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Macroeconomics (Economics Cambridge Part I) > Lectures 9 & 10 - Labour Markets and Unemployment > Flashcards

Lectures 9 & 10 - Labour Markets and Unemployment Flashcards

1
Q

Define the ‘adult, civilian population’

A

everyone not in the military, aged 16+

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2
Q

Define labour force

A

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

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3
Q

What is the equation for the unemployment rate?

A

UR = (number unemployed / labour force) x 100

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4
Q

What is the equation for the participation rate?

A

PR = (labour force / adult population) x 100

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5
Q

Are discouraged workers part of the labour force?

A

no

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6
Q

Define the natural rate of unemployment

A

the unemployment rate that would prevail if the economy were in neither a boom nor a bust

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7
Q

Define cyclical unemployment. What is it associated with?

A
  • the difference between the actual rate and the natural rate
  • associated with short-run fluctuations in output
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8
Q

In the Pool model, how many endogenous variables are there? What are these endogenous variables?

A
  • 2 endogenous variables
  • employment E and unemployment U
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9
Q

In the Pool model, what do L, E, U and U/L represent?

A
  • L = number of workers in labour force
  • E = number of employed workers
  • U = number of unemployed workers
  • U/L = unemployment rate
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10
Q

What are the 2 assumptions of the Pool model?

A
  • 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)

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11
Q

What is the steady state situation for the Pool model?

A
  • s x E = f x U
  • number of employed people that lose or leave their jobs = number of unemployed people who find jobs
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12
Q

Derive an equation for the natural rate of unemployment given the Pool model

A
  • 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)
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13
Q

Give 2 drawbacks of the Pool model

A
  • 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
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14
Q

What would have to happen to s or f in order for a policy to reduce the natural rate of unemployment?

A

the policy must lower s or increase f

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15
Q

What would happen if job finding were instantaneous (f = 1)?

A

all spells of unemployment would be brief and the natural rate would be near zero

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16
Q

Give 2 reasons why f (fraction of unemployed workers that find jobs in a given time) < 1

A
  • job search
  • wage rigidity
17
Q

What is frictional unemployment?

A

unemployment caused by the time it takes workers to search for a job

18
Q

Why does frictional unemployment occur?

A
  • 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
19
Q

Define sectoral shifts

A

changes in the composition of demand among industries or regions

20
Q

Why do sectoral shifts cause frictional unemployment?

A

as it takes time for workers to change sectors

21
Q

What does unemployment insurance do?

A

unemployment insurance pays part of a worker’s former wages for a limited time after leaving their job (unemployment benefit)

22
Q

Why does unemployment insurance increase the natural rate?

A
  • reduces the opportunity cost of being employed
  • reduces the urgency of finding work
  • hence, reduces f
23
Q

How may unemployment insurance benefit the economy?

A
  • 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
24
Q

Give and briefly explain 2 government policies which affect unemployment

A
  • 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
25
Q

Unemployment from wage rigidity and job rationing is called what?

A

structural unemployment

26
Q

Give 3 reasons for wage rigidity

A
  • minimum wage laws
  • labour unions
  • efficiency wages
27
Q

Why can’t the minimum wage explain the majority of the natural rate of unemployment?

A

as the minimum wage is well below the equilibrium wage for most workers

28
Q

In what situation do increases in the minimum wage increase unemployment?

A
  • when the minimum wage may exceed the equilibrium wage of certain groups
  • e.g. part-time workers, teenagers, generally unskilled workers
29
Q

What do labour unions do?

A

unions exercise monopoly power to secure higher wages for their members

30
Q

When does unemployment arise as a result of unions?

A

when the union wage exceeds the equilibrium wage, unemployment results

31
Q

Explain how efficiency wages may cause unemployment?

A
  • 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
32
Q

There is higher unemployment in the EU, give 4 reasons for why the EU has more labour market rigidities?

A
  • EU more diverse than US (culture, language)
  • EU countries have strong union traditions
  • European welfare states (generous unemployment benefits, etc)
  • strong employment protection legislations
33
Q

What is meant by hysteresis, in relation to unemployment?

A
  • 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
34
Q

Strong welfare states is a reason for unemployment in the EU, give 3 aspects of strong welfare states can lead to unemployment?

A
  • generous social insurance programmes
  • large unemployment benefits
  • collective bargaining
35
Q

Define mobility rate

A

ratio of the total number of people who changed region of residence to the total population over a period of time (usually 1 year)

36
Q

Explain how the ‘black economy’ may be a reason for unemployment in the EU

A
  • in south Europe, black economies have significant size
  • many unskilled workers hired on the black market - thus appearing as “unemployed”
37
Q

Give 3 reason why EU legislation may contribute to its unemployment

A
  • strict labour laws
  • hiring/firing, probation periods
  • tenure

Macroeconomics (Economics Cambridge Part I) (26 decks)

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