Chapter 9

Question 1

UNEMPLOYMENT AND ITS NATURAL RATE

Answer 1

The problem of unemployment is usually divided into two categories:
The long-run problem
The short-run problem

The economy’s natural rate of unemployment refers to the amount of unemployment the economy normally experiences.

Question 2

UNEMPLOYMENT AND ITS NATURAL RATE

Answer 2

Cyclical unemployment is the year-to-year fluctuations in unemployment around the natural rate.

• It is closely associated with the short-run ups and downs of economic activity.

Question 3

Identifying Unemployment

Answer 3

How Is Unemployment Measured?
Every month, Statistics Canada (SC) conducts the Labour Force Survey (LFS).

Sample of 54 000 households where data are produced on:
* Unemployment
* Types of employment
* Length of the average workweek
* Duration of unemployment

Question 4

Identifying Unemployment Part 2

Answer 4

How Is Unemployment Measured?

Statistics Canada places each adult (aged 15 and older) in each surveyed household into one of three categories:
* Employed
* Unemployed
* Not in the labour force

A person is considered employed if they spent some of the previous week working at a paid job.

A person is unemployed if they are on temporary layoff or are looking for a job.

A person who fits neither of the first two categories, such as a full-time student, homemaker, or retiree, is not in the labour force.

Question 5

Identifying Unemployment: Labour Force

Answer 5

Once the surveyed individuals are categorized, Statistics Canada will compute various statistics to summarize the state of the labour market.

Labour force is the total number of workers, including both the employed and the unemployed.

LF = # of employees + # of unemployed

Question 6

Identifying Unemployment: Unemplyoment rate and Labour Force Participation Rate

Answer 6

How Is Unemployment Measured?

Unemployment rate is the percentage of the labour force that is unemployed.

U = (# of unemployed / LF) * 100

Labour force participation rate is the percentage of the adult population that is in the labour force.

LFPR = (LF/ Adult Population) * 100

Adult Population = LF + Not in LF

Question 7

TABLE 9.1 The Labour-Market Experiences of Various Demographic Groups

Answer 7

Table 9.1 compares statistics on unemployment rate and labour force participation rate for two groups in the population: between men and women and between young and old.

Three interesting facts are revealed in these statistics:
* The labour-force participation rate of young women (aged 15–24) is very similar to that of young men, but for other age groups women have noticeably lower rates of labour-force participation than men.

• Young people aged 15 to 24 have much higher rates of unemployment than older people.
• Similarly aged men and women tend to have similar rates of unemployment. Although this third fact has proven to be generally true over time, it is interesting to note that after 2009, the unemployment rate of males has proven to be noticeably higher than the unemployment rate of similarly aged females. This result has prompted some labour economists to label the 2008–09 recession a mancession because it affected the unemployment rates of males more than the unemployment rates of females.

Question 8

FIGURE 9.3 Labour-Force Participation Rates for Women with Young Children

Answer 8

This figure shows, for Ontario and Québec, the percentage of women with a spouse and one or more children aged 6 years or under who are members of the labour force.

Although participation rates increased in both provinces after 1976, since 1997 they have increased faster in Québec than in Ontario.

The timing of these relative changes is suggestive of the influence on the labour force participation rate of the Québec government providing subsidized childcare beginning in that year.

Question 9

Identifying Unemployment: Does the Unemployment Rate Measure What We Want It To?

Answer 9

Does the Unemployment Rate Measure What We Want It To?

Because people move into and out of the labour force often, statistics on unemployment can be difficult to interpret.
* Unemployed people who are not trying hard to find a job.
* People calling themselves unemployed in order to receive unemployment insurance.
* People who are officially unemployed but are working “under the table.”

**Discouraged searchers: **are individuals who would like to work but have given up looking for a job.

Question 10

TABLE 9.2 Alternative Measures of Labour Underutilization

Answer 10

This table shows various measures of joblessness for the Canadian economy. The data are averages for 2020. Figures may fail to sum exactly due to rounding.

Table 9.2 shows the official unemployment rate for Canada as well as several alternative measures of labour underutilization calculated by Statistics Canada.

These alternative measures can paint quite a different picture of the unemployment situation.

% of the Labour Force:

Unemployed 1 to 4 weeks: 3.1%
Unemployed 5 to 13 weeks: 3.0%
Unemployed 14 to 25 weeks: 1.7%

Question 11

Identifying Unemployment: How Long Are the Unemployed without Work?

