Chapter 6 Flashcards
Frictional unemployment
Result of people voluntarily or involuntarily leaving jobs (due to non-recessionary reasons), or looking for a new job.
Ex: Someone is not employed as they left job, but is offered new job, but turns it down for better offer.
Structural unemployment
This type of unemployment occurs when an employee’s skills do not or no longer match those that are needed by the market.
Ex: Rust belt residents losing manufacturing jobs and having trouble finding work.
Hidden unemployment
When companies have employees that are redundant that if laid off, it would not significantly affect the company’s ability to complete tasks and output.
Ex: An instance of hidden unemployment is in a company with 20 employees but only requires 7 to accomplish all the tasks. For the other 13 workers, even if they were to be laid off, there would be no effect on the output of the other seven. Consequently, the extra workers are seen depicting hidden unemployment. Though hidden unemployment appears to be overcompensating on employees, it does significantly impact the economy.
Unemployment measures
U-1 represents individuals unemployed for 15 weeks or more.
U-2 represents job losers and those people who did temporary jobs.
U-3 (Percentage of labor force who is unemployed)
U-4 represents total unemployed and discouraged employees.
U-5 represents total unemployed, and marginally attached workers.
U-6 represents total unemployed, marginally attached workers, and total employed part-time individuals.
How is unemployment data collected?
Current Population Survey
marginally attached workers
those who want to work and have looked for work, but are not presently in the workforce due to non-job market reasons (Ex: taking care of sick family member or going back to school to upskill and be competitive in labor market) or job-market reasons (discouraged workers).
Discouraged workers
Marginally attached workers because of job market reasons. They have looked, but cannot find work they qualify for.
Natural rate of unemployment
minimum level of unemployment that a healthy, well-functioning economy can sustain over a long period of time. If unemployment falls below this, inflation will likely reach unreasonable levels.
Can never be 0% because there will always be structural and frictional unemployment.
It is structural+frictional unemployment rate.
Classical Unemployment
Classical Unemployment is a type of unemployment that occurs when there is a labor surplus in the market due to either high minimum wages or an over-saturation of labor within a particular market.
Long-term unemployment
Unemployment for a year or longer
Seasonal unemployment
Some jobs are seasonal. Once the season is done, those jobs go and demand for the services those jobs provide goes down because consumer demand is down, and those individuals become seasonally unemployed.
Ex: Lifeguards at the pool during the summer. Camp counselors during the summer. Because demand for the pool and camps goes down after the summer.
Underemployment
a type of unemployment in which employees are being paid less than they are worth in regards to the skill sets/training they possess and bring to the table.
Ex: An engineering graduate working at a Walmart.
Regional unemployment
Structural unemployment restricted to specific regions.
Ex: Loss of coal jobs in WV. Loss of manufacturing jobs in Ohio.
Voluntary unemployment
They may simply be choosing to be unemployed and not seeking work for a multitude of reasons as well. Unemployed because person does not find job he or she wants.
Ex: Quitting job and traveling the world, frictional unemployment
Institutional unemployment
a unique type of unemployment that results from certain factors stemming from the government, firms, or society that provide individuals with an incentive to remain unemployed and not seek out jobs.
Ex: Very generous unemployment benefits preventing people from seeking work.
Natural rate of unemployment calculation
To calculate the natural rate of unemployment, sum the number of people frictionally unemployed with those structurally unemployed, then divide by the number of people in the labor force. Finally, multiply by 100 to express as a percentage.
Equilibrium and labor markets
When labor demand and labor supply are in equilibrium, the natural rate of unemployment is reached.
Phillips Curve
Illustrates trade-off between unemployment and inflation. If unemployment is above natural rate of unemployment, inflation tends to be lower and vice versa.
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Natural rate of unemployment and labor costs
If unemployment above NRU, labor costs tend to be lower since labor supply is high, but labor demand is low. If below, usually, labor costs are higher since the opposite situation occurs and businesses’ bargaining power over wages declines.
