of rapid economic growth, the unemployment rate________
usually falls
short run fluctuation
During recessions or periods of slow growth, the unemployment rate _______
usually rises (short run fluctuation)
Over longer periods, unemployment changes more due to _________
structural changes in the labour force
what is a measurement problem
The official data understate the full effects of recessions on unemployment because they do not include:
• discouraged workers
• underemployed workers
two important costs associated with unemployment:
- lost output
- personal costs
cyclical unemployment
• the difference between actual unemployment and the amount that would exist when Y = Y*
what kinds of unemployment still exists when Y=Y*
- frictional
* structural
def. cyclical unemployment
unemployment not due to frictional or
structural factors; it is due to deviations of GDP from Y*.
market clearing theories
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.
non-market clearing theories
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.
market-clearing theories explain fluctuations in employment and real
wages as having one of two causes:
- Changes in technology that affect the marginal product of labour will lead to changes in the demand for labour.
- 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.
what do Market-clearing theories of the labour market assume?
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.
non-market clearing wages
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.
Why do wages not quickly adjust to eliminate involuntary unemployment?
- 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. - 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. - Efficiency Wages
Firms may find it profitable to pay higher-than-marketclearing wages so that workers put forth greater effort. - Union Bargaining
Wages may be more influenced by “insiders” than by “outsiders” —this may keep wages high, even in the face of declining demand.
def. frictional unemployment
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
def. structural unemployment
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.
In a sense, structural unemployment is really long-term _______ unemployment
frictional
describe the frictional-structural distinction
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.
describe demographic shifts and how that might affect NAIRU
Greater labour-force participation by groups with high unemployment rates increases the NAIRU.
what is hysteresis
“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.
how might a heavily unionized labour force might affect NAIRU
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
describe how globalization and structural change may affect NAIRU
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
describe how policy and labour-market flexibility may affect NAIRU
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
different opinions on gov reducing cyclical unemployment
• 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.
reducing frictional unemployment
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.
reducing structural unemployment
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.
what do most governments do with regards to managing unemployment
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.
