Chapter 8-2 Economics 211

Which of the following statements about productivity shifts and wages is true?

Adjustments of wages to productivity levels are often not quick. Adjustments of wages to productivity levels will not happen quickly or smoothly. Employers typically review wages only once or twice a year. In many modern jobs, it is difficult to measure productivity at the individual level.

Look at the graph below. Labor demand falls from D0 to D1 due to an economic recession. What is the resulting wage in the short-run due to this shift in demand? HINT: Consider whether this is a situation in which the wages are sticky or flexible.

Because wages are sticky in the short-run the wage will remain at $30 but the quantity demanded at $30 will decrease demand to D1 at Q=15.

True or false? In the imaginary country of Xurbia, large corporations typically hire employees for the long-term, often for life. Suppose, the proportion of older workers, relative to younger workers, in the Xurbian economy was relatively high. We would expect the natural rate of unemployment in Xurbia to be high.

False As the questions implies, older workers in Xurbia are far more likely to experience low unemployment than younger workers because corporations in Xurbia keep workers hired for long. Moreover, older workers tend to have more experience that younger workers therefore we would expect older workers to have less of a difficult time finding employment. Additionally, the question implies that, demographically, there are more older workers than younger workers. As such, we would expect the natural rate of unemployment in Xurbia to be low.

True or False? Unlike the unemployment rate, the natural rate of unemployment cannot change over time,

False Since the underlying economic, social, and political factors that influence the natural rate of unemployment can changeover time, the natural rate of unemployment can change over time as well. For example, some of the common reasons that economists propose for the change in natural rate of unemployment in the U.S. economy in the early 2000s : technological changes in the ways workers look for jobs (LinkedIn etc), the growth of the temporary worker industry, and age-related demographic changes in the labor market.

A recession has caused a shift in demand for labor in Country D. This shift is plotted on the graph below. What is the new wage rate in this economy in the short-run?

In the short-run wages are sticky while the economy adjusts, so the wage rate on D1 will be the same as it is on D0 in equilibrium, $25.

Suppose in the imaginary country of Xurbia, a remarkable new tool which improves the ability for job seekers to find out about jobs at different companies and make contact with those companies with relative ease is introduced and widely adopted by employers and job seekers. What do you expect will happen to the natural rate of unemployment in Xurbia?

It will decrease. A tool that allows job seekers to find jobs and local employers easier would reduce the costs associated with searching for a job and make it easier for employers to find the employees they desire. This would reduce friction in labor markets. Therefore, we would expect that this tool would lead to more job placements ultimately contributing to reducing the natural rate of unemployment.

Which of the following best defines involuntary unemployment?

People are unemployed but willing to work jobs that employ people with similar skills.

Which of the following is an example of cyclical unemployment?

Ronald is laid off by his company as part of company reorganization to cut costs to meet slowing demand in the economy. A company has to lay off half of its work force to cut costs in order to make it through the recession. Cyclical unemployment refers to unemployment which is closely tied to the business cycle, such as higher unemployment during a recession. Ronald lost his job because of slowing demand for the company's products which occurs during recessionary contraction of the economy.

An economic boom has caused a shift in demand curve for labor from D0 to D1 as seen on the graph below. What is the new wage rate and quantity of labor demanded for this economy?

The shift to D1 causes the wages to rise from $10 to $20 and the quantity of labor demanded to rise from 20 to 30.

What is efficiency wage theory?

The theory that workers' productivity depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. Efficiency wage theory argues that workers' productivity depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. One reason is that employees who receive better pay than others will be more productive because they recognize that if they were to lose their current jobs, they would suffer a decline in salary. As a result, they are motivated to work harder and to stay with the current employer.

All of the following are examples of someone who is involuntary unemployed, except:

Tom was let go from his job at The Burger Shack five weeks ago and has yet to search for another job because he wants to earn more than $15/hour. Not only is Tom not considered involuntary unemployed, he is not considered unemployed by the Bureau of Labor Statistics because he is not actively seeking work. Tina, Tonya, and Trent are considered involuntary unemployed because they are willing to work at the jobs similar to what those with their skill sets have and at wages that are similar to what those with their skill sets are receiving.

The labor demand decrease graphed below represents a contracting economy. The labor demand curve decreased to the left because of a decrease in output demand. In the short-run what is the labor demanded wage due to this shift?

With the decrease in economic demand, companies will decrease production. In the short-run the wage will remain the same or will remain sticky while the economy adjusts. The wage in equilibrium on D0 is $30 and will remain at $30 in the short-run on D1.

Which of the following can lead to cyclical unemployment?

a stock market crash

Which of the following best illustrates a worker who is frictionally unemployed?

an entry level clerk leaving a company for a mid-executive position at another company Frictional unemployment is unemployment that occurs as workers move between jobs. Therefore, a recent college graduate looking for a job in her degree field is an example of frictional unemployment because she is looking for her first post-college job.