Impact of business cycles, labor demand, labor supply and tech on unemployment
Cycles: Economic cycles can cause fluctuations in unemployment. During recessions, unemployment tends to rise as the economy experiences a downturn. During expansions, unemployment decreases as the economy flourishes and more jobs become available
Demand: If companies demand a lot of labor, unemployment will drop as more individuals are drawn into job openings. Contrary to higher demand, lower demand will see unemployment rise as companies can’t afford or don’t need labor
Supply: When labor supply is high, unemployment might be higher as companies don’t necessarily need great amounts of labor. When labor supply is low, a greater percentage of the workforce will get employed due to scarcity
Technology: Technological advancement results in human labor being replaced by autonomous machines. This drives unemployment without any positive flipside
Okun’s law
Negative relationship between GDP and unemployment
Governmental costs of unemployment
More social assistance
Less tax revenue (in income and sales tax)
Business costs of unemployment
Less consumer income means less purchasing power and thus, income for businesses, which means more unemployment
More unemployment means a higher UI benefit tax for businesses
Social costs of unemployment
More crime
Less volunteering and charity donations
Calls for immigration restrictions based on myth of immigrants taking jobs
Individual costs of unemployment
Financial problems
Living paycheck-to-paycheck
Efficiency wage theory
Market-clearing wage is a term used to indicate the wage at which the supply of labor equals the demand for labor.
Efficiency wage theory is the idea that paying employees more than the market-clearing wage will benefit the company. Under this theory, companies benefit from this ‘‘overpayment’’ by retaining employees and motivating them to work harder. When employees get paid more, they may begin to feel like an important asset to the company and, therefore, develop loyalty.
Pros of efficiency wage theory
Lower turnover: When employees get paid higher-than-industry rates, they are less likely to look for a new job. This is because they realize that it might be difficult to find a job that pays more.
Reduced training costs: When new employees start, they often have to go through some sort of training. This training can be quite costly for a company, and when there is a high turnover rate, companies end up paying a great deal of money to train new employees. Retaining employees by offering higher wages helps minimize the costs of training.
More applicants: If job seekers know that a company is offering pay that is higher than other companies, the company is likely to see an increase in the number of applicants for open positions. This increase in applicants gives the company a larger selection of potential employees, which makes the odds of finding higher-quality employees greater, as opposed to companies whose low pay attracts a smaller number of individuals.
Cons of efficiency wage theory
Employees may not voluntarily leave due to high pay at company. That may make it hard to get rid of workers when economic downturns happen without terminating them.
Also, when a company uses higher wages to reduce turnover rates and increase productivity, if and when an employee becomes less productive, a company may terminate him or her as a consequence. This means that employees may feel undue pressure to sustain high levels of productivity in order to avoid losing their jobs.
Theory of rational expectations*
The theory of rational expectations in economics states that economic actors, such as consumers and businesses, make decisions based on the best information available to them, past experiences, and rational thinking.
Ex: An investor deciding to invest in a developing country due to strong economic expansion.
Lucas critique*
The Lucas critique argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.
John Muth*
Muth demonstrated several scenarios in which people’s or companies’ expectations of future events could actually influence those very events.
Ex: Workers expect inflation. Wage hikes. More inflation.
Adaptive expectations. Contrast with rational expectations?*
a theory that states that people’s expectations of the future are based on their experience with the past.
In comparison, rational expectations theory postulates that people’s expectations for the future are not just based on their past experiences but also include rational thinking and analysis of all available info.
Uses of rational expectations in economic policy making. Example?*
For instance, if a central bank expands the money supply, rational expectations theory suggests that participants in the economy are likely to anticipate increased inflation rates in the near future. Consequently, this leads to altered decisions and conducts.
Critique of rational expectations*
First, it assumes that people have perfect information and can accurately predict the future. This assumption is considered by many to be unrealistic in most cases since economic data is often incomplete or subject to change.
Second, the theory relies on the assumption of completely rational decision-making, which does not take into account irrational or emotional behavior.
Finally, because economics is so complex, any one prediction model or theory is unlikely to predict future economic behavior perfectly.
Classical model of economy
Classical macroeconomic theory economists believe the economy is, in general, a self-correcting entity (without govt. intervention) (Best describes economy in the long run)
Emphasize supply and demand.
Keynesian model of economy
Emphasize aggregate demand and aggregate supply
Believe in government interventions during recessions.
More accurately describes economy in short run.
Differences between classical and Keynesian economics
Keynesian believes in more active government role in economy while classical economics does not.
Keynesians are okay with deficit spending, especially in recessions, while classical economics prefers balanced budgets always.
Keynesians like price controls while classical economists do not.
Keynesians worry more about unemployment while classical economists worry about inflation.
Fifth, when comparing Keynesian economics vs classical economics, the former tends to look at short-term issues, while the latter tends to focus on long-term issues.
