Chapter 9 (Unemployment and Its Natural Rate)

Question 1

The problem of unemployment is usefully divided into two categories

Answer 1

the long-run problem and the short-run problem

Question 2

The economy’s natural rate of unemployment refers to the amount

Answer 2

of unemployment that the economy normally experiences

Question 3

Cyclical unemployment refers to

Answer 3

the year-to-year fluctuations in unemployment around its natural rate, and it is closely associated with the short-run ups and downs of economic activity.

Question 4

We discuss four explanations for the economy’s natural rate of unemployment:

Answer 4

job search, minimum-wage laws, unions, and efficiency wages

Question 5

Statistics Canada defines the labor force as

Answer 5

Labour force = Number of employed + Number of unemployed

Question 6

Statistics Canada defines the unemployment rate as a percentage

Answer 6

unemployment rate= (Number of unemployed/labor force) x100

Question 7

The labor-force participation rate measures the percentage of the total adult population of Canada that is in the labor force:

Answer 7

Labour-force participation rate = (Labor force/adult population) x 100

Question 8

To see how these data are computed, consider the figures for 2014. In that year, 17.80 million people were employed, and 1.32 million people were unemployed. The labor force was

Answer 8

Labour force = 17.80 + 1.32 = 19.12 million. The unemployment rate was
Unemployment rate = (1.32/19.12) X 100 = 6.90 percent.
Because the adult population was 28.98 million, the labor-force participation rate was
Labour-force participation rate = (19.12/28.98) X 100 = 65.98 percent.
Hence, in 2014, two-thirds of Canada’s adult population were participating in the labor market, and 6.9 percent of those labor-market participants were without
work.

Question 9

This result has prompted some labor economists to

label the 2008-09 recession a mancession because

Answer 9

it affected the unemployment rates of males more than the unemployment rates of females

Question 10

A final point worth making about measuring unemployment is that it is sometimes misleading to make international comparisons

Answer 10

In the United States, for example, the unemployment rate is defined slightly differently than it is in Canada. One example of the difference is that in the United States, the labor force is defined as the number of people aged 16 years and above actively seeking employment, whereas in Canada the age cut-off is 15 years and above.

Question 11

These individuals may have tried to find a job but have given up after an unsuccessful search. Such individuals, labelled

Answer 11

discouraged searchers by Statistics Canada, do not show up in unemployment statistics, even though they are truly workers without jobs.

Question 12

the average spell of unemployment in Canada lasted

Answer 12

20.8 weeks.

Unfortunately, averages can hide a lot of interesting variation

Question 13

Average values also hide the fact that there may be a wide dispersion of unemployment experiences across individuals

Answer 13

such as those who give up and are discouraged

Question 14

In short, a high employment ratio is a good indicator of a successful economy along many dimensions

Answer 14

suggest that economists and policymakers must be
careful when interpreting data on unemployment and when designing policies to help the unemployed. Most people who become unemployed will soon find jobs. Policy solutions directed toward fixing the unemployment problem should be directed toward those suffering prolonged spells of unemployment

Question 15

The natural rate of unemployment

Answer 15

is what economists judge to be the rate of unemployment to which the economy tends to return in the long run

Question 16

The observed unemployment rate differs from the natural rate due to the existence of

Answer 16

cyclical unemployment. Cyclical unemployment arises due to short-run economic fluctuations

Question 17

The first explanation is that it takes time for workers to search for the jobs that are best suited for them. The unemployment that results from the process of matching workers and jobs is sometimes called

Answer 17

frictional unemployment, and it is often thought to explain relatively short spells of unemployment.

Question 18

The next three explanations for unemployment suggest that the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. This occurs when the quantity of labor supplied
exceeds the quantity demanded. Unemployment of this sort is sometimes called

Answer 18

structural unemployment, and it is often thought to explain longer spells of unemployment. As we will see, this kind of unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium.

Question 19

we will examine three possible reasons for an above-equilibrium wage:

Answer 19

minimum-wage laws, unions, and efficiency wages

Question 20

Job search is the process of

Answer 20

matching workers with appropriate jobs. If all workers
and all jobs were the same, so that all workers were equally well suited for all jobs, job search would not be a problem.

Question 21

Frictional unemployment is often the result of changes in

Answer 21

the demand for labor among different firms (preference for one product or brand over the other).

Question 22

Changes in the composition of demand among industries or regions are called

Answer 22

sectoral shifts. Because it takes time for workers to search for jobs in the new sectors, sectoral shifts temporarily cause unemployment. (a company closes say in QC but opens in SK).

Question 23

Frictional unemployment is inevitable simply because

Answer 23

the economy is always changing (rise and fall of inductries altogether).

Question 24

Because frictional unemployment is the result of a well-functioning economy that rewards innovation and new ideas, we should always expect

Answer 24

frictional unemployment to be greater than zero.

