Week 7

Question 1

Unemployed people

Answer 1

People without a paid job but actively looking for one

Question 2

What does it mean when we say that labour markets are dynamic?

Answer 2

• There is always someone looking for a job. Searching is costly (eg. time, effort, need to do CVs), but want to make sure get a good job
• There is always a firm w/ an open vacancy. Filling vacancy is costly (eg. interviews) but want to make sure get a good employee

Question 3

Types of unemployment

Answer 3

1. Cyclical unemployment
2. Natural rate of unemployment - the rate that would prevail if there are no business cycles / cyclical fluctuations

Under natural rate,

3. Frictional unemployment
   - by workers looking for a job. caused by time and effort taken to search for a job. Interviews, send CV etc.
   - & due to sectoral shifts (takes time for workers to change sectors)
4. Structural unemployment
   - due to labour market policies & institutions
   - & due to wage rigidity (failure of wages to adjust to a level at which labor supply equals labor demand)

Question 4

Real-wage rigidity reduces the rate of job finding and raises the level of unemployment.

3 causes of wage rigidity

Answer 4

1. Minimum-wage laws
2. Monopoly power of unions
   - A firm may choose to pay its workers high wages to keep them happy and discourage them from forming a union.
3. Efficiency wages
   - Firm operates more efficiently if it pays its workers a high wage, the firm may find it profitable to keep wages above the level that balances supply and demand

Question 5

4 examples of policies and institutions that affect f and s

Answer 5

1. If tax for a worker is higher, VALUE of the job is lower. Cost of worker is higher for firm -> lower INCENTIVE to open vacancy
2. Generous unemployment benefits are an incentive to stay unemployed longer -> lower job finding rate (f)
3. If easier to look for job -> higher job finding rate
   eg. technological progress
4. If costly to fire worker -> lower job separation rate (s)

Question 6

3 “active” labour market policies

ie. government programs to help workers search

Answer 6

1. Govt employment agencies
   eg. informs job openings, help w/ CV writing, interviewing skills…
   - NOT effective
2. Public job training programs
   - help workers displaced (fired) from declining industries get skills needed for job in growing industries
   - there is evidence that this works
3. Conditional unemployment benefits
   - conditional on you actively searching
   - may increase length of search -> lower job finding rate

Question 7

Employment Protection Legislation (EPL)

Answer 7

In many countries, policies that make firing workers more costly + notice period (1-3 months in UK)
Aims to protect workers from job insecurity & arbitrary decisions by employer.
- Lowers job separation rate & also job finding rate
- Ambiguous effect; depends on whether effect on s/f is stronger