Unemployment

Question 1

DEF: labour force

Answer 1

Everyone in adult, civilian population
Either employed or actively seeking
And ready to start within fortnight

Question 2

DEF: Natural rate of unemployment

Answer 2

Rate that would prevail if econ in neither boom nor bust

Question 3

DEF: Cyclical unemployment

Answer 3

Difference between actual rate and natural rate,

Associated with SR fluctuations in output

Question 4

What does actual unemployment compose of?

Answer 4

Actual= frictional + structural + cyclical

Frictional -> dynamic changes
Structural -> real wage rigidities, hiring and firing costs, unemployment benefits, unions and collective bargaining. Results from labour market institutions that match up workers and firms in labour market.
Cyclical -> booms and recessions, SR fluctuations

Question 5

What’s the first model of natural unemployment?
How do you derive it?
What does it imply?

Answer 5

The bathtub model

Use following
E + U = L
sE=fU, sub above eqn into E

End up with U/L = s/(s+f)

Implies that to change NRU gotta change s or f.

Question 6

Why would f<1?
Two reasons

1. PIMIS
2. MET

Answer 6

1. Job search - FRICTIONAL

Why hard to find?

• info (government employment agencies can fix)
• firms’ preferences for skills of workers (sectoral shifts, public training programmes can help)
• workers’ preferences for firms
• geographic immobility
• maybe don’t wanna find due to insurance, then again helps with certainty and workers can take time to find a job for which they’d be most productive

2. Wage rigidity and job rationing -> STRUCTURAL
   - Minimum wages (diagram)
   - Efficiency wages
   More productive from increased effort via reduced shirking or nutrition
   Fewer turnovers
   Attracting higher quality job applicants
   - Trade Unions
   Dynamics between insiders and outsiders