Chapter 8 - Unemployment Flashcards
Why is youth unemployment important?
Has long lasting effects - reduces wages later in life
What was the average difference in unemployment between Canada and the US between 1955 - 1977? Between 1977-2008?
50s-70s: .14%, more or less equal
70s - 2008: unemployment significantly higher in Canada, average at 3% but peaked in 1993 at 4.9%
How was unemployment different in Canada vs the US after the Great Recession and Pandemic?
After the Great Recession, unemployment in Canada was lower than in the US until 2013.
From 2013 - 2022: difference in unemployment rates is 1.8%
Why is unemployment in Canada higher than the US?
Canada counts passively searching for employment as unemployed, US requires actively searching
US also has high unemployment rates of minorities from large proportion being in jail/army
Higher unemployment benefits in Canada
What is the natural rate of unemployment?
Defined as the average rate of unemployment when the economy is hit by temporary shocks
Labour force equation:
L = E+U
What are the equations for 1) flow from unemployment to employment and 2) flow from employment to unemployment?
1) fU where f = proportion of unemployed who find a job
2) sE where s = proportion of employed who become separated from a job
What is the equation to find unemployment rate where the two flows fU and sE are equal?
un
= Un / L
= s / s + f
where:
L = labor force
f = proportion of unemployed who find a job
s = proportion of employed who become separated from job
What is frictional unemployment?
Due to searching for a job; job and worker heterogeneity; jobs require a match between the worker and the job, takes a long time
Fill in the blanks for the assumptions of a job search model:
1. all benefits of a)_______ can be summarized in equivalent income when b)______, y^E
2. all costs and benefits of being c)_______ can be summarized in equivalent income when d)________, yU
3. Job searching know the changes of finding a job that provides a e) ______ ______ when employed
a) employment
b) employed
c) unemployment
d) unemployed
e) particular income
What is the optimal search strategy model?
Set a reservation income when employed, y^E*
Reject y^E < y^E* (reject income when employed if less than reservation income you set)
Accept if y^E > y^E* (accept income when employed if greater than reservation income you set)
Indifferent if y^E = y^E* (indifferent to being employed if equal to reservation income you set)
What are the costs of rejecting a job offer?
Income not earned
Costs of further searching
Less job experience
What changes could reduce the cost or raise the benefit of being employed?
Search costs falling
Difference between income offered and income when unemployed such as EI
Job market prospects improve
What are the costs to the benefits of rejecting a job offer?
Income received when employed
Difference between time spent working and time spent searching
Prospect of finding better job
What is structural unemployment?
Potential job applicants do not have the right skills i.e. due to technological changes
What is cyclical unemployment?
Changes of employment from the natural rate - temporary
What is the process of unemployment increasing during recessions?
Demand becomes lower, more firms reduce employment, job separation rate increases, few vacancies so not finding jobs, s goes up and f goes down, unemployment increases
What happens to f and s after recession ends?
Return back to previous values
What is the beveridge curve?
Shows the relationship over time between number of unemployed workers and vacant jobs to distinguish between structural and cyclical unemployment
How do minimum wage laws affect unemployment?
If minimum wage is above equilibrium, believed that there is an excess supply of inexperience workers with minimum qualifications, increasing unemployment
What is a monopsonistic labor market and how did establishing minimum wage not end up reducing employment in this industry?
Industries where buyer can affect prices. Fast food restaurants use monopsonistic power to reduce wages and raise profit, and being forced to pay higher wages they didn’t have to reduce employment since they already had high profit margin, but earned lower profits (or raised prices)
Why is it believed that minimum wage may not increase unemployment?
Employers may cut benefits, companies may raise prices or settle for lower profits, workers may work harder, companies may benefit from lower turnover
How do unions affect unemployment?
Unions use redundancy rule to vote for most recently hired being laid off over older workers instead of voting to lower wages to keep workers
What are efficiency wages meant to do?
Maximize profits when effort depends on wage i.e. provide enough wages for workers to feed themselves properly, be more loyal to company = lower the costs of labour turnover and be more efficient
