Week 5 - Labour Force Flashcards
Describe the micro model of employment
Firms demand labour as an input into production. The labour supply curve describes the entire supply of labour (represents employees) .
The model assumes that the market will clear and includes no unemployment.
Describe the effect of an increase in income tax on the labour market
The tax reduces after tax wages, labour supply (upwards shift) contracts, employment declines and wages increase.
Describe the effect of automaker’s subsidy being withdrawn
The break even point for hiring is raised as less money results in less demand for labour. Consequently, wages and employment fall (leftwards shift in demand curve)
Describe the effect of a floor on wages
At the higher wage rate, an excess of supply is creates. This mismatch causes unemployment to rise as the market can’t clear.
Formula for the participation rate
those in the labour force/ total working age population
Define employed people
those who have worked at least 1 hour in the week before the survey
Define unemployed people
those who have not worked at all in the week before the survey, who were actively looking for work in the past 4 weeks. They must also be ready to work
What are 3 issues with unemployment statistics?
- In a recession, people tent to leave the labour force (edu or discouraged) making unemployment look lower
- Under-employment is hard to capture
- people claiming to be unemployed when they’re not can lead to it being overstated
Factors that impact employment prospects
Education improves prospects
Older workers are unemployed longer (ageism and specialisation)
Unemployment rates are higher among young people
Define cyclical unemployment
Caused by shifts in the business cycle. Falling activity leads to less production and lay offs. When the economy recovers, the rate continues to rise for a time due to lag
Define full employment
No cyclical unemployment - only frictional and structural
Define the natural rate of unemployment
rate of unemployment when the economy operates at potential GDP
define frictional unemployment
short term unemployment arising from the time taken to match workers and jobs
Define seasonal unemployment
caused by factors such as the weather, tourism, Christmas etc
Define structural unemployment
Arises from the persistent mismatch between skills and requirements
What is the actual rate if unemployment?
Frictional + structural (aka natural) + cyclical
What are 5 costs of unemployment?
1) loss of GDP through lower L and the opportunity cost of slack human capital
2) loss or deterioration of human capital
3) retraining costs
4) financial costs to the government through benefits and loss of tax revenue
5) social costs such as loss of income, crime, health etc
How can rising unemployment in the 60s and 70s be explained?
Exogenous shocks can cause long term unemployment.
Many you workers entered the labour force at this time as the baby boomers became old enough to work. The decline in the 80s and 90s was due to the ageing of them
Explain the variables in the bathtub model
endogenous: employment and unemployment
exogenous: job search rate and job finding rate
Formula for the bathtub model
labour = employment + unemployment
channge in unemployment = employed who lose jobs - unemployed finding jobs
