15.3 What Determines the NAIRU and 15.4 Reducing Unemployment

Question 1

When is the unemployment rate eequal to potential output? What kind of unemployment exists in this situation?

Answer 1

When real GDP is equal to potential output, the unemployment rate is equal to the NAIRU. In this situation there is only frictional and structural unemployment.

Question 2

Definition of Frictional Unemployment.

Answer 2

Frictional unemployment

Unemployment that results from the turnover in the labour market as workers move between jobs.

Question 3

What are some sources of frictiona unemployment?

Answer 3

• Young people who enter the labour force and look for jobs.
• People who leave their jobs. Some may quit because they are dissatisfied with the type of work or their working conditions; others may be fired because of incompetence or laid off because their employers go out of business.
• Others may lose their jobs because the jobs themselves are eliminated by the introduction of new technologies.

Question 4

What is search unemployment?

Answer 4

People who are unemployed while searching for jobs are said to be frictionally unemployed or in search unemployment.

Question 5

What does the normal turnover of labour cause?

Answer 5

The normal turnover of labour causes frictional unemployment to persist, even if the economy is at potential output.

Question 6

Why is some amount of frictional unemployment desirable?

Answer 6

Some amount of frictional (search) unemployemnt is desirable because it gives unemployed people time to find an available job that makes the best use of their skills.

Question 7

What is Structural unemployment?

Answer 7

Structural unemployment

Unemployment caused by a mismatch in skills, industry, or location between available jobs and unemployed workers.

  Defined as a mismatch between the current structure of the labour force—in terms of skills, occupations, industries, or geographical locations—and the current structure of firms’ demand for labour.

Question 8

What do changes that accompany economic growth do tothe structure of the demand for labour?

Answer 8

Changes that accompany economic growth shift the structure of the demand for labour.

Demand might rise in such expanding areas as British Columbia’s Lower Mainland or northern Alberta and might fall in parts of Ontario and Quebec.

Demand rises for workers with certain skills, such as computer programming and electronics engineering, and falls for workers with other skills, such as paralegal services, assembly line work, and middle management.

Question 9

How do we meet changing demands?

Answer 9

To meet changing demands, the structure of the labour force must change.

Some existing workers can retrain and some new entrants can acquire fresh skills, but the transition is often difficult, especially for older workers whose skills become economically obsolete.

Question 10

What are some sources of structural unemployment?

Answer 10

Technological changes
or
Increases in international competition

Question 11

When wil structural unemployment increase/decrease?

Answer 11

Structural unemployment will increase if there is either an increase in the pace at which the structure of the demand for labour is changing or a decrease in the pace at which labour is adapting to these changes.

Question 12

What kinds of policies tend to reduce the rate at which unemployed workers are matched with a vacent job?

Answer 12

Some countries, including Canada, have adopted some policies that discourage movement among regions, industries, and occupations.

These policies may be desirable for other reasons, but they tend to reduce the rate at which unemployed workers are matched with vacant jobs, and thus tend to raise the amount of structural unemployment.

Question 13

For two specific reasons, the Canadian employment-insurance (EI) program contributes to structural unemployment…

Answer 13

First, the EI system ties workers’ benefits to the regional unemployment rate in such a way that unemployed workers can collect EI benefits for more weeks in regions where unemployment is high than where it is low. this encourges the unemployed to stay in these regions.

Second, workers are eligible for employment insurance only if they have worked for a given number of weeks in the previous year—this is known as the entrance requirement.

Question 14

Policies designed to enhance workers’ job security may also tend to increase structural unemployment. How?

Answer 14

Specifically, policies that make it difficult or costly for firms to fire workers also make employers more reluctant to hire workers in the first place.

Such policies, which are common in the European Union, reduce the amount of turnover in the labour market and are believed to be an important contributor to the amount of long-term unemployment in those countries.

Question 15

In practice, can structural and frictional unemployment be separated?

Answer 15

In practice, structural and frictional unemployment cannot be separated. But the two of them, taken together, can be separated from cyclical unemployment.

Specifically, when real GDP is at its potential level, then, by definition, the only unemployment is frictional and structural and thus the unemployment rate is equal to the NAIRU.

Question 16

Why Does the NAIRU Change?

