Employment/unemployment Flashcards
Q: What is the general definition of full employment?
A: Full employment is when the labor market is in equilibrium, meaning that everyone willing and able to work at prevailing wage rates can find a job. It includes frictional unemployment but not cyclical or structural unemployment.
Q: What is frictional unemployment?
A: Frictional unemployment is the short-term unemployment experienced by people transitioning between jobs or entering the labor market for the first time.
Q: What is equilibrium unemployment?
A: Equilibrium unemployment occurs when the labor market is in balance, with aggregate demand for labor (ADL) equaling aggregate supply of labor (ASL) at the current wage rate, meaning there is no pressure for the real wage to change.
Q: What is the difference between voluntary and involuntary unemployment?
A: Voluntary unemployment occurs when individuals choose not to work at the current wage rate because it is not high enough for them. Involuntary unemployment happens when workers are willing to work at the prevailing wage but cannot find a job.
Q: What is the natural rate of unemployment (NRU)?
A: The natural rate of unemployment is the level of unemployment when the labor market is in equilibrium (ADL = ASL) and is consistent with a stable inflation rate. It includes frictional and structural unemployment but not cyclical unemployment.
Q: What factors influence the natural rate of unemployment?
A: Factors include benefit levels relative to minimum wage, minimum wage laws, quality of education and training, worker experience, availability of job information, labor mobility, and flexibility of workers and firms.
Q: What are supply-side measures to reduce unemployment?
A:
Education and Training: Enhances skills for the long-term unemployed.
Reduce Trade Union Power: Helps reduce real wage unemployment.
Employment Subsidies: Provides tax breaks or subsidies to firms hiring the long-term unemployed.
Improve Labor Market Flexibility: Encourages job creation by reducing restrictive labor market regulations.
Stricter Benefit Requirements: Encourages the unemployed to accept jobs or risk losing benefits.
Improved Geographical Mobility: Helps match unemployed workers with job vacancies in different regions.
Q: What are demand-side policies to reduce unemployment?
A:
Fiscal Policy: Increases aggregate demand through government spending and tax cuts, leading to higher consumption and reduced unemployment.
Monetary Policy: Cuts interest rates to reduce borrowing costs and encourage spending and investment, increasing aggregate demand and reducing unemployment. If ineffective, central banks might use quantitative easing to boost the money supply.
Q: What role does expansionary fiscal policy play in reducing unemployment?
A: Expansionary fiscal policy involves increasing government spending and/or reducing taxes to boost aggregate demand, which can lead to higher economic growth, more job creation, and reduced unemployment.
Q: How does monetary policy affect unemployment?
A: Lower interest rates decrease borrowing costs, encouraging spending and investment, which increases aggregate demand and reduces unemployment. If lower rates are insufficient, quantitative easing may be used to further stimulate the economy.
