Topic 6 Flashcards
Define natural rate of unemployment?
The average rate of unemployment around which the economy fluctuates
What does L represent?
Number workers in labour force
What does U represent?
Number of unemployed workers
What does E represent?
Number of employed workers
What is U/L equal to?
Unemployment rate
Assumption 1 of the model of the labour market?
L is exogenous
Assumption 2 of the model of the labour market?
During any given month, both s and f are exogenous and fixed where:
s=rate of job separations (fraction of employed workers that lose their jobs)
f=rate of job finding (fraction of unemployed workers that find jobs)
What is the steady state condition?
The labour market is in steady state (LR eq.) if unemployment rate is constant
See diagram on employment and unemploYment in notes
now
See how to work out equilibrium unemployment rate
now
What causes a decrease in the natural rate of unemployment?
1) fall in s
2) rise in f
(VICE VERSA)
Why is there unemployment?
Because f<1, ie. the rate of job finding is not instantaneous
Why is the rate of job finding not instantaneous?(2 reasons)
1) Job searching takes time
2) Wage rigidity can lead to inefficiencies in the labour market
Define frictional unemployment?
unemployment caused by the time it takes workers to get a job
4 causes of frictional unemployment?
- differences in abilites, skills & preferences of workers
- different skill requirements of jobs
- geographical mobility of workers not instantaneous
- imperfect information bout vacancies and job candidates
Define sectoral shifts?
changes in composition of demand among industries or regions
2 reasons for sectoral shifts?
1) techonological change (eg. more jobs repairing computers, less repairing typewriters)
2) new international trade agreements (eg. increase in jobs in X industries, decrease in jobs in M competing sectors)
What do sectoral shifts lead to?
frictional unemployment (see case study and learn stats)
What happened in the industrialrevolution(1800s) wrt sectoral shifts?
agriculturedeclines,manufacturingsoars
What happened in the energycrisis(1970s) wrt sectoral shifts?
demandshiftsfromlargercarstosmallerones
See
Healthcarespendingas%ofGDP: 1960:5.22000:13.8 1980:9.12010:17.9
3 government policies to reduce frictional unemployment and brief explanations?
1) gov. employment agencies (distribute info about job openings)
2) public job training programs (helps workers in declining areas develop new skills)
3) unemployment insurance (UI) - pays part of a worker’s wage for a limited time after they become unemployed
How can UI actually increase frictional unemployment? (2)
1) reduces opportunity cost of being unemployed
2) reduces urgency to find work
What did one study find regarding UI?
The longer a worker is eligible for UI, the longer the average spell of unemployment
A key benefit of UI?
May allow a worker to find a more suitable job tf increasing their productivity in that job (matching of skills)
3 reasons for wage rigidity?
1) minimum wage: if minimum wage exceeds the eq. wage of unskilled workers
2) labour unions: use monopoly power to secure higher wages for members tf causing U if eq. wage
See and learn graph of labour market at end of notes
now
