Test #2 (chapter 8)

Question 1

Define unemployed and the unemployment rate

Answer 1

Unemployed = People who are available for work and have been looking for a job in the past 4 weeks
**doesn’t include disabled and retired people

Unemployment rate = the percent of the total number of people in the labour force who are unemployed
- typically aligns with economic troubles but not always perfectly - can be post-recession rise (called jobless recovery or a growth recession)

Calculation = (# of unemployed workers / labour force) x 100

Question 2

What is the labour force? What is the labour force participation rate?

Answer 2

Labour force = employed + unemployed (16+)

LF participation rate = (labour force / population 16+) x 100

Question 3

What is the employment rate

Answer 3

(# of employed workers / labour force) x 100

Question 4

What are the major problems with unemployment statistics?

Answer 4

Can overstate the true level of unemployment because even in ‘good times’ it takes time to find a job

Can understate unemployment because of the cases that aren’t counted:
–> discouraged workers = those who give up looking for a job
–> marginally attached workers = looked for work in the past 12 weeks
–> underemployed = ppl working part-time because they can’t find full time work

Another problem: doesn’t measure the quality of jobs or if the job is a good match for people

Question 5

What are some other indicators of unemployment that economists can look at?

Answer 5

• labour force participation rate
• # of full-time jobs
• average wages

Question 6

What are some trends with unemployment and age / education?

Answer 6

• younger people (15-24) are typically more unemployed because they have less education and they’re more fluid (moving in and out of jobs)
• highschool grads are more unemployed than uni grads
• if you graduate uni during a recession, you’re basically screwed for life

Question 7

What is natural unemployment? What is included in natural unemployment? What is actual unemployment?

Answer 7

Natural unemployment = the normal unemployment rate around which the actual unemployment rate fluctuates (the rate of unemployment that arises from the effects of frictional plus structural unemployment)

Natural unemployment = fictional unemployment + structural unemployment

Actual unemployment = natural unemployment + cyclical unemployment

Question 8

What is frictional unemployment and structural unemployment?

Answer 8

FRICTIONAL = unemployment due to the time spent in job search (maybe bc of scarcity of information or just takes time to find a good match)
–> exists even when the # of ppl seeking jobs = job vacancies - some frictional unemployment will even exist at equilibrium (it doesn’t exist bc of a surplus of labour)
–> it’s a short-term phenomenon + short term unemployment
–> this unemployment is relatively harmless and may even be a good thing (ppl take time to find their match)

STRUCTURAL = caused by changes in labour demand and in technology
–> results when there are more people seeking jobs in a particular labour market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle
–> job seekers > job vacancies
–> amount of labour supplied - the amount of labour demanded = structural unemployment

Question 9

List some causes of structural unemployment

Answer 9

• labour unions
• minimum wages (only when binding)
• efficiency wages (firms paying a little more than minimum wage to try to make people stay and be more productive) –> If some firms pay efficiency wages and others don’t - many workers will only be willing to work for the higher wage, which means we have a pool of workers who want jobs but can’t find them
• government policies (ex. employment insurance so people can afford to be unemployed longer)
• skill mismatches

Question 10

What is cyclical unemployment?

Answer 10

The difference between the actual rate of unemployment and the natural rate of unemployment due to downturns in the business cycle

Question 11

What is the other name for the natural rate of unemployment?

Answer 11

NAIRU - non-accelerating inflation rate of unemployment

Question 12

What causes the natural rate of unemployment to fluctuate?

Answer 12

1. Changes in labour force characteristics:
   - change in demographics (ex. age or education)
   - ex. 1970s rise in unemployment largely due to baby boom kids and women entering workforce
2. Change in labour market institutions:
   - unions, temporary employment agencies (help match workers to jobs), gig economy companies, new technology (tends to increase demand for skilled workers
3. Changes in government policies:
   - minimum wage, employment subsidies + job training programs (reduce unemployment), employment insurance

Question 13

Why does inflation not make everyone poorer?