What best describes a form of insurance for an employee wanting protection against wage declines in bad times in exchange for lower wages in good times?

an implicit contract Economists looking for reasons why wages might be sticky downwards have focused on factors that may characterize most labor relationships in the economy, not just a few. One argument is that even employees who are not union members often work under an implicit contract, which is that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong. This wage-setting behavior acts like a form of insurance: the employee has some protection against wage declines in bad times, but pays for that protection with lower wages in good times.

Labor laws in Europe ______________ laying off or firing current workers compared to labor laws in the U.S. Therefore, the natural rate of unemployment in Europe is likely to be higher than the natural rate of unemployment in the U.S.

discourage When companies know that it will be difficult to fire or lay off workers, they also become hesitant about hiring in the first place. Therefore, laws that discourage laying off or firing current workers could create a higher natural rate of unemployment.

In some countries, the legally required notice before laying off a worker can be more than three months while the required severance package can be as high as a year's salary. Such laws will ____________________.

discourage laying off or firing workers make firms hesitant about hiring workers The legally required notice before laying off a worker can be more than three months in Spain, Germany, Denmark, and Belgium, and the legally required severance package can be as high as a year's salary or more in Austria, Spain, Portugal, Italy, and Greece. Such laws will surely discourage laying off or firing current workers. However, when companies know that it will be difficult to fire or lay off workers, they also become hesitant about hiring in the first place.

Which of the following best describes sticky wages?

earnings that don't adjust quickly to changes in labor market conditions Sticky wages are earnings that don't adjust quickly to changes in labor market conditions.

In the 1970s, the U.S. space program downsized and aerospace engineers struggled to find employment that utilized their skills. What type of unemployment is this an example of?

structural The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills. An example of structural unemployment is the unemployment among aerospace engineers after the U.S. space program downsized in the 1970s.

Tina specializes in newspaper print layout. Unfortunately, her newspaper transformed into a digital-copy only and she was laid off because her print-laying skills were no longer needed. Is Tina's scenario is an example of ____________________ unemployment.

structural The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills. The demand has shifted away from Tina's particular skill set so she is considered structurally unemployed.

True or false? Wages are considered sticky when they do not fall in response to a decrease in demand.

t

True or false? The loss of construction jobs during the 2008 housing financial crisis is an example of cyclical unemployment.

t Cyclical unemployment refers to unemployment, closely tied to the business cycle. The loss of construction jobs during the 2008 housing financial crisis is an example of cyclical unemployment because when home builders stopped building homes, many construction workers lost their jobs.

The Panda Toy Company is losing money and reacts by reducing wages for all 250 employees. As a result, the employees with the best employment alternatives at other toy companies end up leaving. Which of the following best describes why this scenario can lead to wage stickiness?

the adverse selection of wage cuts argument The adverse selection of wage cuts argument points out that if an employer reacts to poor business conditions by reducing wages for all workers, then the best workers, those with the best employment alternatives at other firms, are the most likely to leave. The least attractive workers, with fewer employment alternatives, are more likely to stay.

An employee who is paid higher than her peers is more productive because she realizes that she would likely suffer a decline in salary if she were to leave her position. Which of the following best describes why her situation could cause wage stickiness?

the efficiency wage theory Efficiency wage theory argues that workers' productivity depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. Therefore, an employee who is paid higher than her peers is more productive because she realizes that she would likely suffer a decline in salary if she were to leave her position may be in a situation that could cause wage stickiness due to the efficiency wage theory.

How would an increase in unemployment insurance duration affect the natural rate of unemployment?

the natural rate of unemployment will increase the unemployed worker will be less eager to seek a new job Public policy can also have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of unemployment is lower and that worker will be less eager to seek a new job. What seems to matter most is not just the amount of these benefits, but how long they last. A society that provides generous help for the unemployed that cuts off after, say, six months, may provide less of an incentive for unemployment than a society that provides less generous help that lasts for several years. Conversely, government assistance for job search or retraining can in some cases encourage people back to work sooner.

All of the following can impact the demand for new workers in the labor market, except:

unemployment benefits On the demand side of the labor market, government rules, social institutions, and the presence of unions can affect the willingness of firms to hire. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work, like unemployment benefits.

When productivity rise unexpectedly slows down, how is unemployment typically impacted?

unemployment rates will likely be slightly higher than average Levels of unemployment will tend to be somewhat higher on average when productivity is unexpectedly low, and conversely, will tend to be somewhat lower on average when productivity is unexpectedly high. However, over time, wages do eventually adjust to reflect productivity levels.

The logging industry has had a very productive thirty years and as a result, the demand for labor has been increasing a little each year and equilibrium wages rose each year. If the logging industry's productivity were to slow down, what is likely to happen to equilibrium wages?

wages would continue to rise despite the demand for labor not rising, causing the natural rate of unemployment to rise In this scenario, the quantity of labor that business is willing to hire at any given wage—has been shifting out a little each year because of rising productivity. As a result, equilibrium wages have been rising each year. However, when productivity unexpectedly slows down, the pattern of wage increases does not adjust right away. Wages keep rising each year despite the demand for labor is no longer shifting up. A gap opens where the quantity of labor supplied the quantity demanded and the natural rate of unemployment rises.