Question 25

Even if some frictional unemployment is inevitable, the precise amount is not.

Answer 25

Employment agencies, facilitated job search and so on

Question 26

In fact, most job search in our economy takes place without intervention

Answer 26

by the government

Question 27

In Canada, the federal government maintains an Employment Insurance (El) program

Answer 27

This program is intended to ease the burden of those who find themselves unemployed, by temporarily providing them with income ( minimum work requirement, max number of weeks assisted)

Question 28

These results all suggest that the design of the El program influences behavior in ways that increase the unemployment rate.

Answer 28

May quit a job sooner because it is known to be available and may remain unemployed longer trying to land a better job because they are receiving it

Question 29

On the basis of such results, some economists have argued that El improves the ability of the economy

Answer 29

to match each worker with the most appropriate job.

Question 30

Yet economists disagree on whether economic well-being would be

Answer 30

enhanced or diminished by this change in policy.

Question 31

structural unemployment results when the number of jobs is

Answer 31

insufficient for the number of workers.

Question 32

To understand structural unemployment, we begin by reviewing how unemployment a

Answer 32

arises from minimum-wage laws.

Question 33

If the wage is kept above the equilibrium level

for any reason, the result

Answer 33

is unemployment

Question 34

When a minimum wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level

Answer 34

There is a surplus of labor. Because there are more workers willing to work than there are jobs, some workers are unemployed.

Question 35

When job search is the explanation for unemployment, workers

Answer 35

are searching for the jobs that best suit their tastes and skills.

Question 36

By contrast, when the wage is above the equilibrium level

Answer 36

the quantity of labor supplied exceeds the quantity of labor demanded, and workers are unemployed because they are waiting for jobs to open up

Question 37

A union is a

Answer 37

worker association that bargains with employers over wages and working conditions

Question 38

The process by which unions and firms agree on the terms of employment is called

Answer 38

collective bargaining

Question 39

If the union and the firm do not reach agreement, the union can organize a withdrawal of labour from the firm, called

Answer 39

a strike. Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree to pay higher wages than it otherwise would

Question 40

unions are often thought to cause conflict between different groups of workers

Answer 40

between the insiders who benefit from high union wages and the outsiders who do not get the union jobs.

Question 41

Poverty is greatest amongst those dealing with disabilities and those unable to find employment.

Answer 41

Neither of these groups benefits from minimum-wage policies.

Question 42

A fourth reason why economies always experience some unemployment is suggested by the theory of

Answer 42

efficiency wages. According to this theory, firms operate more efficiently if wages are above the equilibrium level (better pay, happier the worker, the more produced thing).

Question 43

The first and simplest type of efficiency-wage theory emphasizes the link between

Answer 43

wages and worker health. Worker health concerns are far less relevant for firms in rich countries such as Canada, where the equilibrium wages for most workers are well above the level needed for an adequate diet

Question 44

A second type of efficiency-wage theory emphasizes the link between

Answer 44

wages and worker turnover. Firms with higher turnover, therefore, will tend to have higher production costs. Firms may find it profitable to pay wages above the equilibrium level in order to reduce worker turnover. (To maintain employees).

Question 45

A third type of efficiency-wage theory emphasizes the link between

Answer 45

wages and worker effort. High wages make
workers more eager to keep their jobs, giving workers an incentive to put forward their best efforts. If the wage was at the level that balanced supply and demand, workers would have less reason to work hard because if they were fired, they could quickly find new jobs at the same wage. Therefore, firms raise wages
above the equilibrium level, providing an incentive for workers not to shirk their responsibilities

Question 46

A fourth and final type of efficiency-wage theory emphasizes the link between

Answer 46

wages and worker quality. If the firm responded to a surplus of labour by reducing the wage, the most competent applicants—who are more likely to have better alternative opportunities than less competent applicants— may choose not to apply.

Question 47

Ford invented the turnover policy in his production line

Answer 47

Others followed. He stated it was the best policy for business. Helped the work between each party on the assembly line since if one was lacking it slowed the whole line.

Question 48

Many antipoverty advocates argue for consideration of yet another type of wage:

Answer 48

the living wage. Those who advocate for the living wage typically define it as the wage level that allows the earner to afford shelter, food, and the other necessities of life. Often it is defined as a wage sufficient to ensure that no more than 30 percent of it needs to be spent on shelter. Most advocates recognize this would require defining a living wage in excess of the minimum-wage rates listed in the FYI feature “Who Earns the Minimum Wage?’’

Question 49

The concept of an efficiency wage is based on the notion that a firm may find it in its own best interest to pay a wage in excess of what it otherwise needs to pay (the equilibrium wage)

Answer 49

Doing so may enable the firm to enjoy lower worker turnover and higher productivity. A living-wage ordinance, on the other hand, coerces firms to pay a wage higher than they have found to be in their own best interests