Lectures 9 & 10 - Labour Markets and Unemployment Flashcards
Define the ‘adult, civilian population’
everyone not in the military, aged 16+
Define labour force
everyone in the adult, civilian population, either employed or actively seeking employment at the time of measurement and available to start work within a fortnight
What is the equation for the unemployment rate?
UR = (number unemployed / labour force) x 100
What is the equation for the participation rate?
PR = (labour force / adult population) x 100
Are discouraged workers part of the labour force?
no
Define the natural rate of unemployment
the unemployment rate that would prevail if the economy were in neither a boom nor a bust
Define cyclical unemployment. What is it associated with?
- the difference between the actual rate and the natural rate
- associated with short-run fluctuations in output
In the Pool model, how many endogenous variables are there? What are these endogenous variables?
- 2 endogenous variables
- employment E and unemployment U
In the Pool model, what do L, E, U and U/L represent?
- L = number of workers in labour force
- E = number of employed workers
- U = number of unemployed workers
- U/L = unemployment rate
What are the 2 assumptions of the Pool model?
- L is exogenously fixed
- during a given period:
- s = fraction of employed workers that become separated from their jobs
- f = fraction of unemployed workers that find jobs
(both exogenous)
What is the steady state situation for the Pool model?
- s x E = f x U
- number of employed people that lose or leave their jobs = number of unemployed people who find jobs
Derive an equation for the natural rate of unemployment given the Pool model
- f x U = s x E
- f x U = s x (L - U)
- f x U = sL - sU
- U(f + s) = sL
- unemployment rate: U/L = s/(s + f)
Give 2 drawbacks of the Pool model
- does not explain why and how there is unemployment in the first place
- assumes job finding is not instantaneous, BUT it does not explain why
What would have to happen to s or f in order for a policy to reduce the natural rate of unemployment?
the policy must lower s or increase f
What would happen if job finding were instantaneous (f = 1)?
all spells of unemployment would be brief and the natural rate would be near zero
Give 2 reasons why f (fraction of unemployed workers that find jobs in a given time) < 1
- job search
- wage rigidity
What is frictional unemployment?
unemployment caused by the time it takes workers to search for a job
Why does frictional unemployment occur?
- workers have different abilities, preferences
- jobs have different skill requirements
- geographic mobility of workers not instantaneous
- flow of information about vacancies and job candidates is imperfect
Define sectoral shifts
changes in the composition of demand among industries or regions
Why do sectoral shifts cause frictional unemployment?
as it takes time for workers to change sectors
What does unemployment insurance do?
unemployment insurance pays part of a worker’s former wages for a limited time after leaving their job (unemployment benefit)
Why does unemployment insurance increase the natural rate?
- reduces the opportunity cost of being employed
- reduces the urgency of finding work
- hence, reduces f
How may unemployment insurance benefit the economy?
- UI allows workers more time to search for jobs
- may lead to better matches between jobs and workers
- which would lead to greater productivity and higher incomes
Give and briefly explain 2 government policies which affect unemployment
- govt employment agencies: disseminate info about job openings to better match workers and jobs
- public job training programs: help workers displaced from declining industries get skills needed for jobs in growing industries
Unemployment from wage rigidity and job rationing is called what?
structural unemployment
Give 3 reasons for wage rigidity
- minimum wage laws
- labour unions
- efficiency wages
Why can’t the minimum wage explain the majority of the natural rate of unemployment?
as the minimum wage is well below the equilibrium wage for most workers
In what situation do increases in the minimum wage increase unemployment?
- when the minimum wage may exceed the equilibrium wage of certain groups
- e.g. part-time workers, teenagers, generally unskilled workers
What do labour unions do?
unions exercise monopoly power to secure higher wages for their members
When does unemployment arise as a result of unions?
when the union wage exceeds the equilibrium wage, unemployment results
Explain how efficiency wages may cause unemployment?
- high wages may increase workers productivity
- as it attracts higher quality job applicants
- and it increases worker effort
- the increased productivity justifies the cost of paying above-equilibrium wages
- the result: unemployment
There is higher unemployment in the EU, give 4 reasons for why the EU has more labour market rigidities?
- EU more diverse than US (culture, language)
- EU countries have strong union traditions
- European welfare states (generous unemployment benefits, etc)
- strong employment protection legislations
What is meant by hysteresis, in relation to unemployment?
- an economy’s NRU depends on its history
- if workers unemployment for long, they lose skills
- less skills, workers become more “unemployable”, become more discouraged
- unemployment becomes permanent
Strong welfare states is a reason for unemployment in the EU, give 3 aspects of strong welfare states can lead to unemployment?
- generous social insurance programmes
- large unemployment benefits
- collective bargaining
Define mobility rate
ratio of the total number of people who changed region of residence to the total population over a period of time (usually 1 year)
Explain how the ‘black economy’ may be a reason for unemployment in the EU
- in south Europe, black economies have significant size
- many unskilled workers hired on the black market - thus appearing as “unemployed”
Give 3 reason why EU legislation may contribute to its unemployment
- strict labour laws
- hiring/firing, probation periods
- tenure
