Chapter 15 Econ

Labor force participation rate

(Labor force/Adult population) x 100 percentage of total adult population of US that is in the labor force

Unemployment rate

(Number of unemployed/Labor force) x 100 percentage of labor force unemployed

Based on the data the BLS receives from the Current Population Survey, what are the three categories it separates adults (age 16+) into?

Employed: those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business; both full-time and part-time; includes those who were not working but who has jobs from which they were temporarily absent from (vacation, illness, etc) Unemployed: those who were not employed, were available for work, and had tried to employment during the previous four weeks; includes those waiting to be recalled to a job from which they had been laid off Not in the labor force: people who don't fit either category like students and retirees

How does efficiency wages create unemployment?

Similar to the way that unions and minimum wage laws do--in all three cases, unemployment is the result of wages above the level that balanced the equilibrium level but there's a difference between unions and minimum wages and efficiency wages: min wage laws and unions prevent firms from lowering wages despite there being surplus of workers, while efficiency wage theory states that such a constraint on firms is unnecessary in many cases because firms may be better off keep wages above equilibrium

How does a change in wage due to unions effect other sectors of the economy

The people who are now unemployed will often take jobs in another industry, so the supply of labor increases in other parts of the economy which in turn reduces the wages in industries that are not unionized workers in unions reap the benefits of collective bargaining, while workers not in unions bear some of the cost

Are unions good or bad for the economy?

There are two sides to the debate, and economists disagree No: Critics believe that the resulting allocation of labor that inions cause is both inefficient and inequitable. It is inefficient because high union wages reduce employment in unionized firms below the efficient, competitive level (basically inefficient because not at equilibrium). it is inequitable because some workers benefit and the expense of others Yes: unions balance market power of firms and protect workers from being at the mercy of firm's owner, also allow firms to have a happy productive workforce

How does minimum wage laws cause unemployment?

When minimum wage law forced wage to be above the equilibrium, the quantity supplied of labor is higher than the quantity demanded-->there is a surplus of labor, there are more people willing to work than there are jobs

Four types of efficiency wage theory:

Worker heath: better paid workers eat a better diet and workers who eat better are healthier and more productive, can be relevant for 4explaining unemployment is less developed countries where inadequate neutron can be a problem Worker turn over: the more a firm pays its workers the less often its workers choose toe lave and a firm can reduce turnover by paying them a higher wage (trover is costly for firms because they have to train new workers and new workers aren't as productive as experienced ones) Worker quality: when a firm pays a high age it attracts a better pool of workers to a poly for it jobs and increases the quality of its workforce; if a firm responses to surplus by reducing the wage, the most competent applications who are likely to have better alternatives won't choose to apply Worker effort: high wages make workers more eager to keep their jobs and motivate them to put forward their best effort; if wage was at equilibrium workers would have less reason to work hard because if they were fired they could quickly find a new job with the same wage

Unemployment insurance

a government program that partially protects worker's incomes when they become unemployed; this program unintentionally increases the amount of frictional unemployment benefits apply only to people laid off because their previous employers no longer needed their skills the principle from chapter 1 that people respond to incentives explains that because unemployment benefits stop when a worker takes a new job, the unemployed devote less effort to job search and are more likely to turn down unattractive job offers while there are drawbacks, it is not an inherently bad policy. some argue that it allows people to find the most appropriate job most economists agree that eliminating this policy would reduce the amount of unemployment in the economy, yet economists disagree on whether economic well-being wold be enhanced or diminished by getting rid of this policy

Union

a worker association that bargains with employers over wags, benefits and working conditions a union is a type of cartel, a group of sellers acting together in the hope of exerting their joint market power

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity according to this theory, firms operate more efficiently if wages are above the equilibrium level, so it may be profitable of firms to keep wages high even in the presence of a surplus of labor