Answer 16

The NAIRU can change for two broad reasons. First, anything that alters the amount of adjustment required between firms, occupations, sectors, or regions will cause a change in NAIRU.

Second, anything that alters the ability of the labour force to make these adjustments will cause a change in NAIRU.

Question 17

Four specific reasons for a change in the NAIRU

Answer 17

Demographic Shifts
Hysteresis
Globalization and Structural Change
Policy and Labour-Market Flexibility

Question 18

Why do young people typically have higher unemployment rates then older?

Answer 18

Because young people usually try several jobs before settling into one for a longer period of time, young workers have more labour-market turnover and therefore higher unemployment rates than older, more experienced workers.

Question 19

How has the age of the demographic in the work force changed since the 70s?

Answer 19

The proportion of young workers in the labour force rose significantly as the baby-boom generation of the 1950s entered the labour force in the 1970s and early 1980s. This trend had the effect of increasing the NAIRU during the 1970s and 1980s. But as the baby-boom generation aged, and the fraction of young workers in the labour force declined in the late 1990s and early 2000s, the opposite effect was observed and tended to reduce the NAIRU.

Question 20

A second demographic trend relates to the labour-force participation of women.

Answer 20

During the 1960s and 1970s women tended to have higher unemployment rates than men. Since this was true at all points of the business cycle, the higher unemployment was higher frictional and structural unemployment.

Thus, when female labour-force participation rates increased dramatically in the 1960s and 1970s, the NAIRU increased.

In recent years, however, female unemployment rates have dropped below the rates for men, and so further increases in female participation will tend to decrease the NAIRU.

Question 21

How does great labour-foce participation by groups with high unemployment rates effect the NAIRU?

Answer 21

Greater labour-force participation by groups with high unemployment rates increases the NAIRU.

Question 22

Graph of Canadian Unemployment Rates by Demographic Groups, April 2021

Answer 22

Question 23

How is unemployment spread among different groups in the labour force?

Answer 23

Unemployment is unevenly spread among different groups in the labour force.

Question 24

What groups had the highest rates of unemployment as of April of 2021 in Canada?

Answer 24

In April of 2021, when the overall unemployment rate was 8.1 percent, the unemployment rates for youths (of both sexes) were considerably higher.

Question 25

What is hysteresis and what does it mean?

Answer 25

We saw in Chapter 12 that short-run changes in real GDP sometimes cause changes in the level of potential output,

One possible reason that we examined was due to the operation of labour markets, whereby the NAIRU can be influenced by the current rate of unemployment.

Such models get their name from the Greek word hysteresis, meaning “lagged effect.”

Question 26

What is one mechanism that can lead to hysteresis? What is an example of this?

Answer 26

One mechanism that can lead to hysteresis arises from the importance of experience and on-the-job training.

Suppose a recession causes a significant group of new entrants to the labour force to encounter unusual difficulty obtaining their first jobs. As a result, this unlucky group will be slow to acquire the important skills that workers generally learn in their first jobs.

When demand increases again, this group of workers will be at a disadvantage relative to workers with normal histories of experience, and the unlucky group may take longer to find jobs and thus have unemployment rates that will be higher than average.

Hence, the NAIRU will be higher than it would have been had there been no recession.

Question 27

How can unionization cause hysterisis?

Answer 27

In times of high unemployment, people who are currently employed (“insiders”) may use their bargaining power to ensure that their own status is maintained and prevent new entrants to the labour force (“outsiders”) from competing effectively.

For this reason, high unemployment—whatever its initial cause—will tend to become “locked in.”

If outsiders are denied access to the labour market, their unemployment will fail to exert downward pressure on wages, and the NAIRU will tend to rise.

Question 28

How can Globalization and Structural Change alter the NAIRU?

Answer 28

While most economists argue that the growing integration of Canada in the global economy generates net benefits for Canada, they also recognize a downside.

Canadian labour markets are increasingly affected by changes in demand and supply conditions elsewhere in the world.

As Canadian labour markets require more frequent and larger adjustments to economic events occurring in other parts of the world, the NAIRU will tend to increase.

Question 29

What does EI do the the flexibility of the labour market?

Answer 29

Employment insurance is one example of a policy reducing the flexibility of the labour market.

Such inflexibility is an important cause of unemployment.

