CH 9 - Unemployment and Its Natural Rate

Question 1

how to measure employement - 3 categories

Answer 1

employed = person spent some of the previous week working at a paid job (working for a family business without pay, who are not at work due to illness or disability, parental leave, vacation)

unemployed = they are on temporary layoff or are looking for a job

Not in the labour force = unable to work, unavailable for work (full-time student, homemaker, retiree), discouraged searchers, volunteer work

Question 2

Labour force equation

Answer 2

Labour force = number of employed + number of unemployed

Question 3

Unemployment rate formula

Answer 3

N. of unemployed / labour force x 100

Question 4

Labour force participation rate

Answer 4

labour force / adult population x 100

Question 5

Employment rate

Answer 5

employed / working age pop. x 100

Question 6

Discouraged workers

Answer 6

person who has given up after unsuccessful search
=> Someone who reports being out of the labour force may actually want to work

Question 7

why unemployment rate is not perfect

Answer 7

• discouraged workers
• part time wants full time
• someone reporting unemployed may not be trying hard to find a job (may be on temporary layoff or just want the employment insurance, or are working and are being paid “under the table”)

Question 8

Natural rate of unemployment

Answer 8

= amount of unemployment that the economy normally experiences / rate of unemployment to which the economy tends to return in the long run (estimated for Canada to be 6-7%)
=> contains frictional, structural and classical unemployment

Question 9

Frictional unemployment

Answer 9

difficulty in matching employers and jobseekers (not enough information, different locations), period of search between jobs

Question 10

Structural unemployment

Answer 10

The economy is constantly changing and so are the skills requirement for jobs, so skills mismatches arise, and some positions remain unfilled

number of jobs available in some labour markets may be insufficient to give a job to everyone who wants one (quantity of labour supplied exceeds the quantity demanded, jobseekers do not have the right skills needed)

Question 11

real-wage / classical unemployment

Answer 11

when wages are above equilibrium levels, there are not enough jobs (e.g. due to minimum wage laws, labour unions and efficiency wages)

Question 12

why frictional unemployment is inevitable

Answer 12

1) Frictional unemployment is often the result of changes in the demand for labour among different firms = period of time during the transition is a period of unemployment

2) sectoral shifts - because different regions of the country produce different goods, employment can rise in one region while it falls in another = temporarily cause unemployment

3) Economy is always changing - before more agriculture, now more manufacturing

Question 13

Gross job creation, destruction, net employment growth def

Answer 13

Gross Job Creation = sum of the increase in the number of jobs across all new and established firms in a given year

Gross Job Destruction = sum of the job losses across all firms that either reduce their employment or go out of business altogether in that year

Net Employment Growth = the difference between job creation and job destruction in that year

Question 14

gov programs to facilitate job search

Answer 14

1- Government-run employment agencies (give out information about job vacancies)
2- Public training programs (aim to ease transition of workers from declining to growing industries and help disadvantaged groups escape poverty)

Pros: make the economy operate more efficiently, in certain circumstances the private sector is incapable of helping those who lose their jobs (when the job loss is the result of natural disasters)

Cons: Better to let the private market match worker and jobs (much worker education is done privately), Government is no better at disseminating the right information to the right workers and deciding what kind of worker training would be the most valuable

Question 15

Employment Insurance (EI) Program

Answer 15

federal program intended to ease the burden of those who find themselves unemployed by temporarily providing them with income

Eases the burden of being unemployed but may also cause the (frictional) unemployment rate to be higher than it would be otherwise

Workers pay into the program (premiums) to obtain benefits (employees and employers contribute)

Question 16

2 considerations for when and for how long someone can collect EI benefits

Answer 16

Number of hours worker in the past year (more hours – longer period of time to collect benefits)

Unemployment rate in the area of residence (high unemployment rate -> longer period + less hours of work to be eligible)

Question 17

Why EI can also increase unemployment

Answer 17

-> people might not try as hard to find a new job
-> people might enter the labour force when they might not have to leave to collect benefits

Question 18

3 reasons why wages do not fall to clear markets

Answer 18

1) minimum-wage legislation
2) Labour unions
3) efficiency wages

Question 19

Minimum wage laws - prevent to clear the market

Answer 19

-> surplus supply of labour
-> causes long term unemployment
-> affect mostly least skilled and least experienced members of the labour force

Question 20

Unions and collective bargaining - fail to clear market

Answer 20

union= A worker association that bargains with employers over wages, benefits and working conditions
- 30% of Canadian employees
Collective bargaining = the process by which unions and firms agree on the terms of employment
Strike = the organized withdrawal of labour from a firm by a union (when the union and the firm do not come to an agreement) -> threat
-> when they make the wages rise: q of labour demanded falls
insiders - workers who remain employed (better off)
Outsiders – workers who lose their jobs

Question 21

Are Unions Good or Bad for the Economy?

Answer 21

Critics argue that:
- Unions cause the allocation of labour to be inefficient and inequitable
- Wages above the competitive level reduce the quantity of labour demanded and cause unemployment
- Some workers benefit at the expense of other workers

Advocates argue that :
- Unions are necessary to counter the market power of firms that hire workers
- Unions are important for helping firms respond efficiently to workers’ concerns

Question 22

The theory of efficiency wages (+reasons why)

Answer 22

-> Firms voluntarily pay above-equilibrium wages to boost worker productivity

1) Worker turnover: New workers are costly and usually less productive in their first few months on the job (more incentive to stay)

2) Worker quality: offering higher wages attracts better job applicants, thereby increasing the quality of a firm’s workforce

3) Worker effort: Higher wages encourage workers to be more productive, thereby increasing firm productivity, and reduce costs associated with monitoring and firing workers who shirk

4) Worker Health: Healthier workers are more productive

Question 23

2 other factors that influence unemployment

Answer 23

1) taxes on wage income
-> Lower taxes would allow people to keep more of their labour income
-> They would then have more incentive to find a job, which would reduce unemployment

2) degree of difficulty in firing employees
Employers may be reluctant to hire people if they know that it will be difficult to get rid of them, which can also increase unemployment