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EC1B3 > Chapter 7: Unemployment > Flashcards

Chapter 7: Unemployment Flashcards

1
Q

Define employment:

A

Working at a paid job

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2
Q

Define unemployment:

A

Not employed but looking for a job
o Does not have a job that pays a wage or salary
o Actively looked for a job in the last 4 weeks
o Available to work.

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3
Q

Define labour force:

A

Employed plus unemployed (Assumed to be a constant)

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4
Q

Define economcially inactive:

A

Not employed, not looking for work (E.g. Students and stay at home parent)

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5
Q

What is the working age population?

A

16-64

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6
Q

What is the unemployment rate

A
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7
Q

What does it mean by labour markets are dynamic?

A

Someone is always looking for a job

Searching is costly, but want to make sure that they get a good job

There is always a vacancy in a firm

Filling the vacancy is costly, but want to make sure you get a good employer

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8
Q

What is the work of Chris Pissarides?

A
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9
Q

What is the equation for the labour force?

A
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10
Q
A
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11
Q

What is the equation for the change in unemployment?

A
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12
Q
A
  • Number of employed people who lose their job is the job separation rate (proportion of those who lose their job) multiplied by the number of employed people
  • Number of unemployed people who gain a job is the job finding rate (proportion of those who gain a job), multiplied by the number of unemployed people shows us how many people are gaining jobs
  • Steady state =0
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13
Q

What is the equation for the number of unemployed in the steady state?

A
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14
Q

What is the proof for the following equation?

A
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15
Q

What is the equation for the natural rate of unemployment?

A
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16
Q

The natural rate of unemployment

A

Natural rate of unemployment: the rate that prevails when the economy is neither in a boom nor a recession. *Rate that would prevail with no cyclical unemployment and no intervention (Associated with short-run fluctuations in output)

Depends on the:

  • Job finding rate
  • Job separation rate

Small value means that there is a small amount of people losing their jobs and a large fraction of the unemployed find work each month. The value can only be changed when there is a change in the job finding and job separation rate.

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17
Q

What makes the natural rate of unemployment larger?

A
  • s is larger: Increasing the proportion of people loosing jobs means more unemployed people
  • f is smaller: Less people moving out of unemployed into employed
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18
Q

Why is the natural rate of unemployment not equal to 0?

A
  • Frictional unemployment - Workers between jobs in the dynamic economy, as it takes time to get a job
  • Structural unemployment - Labour market failure to match workers and firms
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19
Q

What is the theory of efficency wages and what are the reasons explaining it?

A

It may increase a firm’s profits to pay a wage greater than the wage needed to retain workers and the reasons for this are:

  1. Especially in poor countries, workers may be so poor that paying a higher wage will allow them to eat more and thus become healthier, more energetic, and more productive.
  2. When it is difficult for the firm to monitor a worker’s effort on the job, paying a higher wage can ensure high effort and they would want to minimise the chances of being fired, due to the higher pay
  3. The higher wage may attract more able workers to that company, making the firm more productive
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20
Q

What are the labour market differences between Europe and the US?

A
  • Unemployment in Europe is well above the rate in the United States. (E.g. Spain tends to have a high unemployment rate)
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21
Q

Why was European unemployment higher than the US?

A
  • Adverse macroeconomic shocks and high oil prices.
  • inefficient labor market institutions (Estimates that 2/3 of the difference is down to this factor, therefore they largely determine the rate):
    • Welfare benefits
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22
Q

What is cyclical unemployment?

A

Associated with the short run fluctuations in output

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23
Q

What is structural unemployment?

A

Labour market failure to match workers and firms

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24
Q

What is frictional unemployment?

A

Unemployment caused by the time it takes workers to search for a job

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25
Q

What is a sectoral shift?

A

Change in the composition of demand among industries or regions. It takes time for workers to change sectors, therefore there is frictional unemployment

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26
Q

What are the reasons for job seperation and frictional unemployment?

A
  • When firms fail
  • When their job performance is deemed unacceptable
  • When the particualr skill is no longer needed
  • When the worker wants to change career or move country
27
Q

How do labour market policies affect the job finding (f) and the job seperation rate (s)?

