Unemployment and Inflation Flashcards
(39 cards)
Which 3 groups does Statistics Canada classify the adult population into?
1) Employed(E): Those with a paid job (either full time or part time)
2) Unemployed(U): Those who are currently available for work, but have not been able to find it–and who have been searching for the last 4 weeks
3) Not in the Labour Force(NILF): those who do not have a job and are not looking for one. A solid example is retired people, housewives, and full-time students
How do we calculate the labour force?
Labour Force(LF)=Employed+Unemployed
How do we calculate labour force participation rate?
Labour Force Participation Rate(LFPR)=(Labour force/Adult Population)*100%
How do we calculate unemployment rate?
Unemployment rate(ur)=(#of unemployed/labour force)*100%
How do we calculate employment rate?
Employment rate(er)=(#of unemployed/adult population)*100%
If you are a student, and you are also working part time, how would you be classified?
The no double counting rule also applies to unemployment. You can’t be considered employed and not in the labour force. Chances are you would be considered not in the labour force because most of your efforts are geared towards school.
Why might the measured unemployment rate be overstated?
1) People claim they are unemployed, when they actually didn’t put enough effort into finding a job. They want to claim Employment Insurance.
2) Even experienced workers take a while to find a job. Someone with a high skillset may not be accepting job offers for a long time because they are holding out for something better.
The unemployment rate will never be zero.
Why might unemployment rate be understated?
1) Discouraged workers-People who faced difficulty finding a job, got discouraged, and stopped trying for a job. There will be a lot of discouraged workers during times of economic downturn.
2) Marginally attached workers-They have a job, but are waiting for their position to start.
3) Underemployed workers/invisibly unemployed workers-individuals who work, but not in their desired capacity. For instance, accountants who work in a fast food restaurant.
What is the natural rate of unemployment?
-The long run rate of unemployment in the economy.
-Occurs when they are producing at their full employment level of output.
-Resources are fully utilized
-The economy self-adjusts without government intervention.
-There are no cyclical unemployment effects, so it accounts for structural and frictional unemployment.
What is frictional unemployment?
-Unemployment due to the time workers spend in the job search.
-Frictional unemployment is inevitable because there are always workers who want a new job.
-A low level of frictional unemployment is normal and may be good for the economy because it allows workers to take time to find jobs they like and suits their skills. That creates a more productive relationship between the employee and employer because they are a better fit.
What is structural unemployment?
-Unemployment caused by excess supply of labour at the current wage, even in the long run.
-Linked to/caused by wage rigidities.
What are wage rigidities caused by?
1) Binding minimum wages
2) Labour unions-bargain for wages that are higher than equilibrium wages. Companies then demand less labour.
3) Efficiency wages-Companies pay their people more. Happier people work better. They don’t want to get fired. Carrot and stick.
4) Side effects of government policies. Employment insurance may lead to higher unemployment.
5) Mismatch between employers and employees. Workers don’t have the skills.
What is the formula for natural rate of unemployment?
NRU=Level of frictional unemployment+Level of structural unemployment/Labour force*100%
What is the formula for natural unemployment?
Natural unemployment=Frictional unemployment+Structural unemployment
What is the formula for actual unemployment?
Actual unemployment=Natural unemployment+Cyclical unemployment
What is the difference between actual unemployment and natural unemployment?
-Actual unemployment is what we hear about in the news. It’s avoidable.
-Natural unemployment is the long run rate of unemployment. It’s unavoidable.
What is cyclical unemployment?
-Cyclical unemployment arises because the economy moves in different phases with ups and downs.
-During recessionary periods, cyclical unemployment will be high.
If a large portion of the labour force is young workers, how does that affect natural rate of unemployment?
-Because they are inexperienced, they may not stay in the same job for a long period of time.
-That means they face frictional unemployment.
-Therefore, the natural rate of unemployment will be higher.
How can changes in labour market institutions change the natural rates of unemployment?
1) The presence of strong labour unions may contribute to higher NRU. Related to structural unemployment. If unions bargain for job security for their members, natural rate of unemployment may go down due to less firings.
2) The presence of employment agencies may lower NRU. Employment agencies find better fits between government and job seekers. Reduces frictional unemployment.
3) Technological improvement may lead to higher NRU because it lowers the demand for unskilled workers, and reduces equilibrium quantity. Increases structural unemployment.
How can changes in government policies affect the natural rate of unemployment?
1) Increase in minimum wage could lead to higher NRU
2) The provision of employment insurance(EI) might also lead to higher NRU. EI encourages people to take longer to find a job(not look for a job for a while)…leading to frictional unemployment. Or they be more picky about what they accept.
3) Job training programs and employment subsidies lower NRU. It increases the amount of skilled workers who can enter the labour market where demand is high. It reduces structural unemployment. Employment subsidies provide financial incentives for workers to accept new jobs or for employers to offer jobs. That reduces frictional unemployment.
What is inflation? What is it’s formula?
Inflation rate(t)=Price level in year t-Price level in year t-1/price level in year t-1*100%
How do you calculate CPI in year t?
CPIt=COBt/COB base year *100
What are the various costs associated with higher inflation?
1) Shoe-leather Costs
-Purchasing power is eroded making people less likely to hold money.
-People may incur higher transaction costs when they reduce their money holding.
-Transaction costs occur in the form of service charges, and the time cost.
2) Menu Costs
-When firms change price, they have to print out new menus.
-When the inputs for each food dish goes out, the restaurant owner must charge higher prices.
-Therefore, they must print new menus.
-The extra printing costs will further increase the costs incurred by purchasers.
3) Unit-of-Account Costs
-Money is used to quote prices. Pricetags helps us make decisions.
-If money is a less reliable unit of measurement, it’s harder for individuals and firms to make solid decisions.
-Indexation meant we need to adjust the nominal value of the dollar to the inflation rate.
What is the Fisher equation?
-Nominal interest rate (i)=Real interest rate (r)+Inflation Rate (pi)
-The equation can be rearranged such that r=i-pi. That is the interest rate that matters to lenders (savers) and borrowers (debtors).
