Topic 6

Question 1

Define natural rate of unemployment?

Answer 1

The average rate of unemployment around which the economy fluctuates

Question 2

What does L represent?

Answer 2

Number workers in labour force

Question 3

What does U represent?

Answer 3

Number of unemployed workers

Question 4

What does E represent?

Answer 4

Number of employed workers

Question 5

What is U/L equal to?

Answer 5

Unemployment rate

Question 6

Assumption 1 of the model of the labour market?

Answer 6

L is exogenous

Question 7

Assumption 2 of the model of the labour market?

Answer 7

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)

Question 8

What is the steady state condition?

Answer 8

The labour market is in steady state (LR eq.) if unemployment rate is constant

Question 9

See diagram on employment and unemploYment in notes

Answer 9

now

Question 10

See how to work out equilibrium unemployment rate

Answer 10

now

Question 11

What causes a decrease in the natural rate of unemployment?

Answer 11

1) fall in s
2) rise in f
(VICE VERSA)

Question 12

Why is there unemployment?

Answer 12

Because f<1, ie. the rate of job finding is not instantaneous

Question 13

Why is the rate of job finding not instantaneous?(2 reasons)

Answer 13

1) Job searching takes time

2) Wage rigidity can lead to inefficiencies in the labour market

Question 14

Define frictional unemployment?

Answer 14

unemployment caused by the time it takes workers to get a job

Question 15

4 causes of frictional unemployment?

Answer 15

• 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

Question 16

Define sectoral shifts?

Answer 16

changes in composition of demand among industries or regions

Question 17

2 reasons for sectoral shifts?

Answer 17

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)

Question 18

What do sectoral shifts lead to?

Answer 18

frictional unemployment (see case study and learn stats)

Question 19

What happened in the industrialrevolution(1800s) wrt sectoral shifts?

Answer 19

agriculturedeclines,manufacturingsoars

Question 20

What happened in the energycrisis(1970s) wrt sectoral shifts?

Answer 20

demandshiftsfromlargercarstosmallerones

Question 21

See

Answer 21

Healthcarespendingas%ofGDP: 1960:5.22000:13.8 1980:9.12010:17.9

Question 22

3 government policies to reduce frictional unemployment and brief explanations?

Answer 22

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

Question 23

How can UI actually increase frictional unemployment? (2)

Answer 23

1) reduces opportunity cost of being unemployed

2) reduces urgency to find work

Question 24

What did one study find regarding UI?

Answer 24

The longer a worker is eligible for UI, the longer the average spell of unemployment

Question 25

A key benefit of UI?

Answer 25

May allow a worker to find a more suitable job tf increasing their productivity in that job (matching of skills)

Question 26

3 reasons for wage rigidity?

Answer 26

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

Question 27

See and learn graph of labour market at end of notes

Answer 27

now