A
  • Incentive for firms to open vacancies
  • Incentives to conduct a search for a job - (E.g. Unemployment benefits like job seeker allowance)
  • Efficiency of job search improved due to technology
  • Cost of seperation - Affects s, as it is costly to remove workers so the s is lower (E.g. Long removal process)
  • Outside option for quitters
  • Retrainning programs to enable transition from declining to growing industries
28
Q

What is the role of government employment agencies?

A
  • Disseminate info about job openings to better match workers & jobs; help with CVs; interviewing skills.
  • Up skill workers.
  • Evidence shows that these are not effective or make a difference because technology is more efficient and this is a waste of resources and these burecratic government categorise government and promote jobs even if the person doesn’t want it.
  • Doesn’t change for the employment structure.
29
Q

What is the role of public trainning programs and what impact do they have?

A
  • Help workers displaced from declining industries get skills needed for jobs in growing industries.
  • Evidence that they tend to work.
  • This policy affects human capital in the long run as they provide the worker with skills in demand making the prospect of finding a job even better. Takes time to be effective.
30
Q

What is the role of unemployment benefits and what is the impact of them?

A
  • Incentivize worker search by making UI dependent on job search efforts. Conditional means the worker has to do something (in most countries it is attending job interviews).
  • After a few months, they would not receive rates or it would decline in the following months in order to provide an incentive for intense job research.
31
Q

What is unemployment insurance?

A

Pays part of a worker’s former wages for a limited time after the worker loses his/her job

32
Q

What are the advantages of unemployment insurance?

A
  • Reduces the hardship of unemployment, therefore they are able to survive
  • By allowing workers more time to search, UI may lead to better matches between jobs and workers, and thus to greater productivity and higher incomes. Efficiency gain through longer period to search.
  • May support aggregate demand in recessions by preserving the spending power of the unemployed
33
Q

What are the disadvantages of unemployment insurance?

A
  • Gov. problem: choosing level and duration of UI so as to find the right balance between costs and benefits
  • UI may increase search unemployment, because it reduces the opportunity cost of being unemployed. Not paying the full consequences of being unemployed may induce you to search for longer so job finding rate decreases which implies a higher natural rate of unemployment.
  • Increases frictional unemployment
  • Raises job seperation rate, as stable employment prospect is not the most important factor as they are protected by the unemployment insurance.
34
Q

What is employment protection legislation (EPL)?

A

Institution or legislation where countries put restrictions on how you can fire a worker (US model is weak, as it is easy to fire workers but the opposite in Europe)

  • High mandatory severance pay, notice period. Pay several months of salary and generous notice periods.
  • Spelling out of conditions for severance: grave firm distress, grave misconduct. Cases of firing worker need to sometimes be proven in court
35
Q

What is the impact of EPL?

A

Protects worker from excessive insecurity and arbitrary decisions

  • Lower s, as it is harder to remove workers
  • Lower f, higher cost when employing worker as there needs to be certainty
  • Therefore it has no impact

Evidence:

  • Effect on unemployment is neutral, strong effect on flows (High flows in and out of unemployment if there are strong protection legislation.)
  • Persistence of unemployment: higher with strong EPL
  • An important channel: how the judiciary system enforces and interprets the law. (Italian are very strict for workers and tend to assign the case to the worker increasing the strictness of the protection legislation)
36
Q

What is the OECD employment outlook?

A
  • High unemployment insurance, high taxes and PMR (product market regulation) = increases unemployment
  • More centralised wage bargaining, training programmes = Decreases unemployment
  • Structural reform is complementarity: Better results in a more employment-friendly environment
  • EPL: No effect on unemployment (in line with theory as it leads to less people being employed and less people leaving their jobs)
  • Labour market reforms explain 2/3 of structural unemployment changes
37
Q

What is the viewpoint of Prescott?

A

Difference between Europe and US labour supply is because of the different tax systems. Europeans have higher taxes and they have continued to rise.

38
Q

What is the viewpoint of Blanchard?

A

Europeans have more taste for leisure than Americans do, which is why they have directed the increase in leisure to their

39
Q

What is the viewpoint of Alesina, Glaeser and Sacerdote?

