Unemployment

Question 1

How does the US census divide up the adult population?

Answer 1

Employed

Unemployed

Not in the labor force

Question 2

To be classified as unemployed, a person must be?

Answer 2

Without a job, currently available to work, and actively looking for a job within the last four weeks.

Question 3

To be classified as out of the labor force, a person must be?

Answer 3

Unemployed and has not looked for work within the last four weeks

Question 4

How do you calculate the unemployment rate?

Answer 4

Divide the total number of unemployed by the total number of the labor force

Unemployed / Labor Force

Question 5

What is hidden unemployment? Give some examples.

Answer 5

People who are working but mislabeled within the workforce

Includes part-time workers wishing to be full-time, and underemployed people who have higher education but a lower paying job.

Question 6

What happens to the unemployment rate when unemployed workers are reclassified as discouraged?

Answer 6

The unemployment rate falls because these workers are moved out of the labor force

Question 7

What is cyclical unemployment, and how does it affect the labor market and wages?

Answer 7

Unemployment linked to the business cycle.

As the economy expands firms will demand more labor and the demand curve will shift right, raising wages.

As the economy contracts (recession) firms will demand less labor and the demand curve will shift to the left, and combined with sticky wages, unemployment rises

Question 8

What is an implicit wage contract, and what is the best argument for it?

Answer 8

Wage-setting insurance for non union workers.

When the economy contracts they expect to keep their salary, and when the economy expands they will not expect a large salary increase.

This is confirmed by the adverse selection of wage cuts argument

Question 9

What is the efficiency wage theory?

Answer 9

The productivity of workers and the retention of employees depends on paying higher than market wages.

Question 10

What is the adverse selection of wage cuts argument?

Answer 10

If an employer reacts to poor business conditions by cutting wages, the best workers, are most likely to seek higher wages at competing firms, while the least attractive workers will stay

Question 11

What is frictional unemployment?

Answer 11

Unemployment of those in the workforce waiting to be hired or transitioning between jobs

Question 12

What is structural unemployment?

Answer 12

unemployed individuals who lack skills necessary to obtain a job

Question 13

How do public policies affect the supply side of the labor market?

Answer 13

A society with a generous but short lasting unemployment package will have a better chance of getting people back to work than a society with less money but lasting longer.

Question 14

How do public policies affect the demand side of the labor market, what are examples?

Answer 14

Rules that make it hard for businesses to start or expand will discourage the demand for labor and punish workers

Minimum wage, high start up costs, and labor unions

Question 15

Is cyclical unemployment a long term or short term issue, and how can public policies fight it?

Answer 15

Cyclical unemployment is a short term issue

It is the governments best interest to stimulate the buying power in the economy so consumer spending does not fall and firms are willing to hire

Question 16

What term describes the remaining level of unemployment that occurs when the economy is healthy?

Answer 16

Natural Unemployment

Question 17

What is the Phillips curve?

Answer 17

Represents the relationship between wage inflation rates and the unemployment of a country

Question 18

When considering unemployment and wage inflation, what relationship do the two have, and explain.

Answer 18

Wage inflation and unemployment have an inverse relationship

When unemployment is low, labor is scarce, and wages rise rapidly. When unemployment is high, labor is abundant, and wages rise slowly.

Question 19

What happens to real wages when when a government uses expansionary policies to lower unemployment below the natural rate?

Answer 19

The increase of aggregate demand in the economy increases overall prices.

Firms revenues increase and hire more labor and increase the wage rate slightly.

For a short time the labor market suffers from a “money illusion” that their wages have increased at a lesser rate than prices and they are working more to make less than before the policy