Answer 13

Because incomes often rise with prices

Question 14

Define “real wage” and “real income”

Answer 14

real wage = the wage rate divided by the price level

real income = nominal income divided by the price level

Question 15

In terms of the negative impact of inflation, it’s not the ______________ that matters, it’s the ________________________

Answer 15

price level

rate of change of prices (inflation rate)

Question 16

Describe the costs of inflation

Answer 16

1. Shoe-leather costs:
   - the increased costs of transactions caused by inflation
   - High inflation rates discourage people from holding onto money - people will move funds into assets they think will hold value and reduce the amount of money they hold
   - During hyperinflation, so many banking transaction take place - banking sectors grow very large - huge increase of bank employers
   - costs = The wear and tear caused by the extra running around that takes place when people are trying to avoid holding money
2. Menu costs:
   - the real cost of changing a listed price
   - Sometimes when inflation is really high, merchants might decide to list their prices in an artificial unit or a more stable currency like the US dollar
3. Unit-of-account costs:
   - costs arising from the way inflation makes money a less reliable unit of measurement (makes it hard to accurately plan a family budget or project firm revenue)
   —> Particularly important in the tax system
   ex. Canadian tax law would make a business pay taxes on a phantom gain (they didn’t really gain anything in a house sale for example, because the amount that the house went up is divided by the amount that inflation went up)

Question 17

What is an interest rate? What is the nominal interest rate and the real interest rate?

Answer 17

Interest rate = the price that a lender charges for the use of his or her savings for one year

nominal interest rate = the interest rate expressed in dollar terms

real interest rate = the nominal interest rate minus the rate of inflation (*this is the one that matters in terms of winners and losers)

Question 18

Who wins and loses from falsely expected inflation rates?

Answer 18

*higher than expected inflation = good for buyers/borrowers (same amount of money is worth less in the future so doesn’t mean as much to pay back)

*lower than expected inflation = good for loaners

Question 19

Why do policy makers respond forcefully to signs that inflation may be accelerating?
What’s the solution to infaltion?

Answer 19

Because disinflation (process of bringing down the inflation rate) is very difficult, and becomes more costly one a higher rate of inflation has become well established in the economy
–> the policies needed to slow prices usually cause unemployment because the solution to inflation = recession

Question 20

A high minimum wage can cause ________ unemployment

Answer 20

structural

Question 21

Generous unemployment benefits can increase ___________ unemployment

Answer 21

both structural and fictional unemployment

Question 22

What is the most important source of gains and losses from unexpected inflation?

Answer 22

Home mortgages in canadian households

Question 23

What is monetary policy?

Answer 23

Decisions about the quantity of money and key interest rates (set by bank of Canada)

Question 24

What are the main goals of macroeconomic policy?

Answer 24

low unemployment
price stability
- sometimes these goals are in conflict

Question 25

What is the unemployment rate a good indicator of?

Answer 25

Overall labour market conditions, not so much an exact measure of the percentage of people unable to find jobs

Question 26

Define visibly underemployed and invisibly underemployed

Answer 26

visibly = work fewer hours than desired
invisibly = have jobs that do not use their skills fully

Question 27

What is the R8?

Answer 27

the broadest measure of unemployment and underemployment → includes the three omitted categories plus the unemployed

Question 28

What are two reasons for natural job loss?

Answer 28

Structural change in the economy → industries rising and falling as new technologies emerge and consumers’ tastes change

Poor management performance or bad luck at individual companies

Question 29

What caused the fall in the natural rate of unemployment in the 80s and 90s in Canada

Answer 29

Used to have UI (unemployment insurance) - this was at an all time high in the 1970s which was causing a higher natural rate of unemployment

Then they renamed it to EI (employment insurance) and slashed the benefits which make the natural rate of unemployment fall

Question 30

What is an additional cost of inflation having to do with interest?

Answer 30

People being scared to enter into any form of long-term contract because of the uncertainty about future inflation rates