A

Mandate holidays explains a large proportion of the difference in weeks worked in the US and Europe and they also explain the difference in total labour supply

40
Q

What are the causes of a sectoral shift?

A
  • Demand for goods vary overtime, so does the demand for labour that produces the good
  • Firms fail
  • Job preformance is not acceptable
41
Q

What is the relationship between wage rigidity and structural unemployment?

A
  • Failure of wages to adjust to a level where labour supply equals labour demand
  • Unemployment due to wage rigidity and job rationing is called structural unemployment
42
Q

What are the causes of wage rigidity?

A
  • Minimum wage laws (legal minimum paid to employees)
  • Union and collective barganing
  • Efficency wages
43
Q

What are the advantages of minimum wage?

A

Overcome poverty

44
Q

What are the negatives of minimum wage?

A
  • Low skilled workers are paid above the equilibrium wage, therefore reduces the demand and raises unemployment
  • Many minimum wage roles are held by teenagers from middle class earnings for discretionary spending rather than to support families/ alieviate poverty
45
Q

What are the advanatges of policies regarding tax credit?

A

Does not raise firm labour cost therefore demand does not decrease

46
Q

What are the disadvanatges of policies regarding tax credit?

A
  • Reduces government revenue
47
Q

What is the impact of a dual labour market?

A

Temporary jobs without EPL, where they would either hire or fire workers after a certain period of time

  • Unemployed can get work
  • No incentive to invest in firms
  • Lack of security means no worker incentive to invest in firm
48
Q

What are the downsides of union and collective barganing?

A

Wages are not determined by demand and supply but rather barganing with union leaders and firm managment

Keeps wages above equilibrium level

49
Q

What is the 100 percent experience rated?

A

When a firm pays the full cost of the unemplyment benefits when they lay off a worker

50
Q

What is a partially experience rated?

A

When a firm bares some of the unemployment insurance cost after laying off a worker

51
Q

How does minimum wage imapact teenagers?

A
  • They are the least skilled and have a low marginal productivity, therefore they take ‘compensation’ in the form of on-the-job trainning rather than direct pay
  • Therefore wages paid to teens are low
  • 10% 8increase in minimum wage reduces teenage employment by 1-3%
52
Q

What is efficency wage?

A

High wages to make workers more productive

53
Q

What are the wage efficency theories?

A
  • Wages improves nutrition, as individuals are able to afford better quality and more food = more productive due to healthier labourforce (Not necessary in Europe and America, where equilibrium wages are necessary for good health)
  • For developed countries: High wages reduce labour turnover = decreasing time and money spent hiring and trainning new workers
  • Quality of workforce depend on wages: Adverse selection (People with an advantage self-selecting in a way that disadvantages people with less information (the firm)), increases when there a low wages, as high skilled workers seek better oppurtunities
  • High wages improve effort: (Moral hazard - tendency of people to behave inappropriately when their behaviour is monitored) reduces when they are being paid a high wage
54
Q

Who accounts for a small minority of those who become unemployed?

A

Long term

55
Q

What proportion of the unemployed have only recently entered the labour force?

A

1/3

56
Q

What was the opinion of Barro?

A

Expansion of unemployment benefits led to a rise in long-term unemployment

57
Q

What was the opinion of Krugman?

A

Effect of unemplyoment benefits is weak on worker benefits

58
Q

What is the correlation between national unemployment rates and the percentage of the labour force whose wages are set by collective bargining with unions?

A

Positive

59
Q

What tends to be the case for countries with high unemployment insurance?

A

High unemployment rates

60
Q

What tends to happen when benefits are provided over a long period of time?

A

Higher unemployment

61
Q

What is the impact on governmnet spending on active labour market policies?

A

Decreases unemployment

62
Q

What is the differnce between hours worked in the US and Europe?

A
  • Europe tend to work less hours and enjoy more holidays
  • More potential workers are employed in the US so employment to population ratio is higher
63
Q

What are some of the reasons for the lower employment-to-population ratio in Europe?

A
  • Higher unemployment in Europe
  • Earlier retirement in Europe

EC1B3 (13 decks)

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