Week 7: Labour Markets

Question 1

Unemployment rate

Answer 1

the fraction of the labour force that is unemployed

Question 2

Employment Categories in the Population (5)

Answer 2

• Employed
• Unemployed
• Labour force
• Not in labour force – inactive
• Working age population

Question 3

Unemployment rate equation

Answer 3

(unemployed/labour force) x100

Question 4

When is a person unemployed? (3 factors)

Answer 4

• does not have a job that pays a wage
• has actively looked for a job in the past 4 weeks
• is available to work

Question 5

How are labour markets dynamic?

Answer 5

There is always someone searching for a job and there is always a firm looking to fill a vacancy

Question 6

Types of unemployment (4)

Answer 6

cyclical, natural, frictional, structural

Question 7

Cyclical unemployment

Answer 7

employment associated with short-run fluctuations in output

Question 8

Natural Rate of Unemployment

Answer 8

rate that would prevail with no cyclical unemployment

frictional + structural

Question 9

Structural Unemployment

Answer 9

labour market failure to match workers and firms

Question 10

Frictional Unemployment

Answer 10

when workers are between jobs

Question 11

Actual employment equation

Answer 11

frictional + structural + cyclical

Question 12

Employment and unemployment over time equation

Answer 12

E(t) + U(t) = L

E(t) = employment 
U(t) = unemployment 
L = size of the labour force

Question 13

Change in unemployment equation

Answer 13

△U(t+1) = sE(t) - fU(t) 
Where: 
△U(t+1) = change in unemployment 
S = job separation rate 
F = job finding rate

Question 14

Solving Labour Market Flow Model

Answer 14

1. Set change in unemployment to zero

2. Solve for U

Question 15

Unemployment rate equation

Answer 15

u* = U*/L = s/f+s

Question 16

How to Alter Natural Rate of Unemployment

Answer 16

• Change the job-finding rate

- Change the job separation rate

Question 17

Unemployment in Europe since 1980

Answer 17

• Well above the rate in the US

Question 18

Why has European unemployment increased? (4 reasons)

Answer 18

• Adverse shocks
• High oil prices
• Inefficient labour market institutions
• Welfare benefits

Question 19

Why is GDP per capita lower in Europe?

Answer 19

• People work fewer hours

- Europeans enjoy more leisure if work is voluntary

Question 20

Policies and Institutions that can affect f (job finding rate) and s (job separation rate) - 5 factors

Answer 20

• Incentives to open vacancies (value of job)
• Incentives to exert search effort
• Efficiency of search
• Cost of separation
• Outside options for quitters

Question 21

Labour Market Policies

Answer 21

government programs to help workers search for jobs

Question 22

Active Labour Market Policies (4 types)

Answer 22

Gov employment agencies, public job training programs, conditional unemployment benefits, Employment Practice Liability

Question 23

Unemployment Insurance

Answer 23

Pays part of a worker’s former wages for a limited time after the worker loses his/hers job

Question 24

Advantages of Unemployment Insurance (3)

Answer 24

1. Reduced hardship
2. Allows workers mote time to search – may lead to better job matches and therefore greater productivity
3. May support aggregate demand in recessions by preserving spending power of the unemployed

Question 25

Disadvantages of Unemployment Insurance

Answer 25

1. May increase search unemployment as reduced the opportunity cost of being unemployed
2. Gov face problem on choosing the level and duration of UI to find the right balance

Question 26

Employment Protection Legislation

Answer 26

includes all types of employment protection measures

Question 27

Pro and Con of temporary jobs

Answer 27

Pro:
Unemployment gets some work some of the time
Con:
No firm incentives to invest in workers, no worker incentives to invest in firms

Question 28

Payroll taxes

Answer 28

A % withheld from an employee’s salary and paid to a government to fund public programs
Increases cost of labour – reduces value of jobs

Question 29

Result of payroll taxes

Answer 29

Fewer vacancies are created therefore lower f

Question 30

Natural Rate of Unemployment Equation

Answer 30

s/(s+ f)

s = job separation rate 
f = job finding rate

Question 31

How does EPL affect the labour market flows?

Answer 31

reduces the separation rate as the amount of people being fired reduces and reduces job finding rate as firms are reluctant to hire new workers if they are hard to get rid of