Answer 11

Identifying Unemployment: How Long Are the Unemployed without Work?

In 2020, the average spell of unemployment lasted 15.2 weeks.

From Table 9.2:
* One-third of those suffering through a spell of unemployment are unemployed for a month or less.
* Two-thirds are unemployed for less than three months.

Policy solutions directed toward fixing the unemployment problem should be directed at those suffering prolonged spells of unemployment.

In 2020, the average spell of unemployment ranged from a low 12.5 weeks in Québec to a high of 18.2 weeks in Alberta.

Question 12

Identifying Unemployment: Why Are There Always Some People Unemployed?

Answer 12

Identifying Unemployment: Why Are There Always Some People Unemployed?

There are always workers without jobs, even when the overall economy is doing well.

Natural unemployment rate is the rate of unemployment to which the economy tends to return in the long run.
*6 percent to 7 percent.

Cyclical unemployment is the deviation of unemployment from its natural rate, which explains why the observed unemployment rate differs from the natural rate.

Question 13

FIGURE 9.5 Observed and Natural Unemployment Rates, 1966–2020

Answer 13

Most economists agree that the natural unemployment rate increased during the 1970s, stabilized at about 8 percent in the 1980s, and has followed a slow downward path since the mid-1990s.

The difference between the observed unemployment rate and the natural unemployment rate is the cyclical unemployment rate.

The recessions in the early 1980s, the early 1990s, and most recently in 2008–09 are identified in this figure by the jump in the observed unemployment rate well above the natural unemployment rate.

The impact of the COVID-19 pandemic is seen in the large jump in the observed unemployment rate in 2020.

Question 14

Identifying Unemployment: Why Are There Always Some People Unemployed? Pt 3

Answer 14

Why Are There Always Some People Unemployed?

When the quantity of labour supplied exceeds the quantity demanded this results in structural unemployment.

Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one.

• This kind of unemployment results when wages are set above the equilibrium level for the following reasons: 1) above-equilibrium wage (minimum-wage laws), 2) unions, and 3) efficiency wages.

Question 14

Job Search

Answer 14

One reason that economies always experience some unemployment is job search.

**Job search ** the process by which workers find appropriate jobs given their tastes and skills.

Question 14

Identifying Unemployment: Why Are There Always Some People Unemployed? Pt 2

Answer 14

This chapter focuses on the determinants of the natural (long-run) unemployment rate.

The first explanation for the long-run unemployment rate is the existence of frictional unemployment.

• Frictional unemployment is unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. It is often thought to explain relatively short spells of unemployment. It is inevitable simply because the economy is always changing.

Because frictional unemployment is the result of a well-functioning economy that rewards innovation and new ideas, we should always expect frictional unemployment to be greater than zero.

Question 15

Job Search: Why Some Frictional Unemployment Is Inevitable?

Answer 15

Frictional unemployment is inevitable simply because the economy is always changing.

• Only 90 years ago, car manufacturing, petroleum, and aircraft manufacturing industries were very minor sources of employment in Canada. Today, these are three of the largest employers in the Canadian economy.
• At the same time, agriculture has fallen from being the largest single source of employment in Canada in 1911 to being only a minor source of employment today.

Some idea of the size of the flow of employees from shrinking to expanding firms can be understood from Table 9.4.

Because frictional unemployment is the result of a well-functioning economy that rewards innovation and new ideas, we should always expect frictional unemployment to be greater than zero.

Question 16

TABLE 9.4 Job Creation and Destruction

Answer 16

Some idea of the size of the flow of employees from shrinking to expanding firms can be understood from this table.

Gross job creation is the sum of the increase in the number of jobs across all new and established firms in a given year.

Gross job destruction is the sum of the job losses across all firms that either reduce their employment or go out of business altogether in that year. Net employment growth is the difference between job creation and job destruction in that year.

The numbers in the table measure the size of employment changes as a percentage of the average level of employment in the current and the previous year.

The table shows that in 2009, for example, employment increased by 9.4 percent because new jobs were created by new firms and by existing firms, which expanded employment.

In the same year, 12.6 percent of existing jobs were lost because existing firms reduced employment or went out of business altogether.

In 2009, the net effect of job creation and destruction was a loss of 3.2 percent of existing jobs.

