8 Unemployment & Economic Growth

Question 1

What does the labor market consist of for supply & demand?

Answer 1

Supply - price of labor (real wages)
Demand - qty (employment)

Question 2

Demand for labor is a derived demand meaning?

Answer 2

Strong demand for output by worker means strong demand for labor

Question 3

2 factors that demand for labor depend on?

Answer 3

1. Productivity of worker
2. Price of worker’s output

Both increase - increase employment

Question 4

What is diminishing returns to labor?

Answer 4

Assuming non-labor (factories & machines) inputs held constant - adding one worker increases output but by LESS than the previous worker added

Question 5

What is Value of Marginal Product (VMP)? Formula?

Answer 5

Extra revenue that an added worker generates

(Demand for labor)

Marginal product x Price

Question 6

Hire when MB (VMP) >/= MC (wage). The lower the wage, the more workers employed. True or False?

Answer 6

True - Demand curve for labor. Employment (x), wage (y)

Question 7

What to do if want more employment and let workers have higher wage?

Answer 7

Shift labor demand to the right. 2 factors that determine demand (VMP) for labor:
- Price of company’s output
- Productivity of workers

Question 8

What is reservation wage?

Answer 8

Lowest wage a worker would accept for a given job

Opportunity cost - leisure time (to take up job, wage must be as valuable as leisure u enjoy)

Other things equal, higher wage induces individuals to supply longer working hours (higher wage $10 - more costly leisure $15 - indiv need supply longer working hours)

Question 9

What is the aggregate labor supply?

Answer 9

1. Size of working age population
   -domestic birthrate
   -immigration and emigration
   - ages when people enter workforce and retire
2. Share of working-age population willing to work

Question 10

Why is supply of labor upward sloping curve?

Answer 10

Higher wage, more people willing to work

Question 11

What causes shift in labor supply? 2 factors

Answer 11

1. Increase in working-age population
   - baby boom
   - higher net immigration
   - increasing age at retirement
2. Increase in share of working-age population willing to work eg women

Question 12

What is the effect of productivity change?

Answer 12

Increases demand for labor - demand curve shifts right - real wage and employment increases

Productivity increases due to technological progress & increase in capital (machines)

Question 13

Effects of Globalization?

Answer 13

Expansion of markets to worldwide supply

Benefits: increased specialization and efficiency

Disadv: some goods produced domestically no longer competitive

Question 14

When wages in importing industries fall and wages in exporting industries rise, wage inequality increases or decreases?

Answer 14

Increases - low-skill industries face the toughest international competition

Technological change can also be a source of increasing wage inequality - favoring higher-skilled workers

Question 15

What is worker mobility?

Answer 15

Movement of workers between jobs, firms, industries

Eg market incentives move workers out of textiles and into software

Question 16

What does skill-biased technological change affect?

Answer 16

It affects the marginal products of higher-skilled workers differently from lower-skilled workers

Demand for unskilled workers decrease/ skilled workers increase

Wages & unemployment decrease/ increase

Question 17

3 classifications of unemployment?

Answer 17

1. Employed (16+ age)
2. Unemployed (willing and able to work, spent time searching but still no job)
3. Out of labor force (choose not to work)

Question 18

Formulas for
1. Labor force
2. Unemployment rate
3. Participation rate

Answer 18

1. Labor force = employed + unemployed
2. Unemployment rate = (unemployed/labor force) x 100%
3. Participation rate = (labor force/working age population) x 100%

*working age population = labor force + not in labor force

Question 19

3 costs of unemployment?

Answer 19

1. Economic costs
   - lost wages and productivity, decreased taxes and increased transfers
2. Psychological costs
3. Social costs

Question 20

Does long-term or short-term unemployment have higher cost?

Answer 20

Long-term - may lead to permanent unemployment

Short-term - can rely on savings then find permanent job - job may be better fitting and match workers’ ability which is beneficial

Question 21

What are discouraged workers?