Question 30

What can shocks to labour demand or supply cause if wages are inflexible?

Answer 30

If wages are inflexible, shocks to labour demand or supply can cause unemployment.

If the generosity of employment insurance makes workers unwilling to move between regions or between industries, changes in the structure of the economy can cause unemployment.

In general, since the economy is always being buffeted by shocks of one sort or another, the less flexible is the labour market, the higher structural unemployment will be.

Question 31

What is the likly result of a government policy that reduces labour-market flexibility?

Answer 31

Any government policy that reduces labour-market flexibility is likely to increase the NAIRU.

Question 32

What is an example of a Job-Security provision?

Answer 32

In most Western European countries, firms that lay off workers are required either to give several months’ notice before doing so or, in lieu of such notice, are required to make severance payments equal to several months’ worth of pay.

Question 33

What do job-security provisions typically do to the flexability of the labour market and the NAIRU?

Answer 33

Such job-security provisions greatly reduce the flexibility of the labour market.

Any policy that forces firms to incur large costs for laying off workers is likely to lead the same firm to be very hesitant about hiring workers in the first place.

While this inflexibility may help currently employed workers keep their jobs, it is harmful to young workers entering the labour force and to any worker seeking to change jobs.

Given this reduction in labour-market flexibility, such policies are likely to increase the NAIRU.

Question 34

What do many economists see as the most important explanation for why Canadian and U.S. unemplyment rates and the averrage duration of unemplyment spells are significantly below those in Europe?

Answer 34

This kind of mandated job security is relatively rare in Canada and the United States.

Its rarity contributes to the general assessment by economists that North American labour markets are much more flexible than those in Europe.

Many economists see this as the most important explanation for why Canadian and U.S. unemployment rates, and also the average duration of unemployment spells, are significantly below those in Europe.

Question 35

What reduces cyclical unemployment?

Answer 35

Monetary and fiscal policies implemented in response to negative AD or AS shocks will act to reduce cyclical unemployment.

Question 36

Where is there room for debate in how cyclical Unemployment is reduced?

Answer 36

There is room for debate, however, about how much the government can and should do in this respect.

Question 37

What is the differents in opinions in reguards to advocates for stabilization policy and those who advocate for a more hands off approach, in terms of managing cyclical unemployment?

Answer 37

Advocates of stabilization policy call for expansionary fiscal and monetary policies to increase output, and thereby reduce cyclical unemployment, especially when a recessionary gap is sustained for a long period of time.

Advocates of a hands-off approach say that normal market adjustments can be relied on to remove recessionary gaps and that government policy, no matter how well intentioned, will only make things worse.

Question 38

When do Conventional recessions happen?

Answer 38

Conventional recessions happen when large numbers of domestic businesses lay off workers as they scale down production in response to worsening economic conditions.

These decisions are made in response to either AD shocks, which reduce the demand for firms’ output, or AS shocks, which raise production costs and lead firms to reduce their output.

Question 39

Conventional recessions have three specific characteristics:

Answer 39

• Recessions usually begin gradually, over a period of a few quarters. They are followed by economic recoveries that are even more gradual, usually lasting several years.
• Recessions usually involve a drop of real GDP and employment of 2–4 percent from the pre-recession peak.
• During recessions, it is typical for unemployed workers to be actively searching for new jobs, which tends to put downward pressure on wages.

Question 40

How was the Covid 19 recession unconventional?

Answer 40

First, the drop in economic activity occurred almost instantly, and was reversed relatively quickly.

Second, the pandemic recession was much deeper than conventional ones (even though it was also much shorter). Canada’s total employment fell from 19.2 million workers in January 2020 to 16.1 million workers two months later, a reduction of over 16 percent in just two months. The unemployment rate increased from 5.8 percent to 13.7 percent over the same period.

Third, most of the millions of unemployed Canadians were not actively searching for jobs during the pandemic

Question 41

The millions of unemployed Canadians were not actively searching for jobs during the pandemic for two reasons.

Answer 41

First, they knew that since most of the economy was shut down for public-health reasons, there was little point in searching.

Second, the Canadian government was providing income support to individuals and businesses whose incomes had disappeared due to the economic shutdown.

Question 42

What made the policy priorties of the pandemic recession different then conventional recessions?

