Unemployment

Question 1

Employed people include

Answer 1

Those who worked
* Paid employees
* In their own business
* Unpaid workers in a family member’s business
Full-time and part-time workers
Temporarily absent
Vacation, illness, bad weather

Question 2

Unemployed people include

Answer 2

Those who were not employed but
* Available for work
* Tried to find employment during the previous four weeks
* Those waiting to be recalled to a job - laid off

Question 3

Labor force includes

Answer 3

• Employed people
• Unemployed people, who have looked for work during previous 4 weeks.

Question 4

People who are not in the labor force include

Answer 4

• Not employed
• Not unemployed
• Full-time students
• Homemakers
• Retirees
• And so on

Question 5

Unemployment rate is

Answer 5

The percentage of labor force that is unemployed.
* Unemployment rate = 100 x (unemployed/labor force)

Question 6

Labor force participation rate is

Answer 6

The percentage of the adult population that is in the labor force
* Participation rate = 100 x (labor force/adult number)

Question 7

There’s always

Answer 7

some unemployment, though the u-rate fluctuates from year to year

Question 8

Natural rate of unemployment

Answer 8

Normal rate of unemployment around which the unemployment rate fluctuates

Question 9

Cyclical unemployment is

Answer 9

deviation of unemployment from its natural rate

Question 10

Even when the economy is doing well, there is always some unemployment, including:

Answer 10

• Frictional unemployment
• It takes time for workers to search for the jobs that best suite their tastes and skills
• Explain relatively short spells of unemployment
• Structural unemployment
• Results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
• Explains longer spells of unemployment
• Results when the wages are set above the equilibrium
• Results from the industrial reorganization

Question 11

Job search - the cause of frictional unemployment

Answer 11

• Job search is the process of matching workers with appropriate jobs.

Question 12

Sectoral shifts - the cause of frictional unemployment

Answer 12

• Sectoral shifts are changes in the composition of demand across industries or regions of the country. For example: beginning of the pandemic => the demand for medical services increases.
• Such shifts desplace some workers, who must search for new jobs appropriate for their skills and tastes.
• Because the economy is always changing, some frictional unemployment is inevitable.

Question 13

Unemployment insurance (UI) is

Answer 13

a government program that partially protects workers’ incomes when they become unemployed.

Question 14

Benefits of UI:

Answer 14

• Reduces uncertainty over incomes
• give the unemployed more time to search, resulting in better job matches and thus higher productivity.

Question 15

Costs of UI

Answer 15

Moral hazard: some people might be just pretending that they are searching for job while they are not.

Question 16

Structural Unemployment Diagram

Answer 16

• We is the equilibrium rate when there is no unemployment occurs.
• Wm is the minimum wage set by the government - causes unemployment.
• If Wm rises, the unemployment will expands.

Question 17

Minimum Wage Laws

Answer 17

• The min wage may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment.
• But as this group is a small part of the labor force, the min wage can’t be blamed for most unemployment.

Question 18

Unions (related to structural unemployment)

Answer 18

• Union is a worker association that bargains with employers over wages, benefits, and working conditions.
• Unions exert their market power to negotiate higher wages for workers.
• When unions raise the wage above equilibrium, unemployment occurs.
• The typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work.

Question 19

Are unions good or bad?

Answer 19

• Critics: Unions are cartels. They raise wages above equilibrium, which causes unemployment and/or depresses wages in non-union labor markets.
• Advocates: Unions counter (against) the market power of large firms, make firms more responsive to workers’ concerns.

Question 20

The theory of efficiency wages

Answer 20

• Firms voluntarily pay above-equilibrium wages to boost worker productivity.
• Different versions of efficiency wage theory suggest different reasons why firms pay high wages.

Question 21

The reasons why firms might pay efficiency wages:

Answer 21

• Worker health: In less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, makes them healthier, more productive.
• Worker turnover: Hiring & training new workers is costly. Paying high wages gives workers more incentive to stay, reduces turnover.
• Worker quality: Offering higher wages attracts better job applicants, increases quality of the firm’s workforce.
• Worker effort: Workers know that if they don’t work hard, they will be fired. Thus, it serves as a motivation.

Question 22

This situation would affect frictional unemployment or structural unemployment?

” The government eliminates the minimum wage. “

Answer 22

Reduce structural unemployment

Question 23

This situation would affect frictional unemployment or structural unemployment?
“The government increases unemployment insurance benefits.”

Answer 23

Increase the frictional unemployment

Question 24

This situation would affect frictional unemployment or structural unemployment?
“A new law bans labor unions.”

Answer 24

Reduce structural unemployment

Question 25

This situation would affect frictional unemployment or structural unemployment?

“More workers post their resumes at LinkedIn.com, and more employers use LinkedIn.com to find suitable workers to hire.”

Answer 25

Reduce frictional unemployment

Question 26

This situation would affect frictional unemployment or structural unemployment?

“Sectoral shifts become more frequent.”

Answer 26

Increase frictional unemployment.

Question 27

Explaining the Natural Rate of Unemployment: A
Summary

Answer 27

The natural rate of unemployment consists of:
* Frictional unemployment: It takes time to search for the right jobs. It occurs even if there are enough jobs to go around
* Structural unemployment: When wage is above equilibrium, not enough jobs. Due to min. wages, labor unions, efficiency wages