Chapter 10: Unemployment and the Demand for Labour

Question 1

Define ‘Unemployment’.

Answer 1

Situation in which someone wants to work but cannot find a job.

Question 2

Define ‘Labour force’.

Answer 2

People who are in the working-age population and are either employed or unemployed - i.e., people who are currently working or who are actively trying to find a job.

Question 3

Define ‘Unemployment rate’.

Answer 3

The number of unemployed people divided by the number of people in the labour force.
Measure of unemployment.
UR = #unemployed / labour force x100

Question 4

Define ‘Labour-force participation rate’.

Answer 4

The number of people in the labour force divided by the working-age population.
The fraction of the working age population that is working or looking for work.
L-F PR = Labour force / working-age pop. x100

Question 5

Define ‘Discouraged workers’.

Answer 5

Workers who have looked for work in the past year but have given up looking because of the condition of the labour market.

Question 6

Define ‘Underemployed’.

Answer 6

Workers who are either working less than they would like to or are working in jobs below their skill level.

Question 7

Define ‘Labour demand curve’.

Answer 7

A graph showing the relationship between the wage rate and the total labour demanded from all the firms in the economy.
Downward slope.

Question 8

Define ‘Labour supply curve’.

Answer 8

A graph showing the relationship between the total labour supplied in the economy and the wage rate.
Upward slope.

Question 9

Define ‘Natural rate of unemployment’.

Answer 9

The minimum level of unemployment that is unavoidable in a dynamic economy.

Question 10

Define ‘Frictional unemployment’.

Answer 10

Unemployment caused by workers who are changing location, job, or career.

Question 11

Define ‘Structural unemployment’.

Answer 11

Unemployment due to a mismatch between the skills workers can offer and the skills in demand.

Question 12

Define ‘Real-wage or classical unemployment’.

Answer 12

Unemployment that results from wages being higher than the market-clearing level.

Question 13

Define ‘Cyclical unemployment’.

Answer 13

Unemployment resulting from changes in GDP.

Question 14

Define ‘Labour unions’.

Answer 14

Groups of employees who join together to bargain with their employer(s) over salaries and work conditions.

Question 15

Define ‘Efficiency wage’.

Answer 15

A wage that is deliberately set above the market rate to increase worker productivity.

Question 16

Define ‘Employment insurance’.

Answer 16

Money paid by the government to people who are unemployed.

Question 17

To be considered unemployed, a person needs to meet what 3 conditions?

Answer 17

1. Part of the working-age, civilian population
2. Not have worked in the previous week
3. Be actively looking for work

Question 18

Equilibrium is reached at the wage (___ ___ ___) where the labour demand and labour supply curves meet.

Answer 18

Price of Labour.

Question 19

How does wage rates above equilibrium cause unemployment?

Answer 19

Unemployment results when the market wage rate remains above the market equilibrium; it is effectively a surplus of labour at the inflated wage rate.

Question 20

What are 2 reasons we expect the economy to have some unemployment when everything else is normal?

Answer 20

• Frictional: Change of jobs or locations.
• Structural: Gov. policies affect the adjustment of the wage rate. Also when mismatch between the skills demanded by firms and the skills the labour force has, perhaps as a result of technological developments.

Question 21

When GDP is higher than normal, unemployment is ___ than the equilibrium rate. And vice versa.

Answer 21

Lower.

Question 22

What are 3 reasons why the wage rate may not fully adjust o the equilibrium wage rate in the labour market?

Answer 22

1. Min. wage above equilibrium wage rate
2. Labour unions that negotiate a wage rate above the equilibrium wage rate
3. Efficiency wages

Question 23

What is the trade-off experiences in the design of ET programs?

Answer 23

Not generous benefits make losing a job a hardship and too generous gives less incentive to find job.