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ECON 2H03 > Chapter 7 - Unemployment > Flashcards

Chapter 7 - Unemployment Flashcards

1
Q

Define natural unemployment. What is the formula?

A

always some, natural unemployment is the average level unemployment rate fluctuates at.

Natural unemployment = structual + frictional

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2
Q

What is the relationship between natural and actual unemployment (formulas)?
How are these related when the economy is in 1. recession 2. expansion 3. full employment

A

Actual U = natural U + cyclical U
(cyclical: lose job due to recession)

Actual = Natural (full employment: cyclical =0)
Actual > Natural (recession: cyclical>0 , less than full employment)
Actual < Natural (expansion: cyclical<0, above full employment)

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3
Q

What are the 2 determinants of the model for labor-force dynamics?
What are the 2 underlying assumptions?
What is the underlying condition?

A

(1) Rate of job separations (s): % E who separated (lose/leave) job (exogenous)
(2) Rate of job finding (f): % U who find hobs (exogenous)

Assumptions:
(1) L (labor) is exogenously fixed (independent)
(2) given the amount of L (perfectly inelastic: demand not change regardless of price)

Steady-state condition: labor market steady state when in LR EQ and the U-rate is constant
sE = fU (#E become U = #U become E)

Given the condition, we find equilibrium U-rate using the formula for the sum of the two rates:
U/L = s/(s+f)
- steady rate = U/L, can solve for s or f

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4
Q

What are the policy implications of lowering the natural rate?

A

lowering natural rate reduces s or increases f (which changes natural U-rate)
U/L will fall accorfding to U/L = s/(s+f)

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5
Q

when would the value of f=1 and f>1?
Explain what this is caused by?

A

f=1: job finding is instantaneous (not realistic)
f > 1: job finding not instant (due to:job search and wage rigidity)

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6
Q

Why is the natural U rate always positive?
Does the classical model explain this?

A

the natural rate is always positive since rate of finding (f) is not instantaneous. It is f>1

The classical model is unable to explain why, we look at other models to understand why it takes time.

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7
Q

Define frictional unemployment.
Provide 4 reasons for it.

A

Frictional unemployment is unemployment due to the time it takes workers to search for jobs, even if wages are flexible and there is enough jobs to go around.

Reasons:
1. KSA
2. preference
3. geographic mobility
4. Flow info about candidates is imperfect

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8
Q

What are sectoral shifts?
What kind of unemployment do they cause?
Provide 3 real-life examples.

A

Sectoral shifts: changes in the composition of demand among industries or regions (results in frictional unemployment)

  • smaller shifts occur frequently in dynamic economies
  • Technological change (few/more jobs repairing old/new tech)
  • New international trade agreement (labor D rises in export sectors, D falls in import)
  • Ex. Industrial revolution (agriculture vs manufacturing), Energy crisis (small cars pref), health care spending as %GDP (increased jobs)
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9
Q

What 3 government programs/public policy affect frictional unemployment?

A
  1. Govt. employment agencies: disseminate job opening info to match workers/jobs
  2. Public job training programs helps displaced workers (falling industries) get skills (rising industries)
  3. Employment Insurance (EI): pays wage limited time after lose job
     Reduces opp. Cost of U, urgency finding work -> increase frictional U
     Studies: longer worker eligible, longer average U period
     Benefits: more time look -> better job/ppl match -> productivity/income rise
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10
Q

What is structural unemployment?

A

arises when firms fail to reduce wages despite excess L supply (wage rigidity)

Often due to technological changes that make older skills irrelevant

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11
Q

Define wage rigidity, what are 3 causes (just name them not explain)

A

Wage rigidity: failure of wages to adjust to level where labor S = labor D

real wage sometimes stuck ABOVE market-clearing level
causes job shortage aka excess labor S

3 reasons:
minimum wage laws, efficiency wages, monopoly power of unions

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12
Q

Minimum wage laws:

More binding for what group and why (3 reasons)?

As min wage rises, how does employment of this group change?

A

more binding for teenagers

reasons: unskilled, training as compensation, low EQP aka wage

study shows as min w rises by 10% -> teen employment falls 1-3% (varies)

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13
Q

Outline debate on high vs low minimum wage

A

High: raise income of working poor
Low: says that high causes unemployment, poorly targeted as is more binding for teens than breadwinners
Suggest alternative: earned income tax credit (reduce tax rev, save jobs)

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14
Q

Canada vs US union %

A

Canada 32% workers
US 12% workers

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15
Q

how is wage of unionized workers set?

how do unions contribute to unemployment?

How do inside workers and outside workers differ wrt interests.

A

wage of unionized: determined by bargaining b/w union and firm’s management.

Unemployment caused by threat of unionization, conflict b/w workers

Insiders: employed union workers interested in high wages
outsiders: unemployed non-union that prefer EQ wage as apposed to high wages (means all can have jobs)

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16
Q

What is Efficiency wage theory?

A

theory that high wages makes more productive

17
Q

What is job rationing?

A

firms ration scarce jobs among workers (if real wage is above the EQ level)

17
Q

What are the first, second, third, and fourth theories of efficiency wages? What is the overall observation from these theories?

A

First theory: poor countries, wage impact nutrition (healthy workforce)
Second theory: developed count., wage impact turnover (highpay= stay)
Third theory: wage impacts avg. quality of workforce
- Adverse selection: ppl more info self-select that hurts firm
Asymmetric info: worker know own outside opportunity
Employee has more info about self
EX. many applicants, one job.
- Pay higher: reduce adverse selection, improve avg quality, prod.
Fourth theory: high wage improves worker effort (high opp. cost if fired)
- Moral hazard: people act out when imperfectly monitored

Observation: high wages benefit firm, low rate find job, greater U

18
Q

What kinds of policy can reduce the natural rate of unemployment? Do they target frictional or structural unemployement?

A
  1. Stop raising the minimum wage (targets structural)
  2. Regulate unions (targets structural)
  3. Reduce generosity of EI benefits (like other monopolies) (targets frictional)
  4. Implement gov empowerment agencies to increase the accessibility of information about job vacancies and available workers (targets frictional)
19
Q

In Canada, what variations exist in unemployment across age groups? Why (2 reasons)?

how has this changed over time

A

youth U > prime-adult U

reasons: (1) youth account for a smaller %U, (2) the aging population changes the structure of unemployment

in 1976, 50% of the unemployed were aged 15-24. Now, 26% is 15-24.

20
Q

What are two components of the unemployment rate?

A

incidence (probability of becoming unemployed)
duration (length determines reasons for U and policy response)

21
Q

In Canada, what four trends have made natural unemployment vary (not constant)?

A

Trends: natural U has not been constant (went from 5% in 50s-60s, 9% in 70s and 80s)

  1. Demographics: change LF composition, entry boomers into LF 1970, female rise
  2. Sectoral shifts: increase technological change, natural resource prices
  3. Productivity: slow 1970 (reduce D labor), sluggish real wage (high LT), rise in U
  4. Transitions in/out LF: assumes LF fixed, discouraged workers, part-time want FT
22
Q

How large was the gap between unemployment in CAD and US in the 1980s? What 3 components are responsible for the gap?

A

1960-70s: similar U rate
1980s: Canada 4% > US
2008: nearly par

breakdown of 4% gap:
1% - Definition of U: US has more active search requirements, CAD easier (looking at ad is enough)
2% - Capacity utilization: CAD operates at lower utilization in 80-90s.
1% - Set structural factors: changing roles on unions in countries (potential output: if all resources maximized)
- CAD > US in terms of: unions, wages (+30%), EI benefits

ECON 2H03 (8 decks)

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