Unemployment and Labour Force Participation

Question 1

How is the unemployment rate calculated?

Answer 1

Unemployment rate = (Unemployment/(Unemployment+Employed) x 100

or

(Unemployment/Laborforce)x100

Question 2

How good an indicator is the unemployment rate?

Answer 2

The unemployment rate is the single best indicator of how well the labour market is working in both of these senses, but still an incomplete indicator.

E.g.: Doesn’t account for people who are discouraged to look for a job/ stopped looking for a job but still want a job.

Question 3

What’s frictional unemployment?

Answer 3

Frictional unemployment is short-term unemployment caused by the ordinary difficulties of matching employee to employer.

Question 4

How is scarcity of information one of the causes of frictional unemployment?

Answer 4

Workers do not know all the job opportunities available for them and employers do not know all the available candidates and their respective qualifications.

Question 5

What’s structural unemployment?

Answer 5

Structural unemployment is persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs.

Question 6

What causes structural unemployment?

Answer 6

One cause is large, economy-wide shocks that occur relatively quickly. Adjusting to these shocks can. create long-lasting unemployment as the economy takes time to restructure.

Question 7

Why has structural unemployment become a more serious problem in Europe than in the United States?

Answer 7

Main reason: Labour regulations, such as unemployment benefits, minimum wages, unions, and unemployment protection laws.

Question 8

Why do unemployment benefits increase unemployment rates?

Answer 8

Unemployment benefits reduce the incentive for workers to search for and take on new jobs.

Question 9

What are the main effects of employment protection laws?

Answer 9

• Create valuable insurance for workers with full-time jobs
• Make labour markets less flexible and dynamic
• Increase the duration of unemployment
• Increase the unemployment rates among young, minority, or otherwise riskier workers

Question 10

Name the 4 most notable labour regulations that can increase structural unemployment.

Answer 10

• Unemployment benefits
• Minimum wages
• Powerful unions
• Employment protection laws

Question 11

Name 4 policies that can reduce structural unemployment

Answer 11

• Job retraining
• Job searching assistance
• Work tests
• Early employment bonuses

Question 12

Explain what cyclical unemployment is

Answer 12

Cyclical unemployment is unemployment correlated with the business cycle.

Question 13

Lower growth is usually accompanied with higher unemployment for two reasons. Name both and explain them:

Answer 13

First, when GDP is falling, firms often lay off workers, which increases unemployment

The second reason is that higher unemployment means that fewer workers are producing goods and services. When workers are sitting idle, it’s likely that related capital is also sitting idle.

Question 14

Explain the natural unemployment rate

Answer 14

The natural unemployment rate is the rate of structural plus frictional unemployment.

Question 15

Define the labour force participation rate

Answer 15

The labour force participation rate is the percentage of adults who are in the labour force

Question 16

Explain the life cycle effects and demographics as a factor that determines the labour force participation rate.

Answer 16

Example, as more people reach retirement age, the labour force participation will naturally decline.

Question 17

Explain how incentives might determine the labour force participation rate

Answer 17

The choice to work can be influenced by taxes on workers and benefits paid to nonworkers.

Taxes discourage work and benefits encourage nonwork.

Question 18

Around what does actual unemployment rate vary around?

Answer 18

Frictional unemployment rate