Answer 21

Would like to have a job but have not looked for work in the past 4 weeks

Counted as out of labor (willing and able but gave up on job search)

Could be counted as unemployed but are not

Question 22

What are involuntary part-time workers?

Answer 22

People who like to work full-time but cannot find a full-time job

Counted as employed

Question 23

3 types of unemployment? and what are each about?

Answer 23

1. Frictional unemployment - workers are between jobs eg just graduated (may increase economic efficiency if find a job that allows u to contribute more)
2. Cyclical unemployment - increase during recession (longer time, more economic costs aka decline in real GDP)
3. Structural unemployment - long-term, chronic unemployment in well-functioning economy eg lack of skills, language barriers, discrimination (results in high economic, psychological, social costs)

Barriers to employment: minimum wages, unions, unemployment insurance

Question 24

How does setting minimum wage laws (structural barriers) affect unemployment?

Answer 24

Setting it above equilibrium creates surplus of people (people wiling to work > people employed)

Once wage is fixed - will forever have surplus

Question 25

Benefits & Costs of labour union?

Answer 25

Benefits: reduced worker exploitation, increase productivity Costs: increase labour costs and introduces inefficiency, increase labor supply in non-labor sector, decreases wages for non-union workers

Question 26

What are the x & y-axis for employment demand & supply curve? Curve or straight line graph?

Answer 26

(x) employment (y) wage Curved

Question 27

What are unemployment benefits & government regulations?

Answer 27

Unemployment benefit is a GOVERNMENT TRANSFER to unemployed workers -reduce costs of unemployment -however may be exploited since unemployed have an incentive to search longer and less intensely -hence unemployment benefits shd be for limited time and less than income received when working

Question 28

What is economic growth? Formula?

Answer 28

% change in real GDP - real GDP of economies tend to increase over time due to improvement in technology & increase in qty & quality of resources

Question 29

Does small growth in GDP per capita have small or very large effect over a long period?

Answer 29

Large effect (small increase in interest rate can have huge effect eg in compound interest)

Question 30

Formula for Years to Double?

Answer 30

72 / interest rate (Number of years for an initial amount to double) Higher the growth rates, shorter time needed to double amt

Question 31

Formula for GDP per capita?

Answer 31

GDP per capita = output per worker x share of total population working Y = real GDP N= no. of people employed POP = population (Y/POP) = (Y/N) x (N/POP)

Question 32

Understanding growth - when does GDP per capita increase?

Answer 32

Output per worker (Y/N) increases (more common reason) OR Share of population employed (N/POP) increases

Question 33

In the long run, increases in output per person arise primarily from INCREASES or DECREASES in average labor productivity?

Answer 33

Increases

Question 34

What are the 6 determinants of average labor productivity?

Answer 34

1. Human capital (talents, education, training) 2. Physical capital (machines and factories to produce - but may have diminishing returns to capital) 3. Land (farming) and other natural resources 4. Technology (single most impt source of productivity improvement - growth seen in industries that produce technology & industries that use them) 5. Entrepreneurship and management 6. Polititcal and legal environment

Question 35

3 ways to promote growth?

Answer 35

1. Human capital (govt support education & training programs - positive externalities) 2. Savings & Investment (CPF, govt can invest directly in capital formation) 3. Research & Development (R&D)

Question 36

Why do countries need institutions to support growth? (hint: promoting economic growth in least developed)

Answer 36

1. Corruption 2. Regulation discourages entrepreneurship 3. Taxes discourage risk-taking 4. Lack of political stability discourages foreign investment

Question 37

Costs of economic growth?

Answer 37

Opportunity cost of producing more CAPITAL goods is fewer CONSUMER goods - reduced leisure time - possible risks of health & safety from rapid capital production - cost of R&D to improve technology - cost of education to develop and use new capital

Question 38

Why growth may not be sustainable?

Answer 38

1. Depletion of some natural resources 2. Environmental damage & global warming - Can promote SUSTAINABLE growth through technology & market system (higher income pay for better production method to promote environmental quality)