Question 17

Job Search: Public Policy and Job Search

Answer 17

Public Policy and Job Search:

Government programs try to facilitate the job search in various ways:

• Government-run employment agencies, which give out information about job vacancies.
• Public training programs, which aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.

Question 18

Job Search: Employment Insurance

Answer 18

Employment insurance (EI) is a government program that partially protects workers’ incomes when they become unemployed.

• EI may reduce the hardship of unemployment, but the design of the program influences workers’ behaviour in ways that will increase the unemployment rate.

Since 1971, two considerations have determined when and for how long someone can collect EI benefits: the number of hours worked in the past year and the unemployment rate in the area of residence.

Question 19

Minimum-Wage Laws

Answer 19

Let’s now examine how structural unemployment results when the number of jobs is insufficient for the number of workers.

Minimum-wage laws affect unemployment by setting the wage above the equilibrium level.
* The quantity of labour supplied exceeds the quantity of labour demanded, and workers are unemployed because they are waiting for jobs to open up.

Minimum-wage laws are an important factor for explaining some of the structural unemployment that persists in the economy.

Question 20

FIGURE 9.6 Unemployment from a Wage above the Equilibrium Level

Answer 20

In this labour market, the wage at which supply and demand balance is WE.

At this equilibrium wage, the quantity of labour supplied and the quantity of labour demanded both equal LE.

By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum-wage law, the quantity of labour supplied rises to LS, and the quantity of labour demanded falls to LD.

The resulting surplus of labour, LS − LD, represents unemployment.

Question 21

UNIONS AND COLLECTIVE BARGAINING

Answer 21

A union is a worker association that bargains with employers over wages and working conditions.

Unionization is highest in industries in the public sector (education, public administration, and health care) and lowest in the food and accommodation industry.

• In the public sector, 71 percent of workers are unionized.
• In the private sector, only 16 percent of workers are unionized.

A union is a type of cartel.

In 2020, union membership was highest in Québec, where 40 percent of the labour force is unionized, and lowest in Alberta, where only 23 percent of the labour force is unionized.

Question 22

UNIONS AND COLLECTIVE BARGAINING: The Economics of Unions

Answer 22

Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power.

When a union bargains with a firm, it asks for higher wages, better benefits, and better working conditions than the firm would offer in the absence of a union.
* Collective bargaining is the process by which unions and firms agree on the terms of employment.

• Strike is the organized withdrawal of labour from a firm by a union.

When a union raises wages above equilibrium level, it raises quantity of labour supplied and the quantity of labour demanded, resulting in unemployment.

Question 23

UNIONS AND COLLECTIVE BARGAINING: Are Unions Good or Bad for the Economy?

Answer 23

Economists disagree about whether unions are good or bad for the economy.

When unions raise wages above the level that would prevail in competitive markets, they reduce the quantity of labour demanded, cause some workers to be unemployed, and reduce the wages in the rest of the economy.

The resulting allocation of labour is, critics argue, both inefficient and inequitable.
* It is inefficient because high union wages reduce employment in unionized firms below the efficient, competitive level. It is inequitable because some workers benefit at the expense of other workers.

Advocates of unions contend that unions are a necessary antidote to the market power of the firms that hire workers.

Advocates of unions also claim that unions are important for helping firms respond efficiently to workers’ concerns.

Question 24

THE THEORY OF EFFICIENCY WAGES

Answer 24

Efficiency wages (the fourth reason for explaining unemployment in the long run) are above-equilibrium wages paid by firms in order to increase worker productivity.

According to this theory, higher wages may increase the efficiency of workers and increase the profitability of the firm, even if they cause a surplus of labour (or unemployment).

Possible efficiency-wage theories:
* Worker health
* Worker turnover
* Worker effort
* Worker quality

Question 25

Possible efficiency-wage theories: Worker health, Worker turnover, Worker effort, Worker quality

Answer 25

Worker health: Better paid workers eat a more nutritious diet and as a result are healthier and more productive.

Worker turnover: The more the firm pays its workers, the less often its workers will choose to leave. Thus, a firm can reduce turnover by paying higher wages.

Worker effort: High wages make workers more eager to keep their jobs, giving workers an incentive to put forth their best efforts.

Worker quality: When a firm pays a high wage, it attracts a better pool of workers, thereby increasing the quality of its workforce.