Chapter 8 - Unemployment

Question 1

Why is youth unemployment important?

Answer 1

Has long lasting effects - reduces wages later in life

Question 2

What was the average difference in unemployment between Canada and the US between 1955 - 1977? Between 1977-2008?

Answer 2

50s-70s: .14%, more or less equal
70s - 2008: unemployment significantly higher in Canada, average at 3% but peaked in 1993 at 4.9%

Question 3

How was unemployment different in Canada vs the US after the Great Recession and Pandemic?

Answer 3

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%

Question 4

Why is unemployment in Canada higher than the US?

Answer 4

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

Question 5

What is the natural rate of unemployment?

Answer 5

Defined as the average rate of unemployment when the economy is hit by temporary shocks

Question 6

Labour force equation:

Answer 6

L = E+U

Question 7

What are the equations for 1) flow from unemployment to employment and 2) flow from employment to unemployment?

Answer 7

1) fU where f = proportion of unemployed who find a job
2) sE where s = proportion of employed who become separated from a job

Question 8

What is the equation to find unemployment rate where the two flows fU and sE are equal?

Answer 8

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

Question 9

What is frictional unemployment?

Answer 9

Due to searching for a job; job and worker heterogeneity; jobs require a match between the worker and the job, takes a long time

Question 10

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

Answer 10

a) employment
b) employed
c) unemployment
d) unemployed
e) particular income

Question 11

What is the optimal search strategy model?

Answer 11

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)

Question 12

What are the costs of rejecting a job offer?

Answer 12

Income not earned
Costs of further searching
Less job experience

Question 13

What changes could reduce the cost or raise the benefit of being employed?

Answer 13

Search costs falling
Difference between income offered and income when unemployed such as EI
Job market prospects improve

Question 14

What are the costs to the benefits of rejecting a job offer?

Answer 14

Income received when employed
Difference between time spent working and time spent searching
Prospect of finding better job

Question 15

What is structural unemployment?

Answer 15

Potential job applicants do not have the right skills i.e. due to technological changes

Question 16

What is cyclical unemployment?

Answer 16

Changes of employment from the natural rate - temporary

Question 17

What is the process of unemployment increasing during recessions?

Answer 17

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

Question 18

What happens to f and s after recession ends?

Answer 18

Return back to previous values

Question 19

What is the beveridge curve?

Answer 19

Shows the relationship over time between number of unemployed workers and vacant jobs to distinguish between structural and cyclical unemployment

Question 20

How do minimum wage laws affect unemployment?

Answer 20

If minimum wage is above equilibrium, believed that there is an excess supply of inexperience workers with minimum qualifications, increasing unemployment

Question 21

What is a monopsonistic labor market and how did establishing minimum wage not end up reducing employment in this industry?

Answer 21

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)

Question 22

Why is it believed that minimum wage may not increase unemployment?

Answer 22

Employers may cut benefits, companies may raise prices or settle for lower profits, workers may work harder, companies may benefit from lower turnover

Question 23

How do unions affect unemployment?

Answer 23

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

Question 24

What are efficiency wages meant to do?

Answer 24

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

Question 25

What was the difference between Germany and Spain before and after the Great Recession? Why?

Answer 25

Before Great Recession: unemployment was similar
After Great Recession: spain was 4 times higher than germany
Spain has very high youth unemployment

Question 26

How high is youth unemployment in Spain compared to Germany?

Answer 26

Spain - 50%
Germany - 7.9%

Question 27

What 3 countries had unemployment rates increase a lot during the Pandemic?

Answer 27

India, Canada, and the US