Unemployment

Question 1

What is unemployment

Answer 1

Number of people of working age who are able and available for work at current wages and don’t have a job

Question 2

What is the opportunity cost of an unemployed individual

Answer 2

The value of g/s not produced

Question 3

Costs of unemployment to macroeconomy

Answer 3

-Lower income tax and higher gov spending
- Lower spending on high YED goods

Question 4

Costs of unemployment to individuals

Answer 4

-Loss of earnings
-Health problems and crime
-Deskilling
-Family breakdowns

Question 5

What two ways measure unemployment

Answer 5

-The claimant count
-Labour force surveys

Question 6

Which measure is more reliable and informative

Answer 6

Labour force surveys

Question 7

What 3 categories of people do surveys identify

Answer 7

-Inactive individuals
-Employed individuals
-Unemployed individuals

Question 8

What is an economically inactive individual

Answer 8

People not employed nor unemployed for reasons such as being full-time students or family

Question 9

What % of people aged 16-64 is economically inactive in UK

Answer 9

21

Question 10

What does the labour force mean

Answer 10

The sum of total workers both employed and unemployed

Question 11

Equation for labour force

Answer 11

L= N (employed) + U (unemployed)

Question 12

Unemployment rate equation

Answer 12

U/L x100

Question 13

Economic activity rate equation

Answer 13

Labour force/population x100

Question 14

How often are unemployment figures published monthly in the UK

Answer 14

monthly

Question 15

Which office is in charge of measuring unemployment

Answer 15

The ONS

Question 16

What does the labour demand curve show

Answer 16

The schedule of the amount of workers firms are willing to hire at different wage rates

Question 17

What does the labour supply curve show

Answer 17

The schedule of the amount of hours workers as a whole are willing to supply at individual wage rates

Question 18

What will happen in this labour market model

Answer 18

At wage rate W there is excess supply of workers
Thus, the wage decreases until the surplus is removed at W* and the market is in equilibrium

Question 19

What are the 4 different causes of unemployment

Answer 19

• Frictional
  -Structural
  -Labour market imperfections
  -Demand-deficient unemployment

Question 20

What is frictional

Answer 20

Unemployment that results because it takes time for workers and firms to search for jobs

Question 21

What is structural unemployment

Answer 21

Unemployment that results when the number of jobs available in some labour markets is insufficient to provide everyone a job who wants one

Question 22

How does occupational and geographical immobility cause unemployment

Answer 22

-When workers lose their jobs, their skills may not match jobs of a certain occupation or in a region
-Switching occupation and moving is costly

Question 23

How does technological change cause unemployment

Answer 23

• Technological change makes workers redundant as their skills and experience depreciate
• A main driver in developed countries

Question 24

How can structural changes cause unemployment

Answer 24

• Changes from competition abroad and technology can make the share of labour across sectors change and thus make skills of one sector more obsolete than others

Question 25

What two factors explain wage rigidity

Answer 25

-Minimum wage laws, excess supply of workers if min wage is above equilibrium - Trade unions, they generate market power for workers and increase wages above equilibrium

Question 26

What do unions and minimum wage laws have in common

Answer 26

Those who get a job at the highr wages benefit, but those who don't would have had a job at a lower wage

Question 27

What evidence is there that minimum wage laws and unions are good for employment

Answer 27

Firms have monopsony power in many labour markets

Question 28

How is efficiency wages another reason why wages are above the equilibrium

Answer 28

More profitable for firms: - Less workers quit - Higher wages=healthier workers - Attract high quality workers -Incentive to make an effort to keep their jobs

Question 29

What type of demand matters when it comes to unemployment

Answer 29

Effective demand- the amount people are not onlt willing but can and do actually purchase

Question 30

What is the natural rate of unemployment

Answer 30

- The Normal rate of unemployment around which unemployment rate fluctuates

Question 31

What is the NAIRU

Answer 31

The rate of unemployment consistent with low stable inflation

Question 32

Natural rate equation

Answer 32

Job separation rate/ job finding +separation rates x100

Question 33

Example of how public policies can reduce NRU

Answer 33

-Making job search more efficient - This increases job finding rate thus reducing NRU

Question 34

How does unenmployment insurance benefit workers

Answer 34

- Reduces hardship of unemployment - Improves quality of workers-jobs matches

Question 35

How could unemployment insurance increase NRU

Answer 35

Reduces the job finding rate

Question 36

What did Keynes argue about unemployment

Answer 36

Surpluses persist and market would not automatically adjust to eliminate unemployment

Question 37

What is the Neo-classical synthesis around unemployment

Answer 37

Markets are slow to adjust in the SR due to sticky wages but classical principles in the long run

Question 38

What do some economists argue about the NRU

Answer 38

That it can change over time

Question 39

How can a changing NRU be explained

Answer 39

Hysteresis- Lagging effects of past economic events on future ones eg a recession affecting unemployment in long run

Question 40

What does the CORE model consist of

Answer 40

- Firms that incentivise workers to make effort by paying higher wages - Workers that decide how much effort to make at different wage rates - Firms that also maximise their profits by deciding their wages, prices and hirings based on product demand and productivity

Question 41

How does unemployment arise in CORE model

Answer 41

As an equilibrium outcome where firms and workers are responding optimally

Question 42

What do workers decide their effort based on

Answer 42

- The wage - The utility of things to buy with wage - The probability of getting fired when working at each effort level

Question 43

How do firms decide wages, production and prices

Answer 43

- Prices, wages and employment of other firms -The demand for its product - Labour productivity

Question 44

What is the workers' effort decision

Answer 44

- Decide between leisure and work - Higher wages increases labour supply due to increase in opportunity cost of not working

Question 45

What is the reservation wage

Answer 45

The wage level under which workers are willing to make no effort

Question 46

What does the workers' effort decision curve show

Answer 46

The combination of wage to effort pairs given a reservation wage

Question 47

What happens to the reservation wage as unemployment increases and how does this effect the curve

Answer 47

The reservation wage decreases thus causing an inward shift in the curve

Question 48

How does high unemployment benefits effect the reservation wage and curve

Answer 48

Increases the reservation wage and thus workers make less effort for a given wage and curve is shifted to right

Question 49

How are firms' wage decisions shown

Answer 49

By an upward sloping curve that shows the points at which the cost of a unit of effort is the same for a firm

Question 50

What does a steeper curve for firms' wage decisions imply

Answer 50

Paying less for a unit of effort, there is a lower cost of effort

Question 51

What type of relationship between Unemployment and wages

Answer 51

Negative

Question 52

What type of relationship between employment and wages

Answer 52

Positive

Question 53

What is the wage setting curve

Answer 53

Wage-unemployment combos that arise from the firm's and worker's optimal decisions in the labour market