Unemployment Flashcards
How can the population be broken down?
The entire population > adult civilian population (nonmilitary 16+) > labour force (adult civilians in or actively seeking employment at time of measurement and available to start work within a fortnight)
Labour force = no. employed + no. unemployed
Discouraged workers are those who have been unemployed for so long that they stop seeking work and so are not counted in the labour force
What are the main rates when studying employment?
Unemployment rate: no. unemployed / labour force
Participation rate: labour force / adult population
What are the main types of unemployment?
Job creation and destruction are normal parts of the economy so there will always be some unemployment, most unemployment spells are short but long spells make up most of the total lost work weeks lost
Natural Rate of Unemployment: the rate the economy would be at if it wasn’t in a boom or bust of a business cycle
Cyclical unemployment: the difference between the actual rate and the natural rate of unemployment, associated with short run output fluctuations
Frictional unemployment: caused by the time it takes workers to search for a job (even if wages are flexible and the number of vacancies is high enough due to differing requirements, abilities, preferences, and geographical mobility)
What is the pool model of the NRU?
Endogenous variables: no. employed E, no. unemployed U
Exogenous variables: size of labour force L, rate of job separation or fraction of employed workers who lose their jobs s, rate of job finding or fraction of unemployed workers who gain a job f
U/L is the unemployment rate
Where is the steady state for the pool model?
Where the number of people being separated from jobs and the number finding jobs are equal so sE = fU
fU = sE = s(L - U) = sL - sU so U/L = s/(s+f)
What is a typical NRU?
5%
What are some drawbacks to the pool model?
Can’t explain the initial unemployment or why job finding is not instantaneous, only what the the long run natural rate of unemployment should be
How do the rates of job separation and finding affect the NRU?
The NRU decreases if s decreases of f increases
Why is the the NRU usually not very close to 0?
This would mean f ≈ 1 so all spells of unemployment would be very brief, f < 1 because of time for job searching and wage rigidity
What is unemployment insurance?
When the government pays part of a worker’s former wages for a limited time after losing their job
What is the effect of unemployment insurance?
It is expected to increase the NRU because it reduces the opportunity cost of being unemployed and reduces the urgency of finding work, studies show that longer periods of eligibility for UI lead to longer spells of unemployment, but this could help productivity and incomes if workers are able to find jobs that they are better suited for
How can policies decrease the NRU?
By decreasing s or increasing f (lessening wage rigidity which can be caused by minimum wages that are likely to be above the equilibrium wage for sectors of the labour force like teenagers and part time workers, labour unions exercising monopoly power to the benefit of current workers’ wages at the expense of unemployed potential workers, and efficiency wages paid above the equilibrium to minimise turnover and improve effort)
How can wage rigidity unemployment be shown graphically?
On a graph of real wage against labour, labour supply is a vertical line, demand for labour is a downward sloping straight line, but the rigid real wage may be a horizontal line above the intersection so the gap between its intersection with demand and with supply is unemployment
How does unemployment vary between the US, UK, and EU
The UK and US are similar possibly because of sectoral shifts during the 70s and 80s and the decline of unions in and after the 80s
EU tends to have higher unemployment, rigidities referred to as Eurosclerosis include diversity in culture and language which decrease labour mobility, strong unions, strong welfare states, and strong employment protection legislation
What is hysteresis?
The way the NRU depends on history as workers who are unemployed for a long time may become permanently unemployed (leaving the labour force) due to loss of skills or discouragement
