Macro Chp 6

What are "efficiency wages?" Why might some employers pay efficiency wages?

Efficiency wages are wages above the equilibrium level that employers voluntarily offer. Such wages might increase labor productivity because they may reduce labor turnover, reduce shirking and theft, attract better workers, and induce greater effort.

What is the "adverse selection of wage cuts" argument?

If a firm cuts wages, the workers most likely to quit are its best workers. These workers have the best chance of finding jobs elsewhere. So if firms do not want to chase away their best workers, they will be reluctant to cut wages

What causes cyclical unemployment?

contraction in GDP associated with the business cycle - When production falls, firms need fewer workers and so lay off employees

Type of employment? a financial analyst who quits her job in Chicago and is pursing similar work in Arizona

frictional

A manufacturing worker whose factory just closed down

unemployed

Internships have become more common for college students. How might this affect frictional unemployment?

Internships serve the function of extended job interviews, and allow the firm and the intern to evaluate each other at length. Firms often hire their interns. The effect should be to reduce frictional unemployment

What happens to the labor force participation rate when employed individuals are reclassified as unemployed? What happens when they are reclassified as discouraged workers?

If they are reclassified as unemployed, there is no change in the labor force, and so no change in the labor force participation rate. If they are reclassified as discouraged workers, they are no longer part of the labor force; the labor force is smaller and therefore the labor force participation rate is smaller

Is it desirable to pursue a goal of zero unemployment? Why or why not?

No. A zero unemployment rate would mean that people could not quit their jobs if they did not like them. It would also mean that firms could never lay-off workers; that means that obsolete industries would keep labor that is required in new industries

Is an increase in the unemployment rate necessarily a bad thing for a nation?

Not in every case. For example, as the economy improves, people who had been discouraged workers may start looking for work again. When this happens, the measured unemployment rate will rise temporarily. This is because they will again be counted as unemployed.

What is structural unemployment? Give examples of structural unemployment.

Structural unemployment exists because some workers do not have the skills that employers want. Some people never acquire skills. Others discover that their skills have become obsolete because of technological change.

What criteria are used by the BLS to count someone as employed? As unemployed?

The BLS counts anyone working for pay as employed. People who are not working for pay but are actively looking for work are considered unemployed.

What term describes the remaining level of unemployment that occurs even when the economy is healthy?

The natural rate of unemployment.

Someone who has been out of work for two years but keeps looking for a job

unemployed

a retiree

out of labor force

Would you expect the natural rate of unemployment to remain the same within one country over the long run of several decades?

No

Are U.S. unemployment rates distributed evenly across the population?

No young are more likely to be unemployed than the old less educated are more likely to be unemployed than the more educated whites have a lower unemployment rate than Hispanics Hispanics have a lower unemployment rate than blacks

Would you expect the natural rate of unemployment to be roughly the same in different countries?

No

Someone who decides to take a part time job because she could not find a full time position

employed

How might the Internet help reduce the amount of frictional unemployment?

The Internet should shorten job searches. Anything that improves the flow of information about available jobs and job candidates will reduce frictional unemployment.

Type of employment? printers laid off due to a drop in demand for printed catalogues and flyers as firms go the internet to advertise their products.

structural

Under what condition would a decrease in unemployment be bad for the economy?

A decrease in unemployment would be bad for the economy if it were the result of unemployed people dropping out of the labor force

Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation?

Because of the influx of women into the labor market, the supply of labor shifted to the right. Since wages are sticky downward, the increased supply of labor caused an increase in people looking for jobs (Qs), but no change in the number of jobs available (Qe). As a result, unemployment increased by the amount of the increase in the labor supply. This can be seen in the figure below. Over time, as labor demand grew, the unemployment declined and eventually wages began to increase again. But this increase in labor demand goes beyond the scope of this problem.

How might more generous unemployment benefits affect the natural rate of unemployment?

Europe provides evidence that more generous unemployment benefits reduce the incentive to find work. The result is a higher natural rate of unemployment.

After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why?

If there have been several years of economic growth, then the cyclical component of unemployment will most likely have been eliminated. What unemployment still remains must be frictional and structural, and therefore components of the natural rate of unemployment.

Are U.S. unemployment rates typically higher, lower, or about the same as unemployment rates in other high-income countries?

It depends on the country, but the U.S. typically has a lower unemployment rate than the average high-income country.

