04 - Employment and Unemployment

Question 1

What are the criteria for being unemployed?

1.
2.
3.
4.

What are you if you do not fulfill one of the LAST TWO criteria?

Answer 1

1. of working age
2. without employment
3. available for work
4. actively seeking work

out of labor force

Question 2

what is the formula for the unemployment rate?

Answer 2

100% * (unemployed / people in labor force)

poeple in labor force = unemployed + employed

Question 3

The labor Market

1. the labor market is where….
2. the demand for labor is determined by…
3. the supply of labor is determined by…

Answer 3

1. equilibrium real wage and quantity of labor are determined
2. firms that want to maximize profits
3. workers who want to maximize utility

Question 4

A firm will hire as long as….

And a profit maximizing firm will continue to hire workers until…

Answer 4

… the additional (marginal) benefits is greater than or equal to the additional marginal cost
…. the value of the marginal prouct of labor equals the market wage (P*MPL = W)

Question 5

What is the marginal benefit in labor demand?
How do you calculate it?

1.
2.

What is the marginal cost?

Answer 5

• the value of the marginal product of labor
• the increase in revenue resulting from hiring an additional worker
• multiplying marginal product of labor (MPL) times the price of output (P)
• marginal cost is the market wage W

Question 6

The labor demand curve is downwards sloping because….

Answer 6

…. the marginal product of labor diminishes as more labor is used

Question 7

What shifts the labor demand curve?

1.
2.
3.
4.
5.

Answer 7

• change in wage is a movement ALONG the labor demand curve
  shift of labor demand curve:
• change in output price
• changes in demand for the output
• changes in technology
• changes in input price of capital

Question 8

How is the shape of the labor supply curve determined?

Answer 8

• shape from workers optimally allocating their limited time between paid work, leisure, and other activities such as home production

Question 9

What shifts the labor supply curve?

1.
2.
3.
4.

Answer 9

• change in wage: movement ALONG labor supply curve

shifts happens because of changes in…
- population size
- taste/ norms such as women entering labor force
- technology such as vacuum cleaners reducing the opportunity cost of time

Question 10

The competitive equilibrium wage is also called….

At this wage….

Answer 10

… market clearing wage.

… every workers who wants a job can find one

Question 11

Explain the concept of voluntarily unemployment

1.
2.
3.

Answer 11

• in the equilibrium there are people who want to work, but not at w* (the area of the supply curve above w*)
• in equilibrium, these are happy to remain unemployed
• still, most observed unemployment is not voluntary

Question 12

What are the two types of non voluntary unemployment? What is each resulting in?

1.
2.

Answer 12

1. frictional unemployment: arise because workers have imperfect information about available jobs and need to engage in a time consuming process of job search (firms dont have all info about skills and experiences / job seekers do not have all info about specifics of each job opening )
2. Result: workers must undertake much job search
3. structural unemployment: arise when qty of labor supplied persistently exceeds qty of labor demanded (they are willing to work but dont find)

Question 13

Structural Unemployment | What might be an explanation between the large gap between the Quantity of Labor Supplied and Demanded? And what are causes of this phenomena?

1.
2.
3.
4.
5.

Answer 13

• wage rigidity (if the market wage w is help above the market clearing level w*)
  Causes:
• minimum wage laws are imposed
• labor unions negotiate higher wages in their collective bargaining
• firms pay higher wages to raise worker productivity (efficiency wages)
• workers resist wage reductions (downward wage rigidity)

Question 14

Explain the concept of Minimum Wage

1.
2.
3.

Answer 14

• prohibits employers from hiring workers for less than a given (or minimum) hourly wage rate
• these laws can keep the wage above the market clearing wage w*, and thus create structural unemployment
• here we have winners and losers, some getting a job and some not

Question 15

What does the empirical effect of a minimum wage depend on?

1.
2.

Answer 15

• its value and thus relevance in the labor market
• in germany, e.g., it has not yet caused relevant unemployment

Question 16

Explain the concept of collective bargaining

Answer 16

• wage negotiations between firms and labor unions may lead to wages that are above the market clearing wage (again winners and losers here)

Question 17

Explain the concept of efficiency wages from the firms perspective

What are possible reasons for the resulting perhaps increasing productivity?

1.
2.
3.
4.
5.
6.

Answer 17

• e.g. offering 4-day-week to be seen as attractive employer when you cannot match salary levels of the big firms
• its the firms willingness to pay above market clearing wage to increase productivity

reasons:
- reducing worker turnover
- reducing shirking (sich drücken)
- motivating workers to work harder
- improving quality of job applicants

Question 18

Downward rage rigidity occurs when….

1.
2.

Answer 18

• workers resist a cut in their wage
• firms would rather fire workers than cut wages of employees (bc it would decrease productivity)