Natural state of unemployment

amount of unemployment that the economy normally experiences the word natural does not imply that is is desirable nor that it is constant over time or impervious to economic police, it just means that this unemployment does not go away on its own even in the long run

cyclical unemployment

deviation of unemployment from its natural rat

Most spells of unemployment are short, but most unemployment observed at any given time is long term

example to explain this statement: suppose each week you find that there are four unemployed workers, three of whom are the same individuals for the whole year while each week the fourth person changes. so over the course of the year you will have seen 55 unemployed people (52 weeks of new people+the 3 people who are unemployed the whole time). this means that 52/55 (95 percent) of unemployment spells last a week-->thus unemployment spells are short but each week when you take a snapshot, 3 of the 4 people (75%) are long-term unemployed. so 75% of the unemployed population at each snapshot are long-term unemployment-->thus most of unemployment observed at a particular point of time is long term unemployment overall this shows that most people who become unemployed will soon find jobs, yet most of the economy's unemployment problem is attributable to relatively few workers who are jobless for long periods of time

What can reduce frictional unemployment?

faster information spreading about job opening and worker availability. the internet and public policy can help with this (some critics think government interference doesn't help with this and it is better done privately by workers and employers)

Why frictional unemployment (unemployment resulting from job search) is inevitable

frictional unemployment is often result of changes in the demand for labor among different firms (example: when consumers decide they prefer ford to GM then GM lays off workers and then people must now search for jobs and ford must decide which new works to hire, result of this period of transition is unemployment) sectional shifts: changes in composition of demand among industries or regions, because it takes time for workers to search for jobs in the new sectors, sectoral shifts temporarily cause employment changing patterns of international trade can also be a source of frictional unemployment, comparative advantages change and goods a country produces changes and people need to change industries which can lead to a period of unemployment simply put, frictional unemployment is inevitable because the economy is always changing

Some issues with how unemployment rate is calcuated

it can be hard to distinguish between someone who is unemployed and someone who is not in the labor force movements into and out of the labor force are common not all unemployment ends with job seeker finding a job, many people end up leaving the labor force some people who report being unemployed aren't looking hard for a job others report being unemployed but are being paid "under the table" some people out of labor force may actually want to work, these people are called discouraged workers: individuals who would like to work but have given up looking for a job

For what group of people do minimum wage laws explain unemployment?

matter most to least skilled and least experienced members of labor force, like teenagers. their equilibrium wages tend to be low and are likely below legal minimum. min wage is not predominant reason for unemployment, but it does have an important effect on certain groups

Natural rate of unemployment

normal rate of unemployment around which the unemployment rate fluctuates

Labor force

number of employed + number of unemployed aka total number of workers

Strike

organized withdrawal of labor from a firm by a union

It seems counterintuitive that firm would benefit from paying higher wages, so why would a firm do this?

paling high ages might be profitable because they might raise the efficiency of a firm's workers

Why don't wages adjust to balance quantity of labor supplied and quantity of labor demanded? aka why is there always some people unemployed?

preview of this answer, four ways to explain this: -frictional unemployment: the unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skills, explains relatively short spells of unemployment -structural unemployment: unemployment that results because the number of jobs available in some markers is insufficient to provide a job for everyone ho wants one, explains larger spells of unemployment, results when wages are set above the level that brings supply and demand into equilibrium (three reasons for an above equilibrium wage: minimum wage laws, unions, and efficiency wages)

Job search

process by which workers find appropriate jobs given their tastes ad skills, one reason that economics experience unemployment

Collective bargaining

the process by which unions and firms agree on the terms of unemployment

How do unions cause unemployment

when a union raises the wage above the equilibrium level, the quantity of labor supplied is greater than the quantity of labor demanded, which causes unemployment workers who remained employed at the higher wage are better off, but those who were previously employed and are now unemployed are worse off

Structural unemployment vs Frictional unemployment

when job search is the explanation for unemployment, works are searching for jobs that best suit their tastes and skills, by contrast, when the wage is above the equilibrium level, the quantity of labor supplied exceeds the quantity of labor demanded, and workers are unemployed because they are waiting for jobs to open up (notice: fictional unemployment=searching, structural unemployment=waiting)

Cyclical unemployment

year-to-year fluctuations in unemployment around its natural state, closed associated with the short-run ups and downs of economic activity