Answer 42

During the 2020–2021 pandemic recession, however, the policy priority was to deal with the health crisis by

(1) keeping people at home as much as possible in an effort to protect them from contracting the virus

(2) providing healthcare to those who became sick. Re-starting the economy and getting people back to work was not an objective of policy, because there was no way to do this while still keeping people safe.

Question 43

What is the nature of the conflict between private interest of workers and social interest?

Answer 43

There is often a conflict between the private interest of workers threatened by structural unemployment, whose interests lie in preserving existing jobs, and the social interest served by reallocating resources to where they are most valuable.

Question 44

What is an up and down side of EI?

Answer 44

Whatever the source of unemployment, employment insurance (EI) is one method of helping people cope with its costs. Although EI alleviates the suffering caused by unemployment, it also contributes to search unemployment, as we have already observed.

Question 45

What recent changes to EI policy has helped to decrease frictional unemployment?

Answer 45

Workers must be actively seeking employment in order to be eligible for EI.

Workers who voluntarily quit their jobs (without cause) are not eligible to collect EI.

Question 46

What technological changes are leading to widespread concerns about potentially rising levels of structural unemployment?

Answer 46

Today, the rise of artificial intelligence, machine learning, and the related automation of jobs is leading to widespread concerns that structural unemployment will significantly increase in the near future.

Question 47

There are two basic approaches to addressing structural unemployment:

Answer 47

Try to resist the changes that the economy experiences
or
Accept the changes and try to assist the necessary adjustments.

Question 48

How can policies that protect works belinging to declining industries potentially do harm?

Answer 48

Agreements to hire unneeded workers raise costs and can hasten the decline of an industry threatened by competitive products.

An industry that is declining because of economic change becomes an increasingly large burden on the public purse as economic forces become less and less favourable to its success.

Question 49

What is the assisted adjustment approach to deaking with structural change?

Answer 49

A second general approach to dealing with structural change is to accept the decline of specific industries and the loss of specific jobs that go with them and to try to reduce the cost of adjustment for the workers affected.

Question 50

What are some examples of assisted adjustment policies?

Answer 50

One such policy is publicly subsidized education and retraining programs.

Another policy is motivated by the difficulty in obtaining good information about current and future job prospects.

*In the late 1990s, the government of Canada created online services to speed up and improve the quality of matches between searching workers and firms. Today, however, the Internet is so sophisticated and widespread that firms and workers are easily able to learn about labour-market opportunities through a large number of online search facilities. As a result, there is a reduced need for government to play an active role in providing labour-market information either to firms or workers.
*

Question 51

What is the effect of policies that increase retraining and improve the flow of labour-market information on structural unemployment?

Answer 51

Policies to increase retraining and to improve the flow of labour-market information will tend to reduce the amount of structural unemployment.

Question 52

The federal government’s 2018 budget responded to the need to improve the skills of Canadian workers in an economy increasingly subject to rapid change.

What did these policies include?

Answer 52

• Better labour-market information to workers in seasonal industries.
• Expanding funding so that young workers could access better summer jobs and acquire necessary skills.
• Funding partnerships between government and the private sector to develop experimental training programs for workers.

Question 53

What was the Canadian governments general apprach with policies intended on lowering levels of structural unemployment?

Answer 53

In general, the government’s policy approach was not one of resisting the economic changes that are occurring but rather accepting these changes, emphasizing the need for flexibility, and then developing policies that improve the labour force’s ability to adapt.

Question 54

What are some characteristics of countries that succeed in the global marketplace while managing the mantain humane social welfare systems?

Answer 54

Countries that succeed in the global marketplace, while also managing to maintain humane social welfare systems, will be those that best learn how to deal with changes in the economic landscape. This ability to adapt will mean avoiding economic policies that inhibit change while adopting social policies that reduce the human cost of adjusting to change. Creating this environment is an enormous challenge for future Canadian economic and social policies.

Question 55

Any government policy that reduces labour market flexibility is likely to

Answer 55

In​ general, since the economy is always being buffeted by shocks of one sort or​ another, the less flexible is the labour​ market, the higher structural unemployment will be. Structural unemployment is positively correlated with the NAIRU so that the impact of labour market flexibility on structural unemployment will be mirrored by a similar change in the NAIRU.

Question 56

Answer 56