Labour Markets and unemployment

Question 1

monetary policymakers problem

Answer 1

keep monetary policy as loose as possible, keep unemployment as low as possible but without allowing too much inflation

keep growth as high as possible

stabilisation of business cycle

Question 2

natural rate of unemployment

Answer 2

the rate below which unwanted inflation starts

Question 3

european central bank problem

Answer 3

trying to set monetary policy, while countries have differing unemployment rates

so ECB monetary policy focuses on inflation

Question 4

Static Labour market

Answer 4

households choice is to split time between leisure and work

household gets utility from consumption (paid by working) and leisure (increased by less work)

Question 5

Labour Force

Answer 5

L^s = L + U

Labour force = employment + unemployment

Question 6

unemployment rate

Answer 6

u, fraction of labour force unable to fins work at the real wage

u= U/L^s

Question 7

how/why does real wage end up being higher than the market clearing wage

Answer 7

collective bargaining

social minima and minimum wages

efficiency wages

Question 8

structural unemployment

Answer 8

mismatch of supply and demand for labour

Question 9

collective bargaining effect on labour market

Answer 9

motivation- higher real wages more jobs

collective labour supply differs from household labour supply leading to a higher real wage

insiders outsider problem, get the best conditions and wages for members who already have a job.

trade union could have higher wages but higher unemployment

Question 10

social minima and minimum wage

Answer 10

leading to wages being higher than they otherwise may be

wages physically can not drop

Question 11

efficiency wages

Answer 11

firms may choose to pay higher wages than they can get away with to elicit higher effort, attract better applicants

why real wages do not decline in the presence of involuntary unemployment

Question 12

conclusion of static interpretation of unemployment

Answer 12

if real wages are too high some natural unemployment exists

Question 13

dynamic labour markets

Answer 13

even if unemployment rate may not change people move between into and out of jobs and even the labour market

Question 14

Dynamic model

Answer 14

Labour force is fixed over time

any given month some employed some unemployed

how the flow between L and U determines the unemployment rate

each month people lose jobs- rate of job separation s

and some looking find job- rate of job finding f

fU must equal sL- steady state condition

amount losing and finding job is equal each month

steady state condition

U/L^s = s/s+f (=u)

for policy makers to reduce natural rate unemployment- increase f or decrease s

Question 15

what do dynamic models do

Answer 15

account for the passage of time

Question 16

what does the dynamic model capture

Answer 16

fact that finding a job takes time

but does not explain it

Question 17

frictional unemployment

Answer 17

time it takes for workers to find new jobs, career change or lose job-> new job

Question 18

what can reduction in frictional unemployment do

Answer 18

could help by increasing the rate of job finding f

example are job centers

level of unemployment insurance reduces the incentive for the unemployed to look for work as quickly