Chapter 7-the natural rate of unemployment

According to the equilibrium real wage model, when is the market in equilibrium?

Market is in equilibrium when the MPL=real wage. There is no unemployment.

Why do europeans work less hours than americans?

European has a high tax system which led to a higher underground economy so many work hours are not reported. Their unions are also more powerful. Income effect is much lower in europe than in america.

Where would firms choose the wage to be on the effort curve?

Firms would choose where the effort limit is (highest possible)

What is the relationship between the natural rate of unemployment and booms and recessions?

In a recession, the unemployment rate will rise higher than the natural rate. In a boom, the unemployment rate will fall below natural rate.

What are the first assumptions made about the first model of natural rate?

Labor (L) is exogenous and fixed. During any given month, s (rate of job separation) and f (rate of job finding) is exogenous.

What are labor unions and how do the affect unemployment? How does this affect insiders vs outsiders?

Labor unions exercise monopoly power to secure higher wages for their members. When union wages exceed the minimum wage, unemployment results. Insiders want to keep wages high while outsiders prefer equilibrium wages so there are enough jobs for them. Unions benefit insiders but make outsiders worse off.

What are marginally attached workers?

Marginally attached workers are persons not in the labor force who want and are available for work and who have looked, but not recently. Discouraged workers are part of this category.

Why has the labor force participation rate decreased by 3% in the last decade?

There was an increase in retired workers, disabled workers, and discouraged workers. There is an increase of students not wanting a job since theyre in school.

Why has the unemployment rate increased in europe?

This is due to temporary shock in Europe when technological progress has shifted labor demand from unskilled to skilled workers, and generous unemployment benefits.

What are the benefits of UI?

UI helps unemployed workers and their families maintain a minimum standard of living. By allowing workers more time to search, UI can lead to better matches between workers and jobs, which leads to better productivity and higher incomes.

What are the two reasons that the rate of job finding (f) is less than 1?

Wage rigidity and job search.

Why does productivity depend on wage?

Well-paid workers work more hard and efficiently. If workers were paid minimum wage, they wouldn't be too concerned about losing their jobs.

Teachers are laid off because the state government has little revenue in an economic downturn. What type of unemployment is this?

cyclical

Barnes & Noble switch to an ebook-focused business model. They close some stores and lay off workers. What type of unemployment is this?

frictional

Unemployment in the auto industry, where unions have relatively strong power. What type of unemployment is this?

structural

What does "full employment" mean?

Full employment is when all unemployment is structural or frictional, there is no cyclical unemployment.

Why is cyclical unemployment?

Cyclical unemployment happens when people are unemployed because the economy is functioning below it's productive capacity. In other words, it's unemployment due to business cycles.

What are discouraged workers and how do they affect unemployment rate?

Discourage workers are unemployed people who cannot find jobs and leave the labor force. They reduce the unemployment rate.

What is the steady state of unemployment and when is the labor market in it?

The steady state is job loss=job finding. In other words, it's when inflow=outflow. The labor market is in steady state when the unemployment rate is constant.

Dave wants to be an accountant, but there is no accountant positions in this area. What type of unemployment is this?

frictional

What are the three reasons for wage rigidity?

Minimum wage laws, labor unions, and efficiency wages all cause wage rigidity.

What kind of unemployment usually happens in the short term vs the long term?

Most unemployment in the short run is frictional, and most unemployment in the long run is due to sectoral shifts or structural.

Is most unemployment short term or long term?

Most unemployment is short term but most of the time spent unemployed are due to long term reasons (sectoral shifts and structural).

What happens if real wage goes down?

The labor demand curve is the MPL given a certain level of effort. If real wage goes down, effort will go down, productivity will go down, and demand will go down.

Why can't real wage ever clear the market? Why is this important?

Real wage cannot clear the market because if real wage decreases, the demand will go down (shift left) and the gap will remain. This means that there will always be unemployment.

What is the efficiency wage theory and how does it affect unemployment?

The efficiency wage theory says that higher wages increase productivity by attracting higher quality job applicants, increasing worker effort, reducing turnover, and improving health of workers. Firms will willingly pay higher than equilibrium wages to increase productivity, this causes structural unemployment.

What is the minimum wage and how does it affect unemployment?

The minimum wage is usually higher than the equilibrium wage of unskilled workers. Increases in minimum wage can decrease employment of teen workers. Minimum wage can only explain a small part of unemployment since most worker's wages are well above the minimum wage.

What are the arguments for and against minimum wage?

Advocates believe it is a way of raising income among the working poor. Opponents believe that higher labor costs will decrease employment, which will eventually hurt the working poor. It is also poorly targeted, most minimum wage earners are teenagers from middle class families.

What is frictional unemployment and why does it occur?

Frictional unemployment is the time it takes workers to find a job. It occurs when wages are flexible and there are enough jobs to go around. It occurs because workers have different abilities, preferences, jobs, and skill requirements. The geographic mobility of workers is imperfect and the flow of information about job vacancies and job candidates is imperfect.

How do government programs affect unemployment?

Government unemployment agencies release job info about job openings to better match workers and jobs. Public training programs help workers who were displaced from declining industries learn new skills.

What happens to the labor demand curve is there is an increase in investment and therefore more capital goods?

High investment leads to higher labor demand, so the unemployment rate is lower than natural rate temporarily.

What is job rationing and what leads to it?

If real wage is stuck above equilibrium level, there aren't enough wages to go around. Thus, firms must ration jobs among workers.

What are sectoral shifts and what does it result in?

Sectoral shifts are the changes in composition of demand among industries or regions. It results in frictional unemployment. Example: Technological change-more jobs repairing computers and less jobs repairing typewriters. Example: A new international trade agreement-Labor demand increases in export sector and decreases in import sector.

What is structural unemployment and what causes it?

Structural unemployment happens when the number of jobs available is not enough to match the number of people who want to work. This is a disequilibrium in the job market. Structural unemployment is caused by wage rigidity and job rationing.

What is the natural rate of unemployment and what is it determined by?

The natural rate of unemployment is the unemployment that happens when the economy's production is at the long run level. It is the average rate of unemployment around which the economy fluctuates. The natural rate of unemployment is mainly determined by the economy's productive capacity and it's institutions.

What is unemployment insurance and how does it affect unemployment?

UI is a mandatory insurance program that offers benefits to unemployed workers, funded by taxpayers. It pays part of the worker's former wages for a limited time. UI increases search unemployment because it reduces the opportunity cost of being fired and the urgency of finding work. The longer a worker is eligible for UI, the longer the duration of unemployment.

How does unemployment in the US differ from unemployment in Europe?

US workers work longer hours, and their employment/population ratio is higher. Europe has higher unemployment and and earlier retirement.