Would you expect hidden unemployment to be higher, lower, or about the same when the unemployment rate is high, say 10%, versus low, say 4%? Explain.

When the unemployment rate is high, it is more likely that unemployed workers will give up looking for work. In addition, more workers will settle for part-time jobs or jobs that do not make use of their skills. Consequently, there will be more hidden (unmeasured) unemployment when the official unemployment rate is high

Type of employment? landscapers laid off in response to a drop in new housing construction during a recession

cyclical

Someone who hates her present job and is actively looking for another one

employed

Type of employment? factory workers in the U.S. laid off as the plants shut down and move to Mexico and Ireland

frictional

Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level?

Over the long term, the U.S. unemployment rate has remained basically the same level

What is frictional unemployment? Give examples of frictional unemployment

Frictional unemployment exists because it takes time for unemployed workers to find a job Technological change, bad management, and changing consumer tastes cause firms to go out of business and cause workers to lose their jobs

If you are out of school but working part time, are you considered employed or unemployed in U.S. labor statistics? If you are a full time student and working 12 hours a week at the college cafeteria are you considered employed or not in the labor force? If you are a senior citizen who is collecting social security and a pension and working as a greeter at Wal-Mart are you considered employed or not in the labor force?

Part-time workers are counted as employed. One need not be retired to collect Social Security. So in all three cases, the person is employed.

What are some of the problems with using the unemployment rate as an accurate measure of overall joblessness?

It may understate the true unemployment rate because: People who have given up hope of finding a job are not considered unemployed People working part time who really want to work full time are considered fully employed People with advanced skills who are forced to settle for unskilled work are also considered fully employed. unemployment rate may overstate the true unemployment rate because: Some people counted as unemployed may in fact be employed, but are working "off the books" or in the underground economy Some people counted as unemployed may claim to be looking for work but are not really looking very hard; they should be considered not in the labor force

Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?

New entrants to the labor force, whether from college or otherwise, are counted as frictionally unemployed until they find a job.

Are all adults who do not hold jobs counted as unemployed?

No. Adults without jobs who are not looking for work are out of the labor force.

Is a decrease in the unemployment rate necessarily a good thing for a nation? Explain

Not in every case. If unemployed workers become discouraged, the measured unemployment rate will fall.

What forces create the natural rate of unemployment for an economy?

Some industries will be growing and others will be shrinking; it takes time for labor to move from one sector to another, and to acquire the new skills that are in demand. There are also public policies that affect the willingness of businesses to hire and the eagerness of people to work the natural rate of unemployment is determined by all of the things that go into determining the frictional and structural rates of unemployment.

What is the difference between being unemployed and being out of the labor force?

Someone who is unemployed is not working, but is looking for work. Someone out of the labor force is not working and not looking for work.

Is the natural rate of unemployment primarily affected by short-run or long-run trends?

The natural rate of unemployment is driven primarily by long-run trends. Short-run events primarily affect cyclical unemployment; the natural rate of unemployment reflects frictional and structural unemployment.

How is the unemployment rate calculated? How is the labor force participation rate calculated?

The unemployment rate is the number of unemployed divided by the labor force. The labor force participation rate is the labor force divided by the adult (working-age) population.

If many workers become discouraged from looking for jobs, explain how the number of jobs could decline but the unemployment rate could fall at the same time

When unemployed workers become discouraged and stop looking for work, they are no longer considered unemployed. Consider an extreme case: suppose every unemployed worker becomes discouraged. In that case, the unemployment rate would fall to zero, because no one would be counted as unemployed!

What happens to the unemployment rate when unemployed workers are reclassified as discouraged workers?

When unemployed workers stop looking for work, the number of unemployed and the labor force both decrease. The unemployment rate is the number of unemployed divided by the labor force. Both numerator and denominator decline, but in percentage terms, the numerator falls more. Consequently, the measured unemployment rate falls.

Whose unemployment rates are commonly higher in the U.S. economy? a. Whites or nonwhites? b. The young or the middle-aged? c. College graduates or high school graduates?

a. Nonwhites b. The young c. High school graduates

A college student doing an unpaid summer internship

out of labor force

A husband willingly stays home with children while his wife works

out of labor force

Someone who has been out of work for two months but isn't looking for a job

out of labor force

Type of employment? coal miners laid off due to EPA regulations that shut down coal-fired power

structural