Ch. 30 (Unemployment)

Why do employment protection laws increase the unemployment rate?

In America, we have the Employment At-Will Doctrine which states that a worker can quit and an employer can fire at any time. European countries have a lot of restrictions on their firing, such as in Portugal, a company has get permission from the government to lay off workers. While this may seem good, hiring and firing costs make labor markets less flexible and dynamic. A company might be reluctant to hire on more workers when production gets ramped up because they know it will be hard to fire them if production slows down

How do taxes and benefits affect the LFPR?

Increased taxes will decrease labor force participation. Increased benefits will increase the labor force participation. It also ties into when people want to retire

Why is frictional unemployment not necessarily bad?

It is a natural occurrence of workers just trying to find the right position for them. It will always be present in the economy

What is a discouraged worker? How do discouraged workers affect the unemployment rate?

A discouraged worker is a worker that has not found work in so long that they stop searching for work. Discouraged workers actually decrease the unemployment rate

Name and describe some policies that can reduce structural unemployment.

Active Labor Market Policies such as limiting unemployment benefits and requiring people who wish to receive benefits to enroll in a job search or training program, subsidizing employers who are willing to train unemployed workers, offering bonuses for people to find jobs earlier

What are some of the weaknesses of using the unemployment rate as a measure of how well the labor market is working?

Discouraged workers and underemployment both skew the measure from its accuracy and keep an increase/decrease in unemployment from always meaning one thing

What makes up a larger share of total unemployment in the U.S.? Frictional or structural?

Frictional

What is frictional unemployment?

Frictional unemployment is short term unemployment

How is the LFPR calculated?

LFPR=100×(labor force)/(adult population)

Why do minimum wages increase the unemployment rate?

Minimum wages that are higher, like binding price floors, than the equilibrium cause unemployment

Is a decrease in the unemployment rate necessarily good? Is an increase in the unemployment rate necessarily bad? Explain.

No and no. The amount of discouraged workers can affect the unemployment rate. When workers become discouraged, they leave the labor force and therefore decrease the unemployment rate. When they get encouraged again, they reenter the labor force and increase the unemployment rate. Therefore an increase/decrease in the unemployment rate is not always a good or bad thing.

Who are the unemployed?

People who are actively seeking work and not currently working for pay

What is the difference between the actual unemployment rate and the natural unemployment rate?

The actual unemployment takes cyclical unemployment into account. The natural rate tends to stay more steady where the actual rate goes up and down more

Why do unemployment benefits increase the unemployment rate?

The better the benefits, the more incentives workers have to stay unemployed

How do lifecycle effects affect the LFPR?

The percentage of people in "working age" generations will affect the labor force. The baby boomer generation had a lot of working people paying their taxes

Who is in the labor force?

The total # of unemployed and employed workers

What are the causes of frictional unemployment?

This is caused by the normal search for jobs. People refusing other job opportunities to find a job that better suits them

How is the unemployment rate calculated?

UR=100×unemployed/(labor force)

Why do unions increase the unemployment rate?

Unions drive up wages and have the same effects as minimum wages

What is structural unemployment?

a. Persistent long term unemployment that come from shocks to the economy b. When people have skills that are not in demand or they don't have skills that are in demand

What is the natural unemployment rate?

a. The rate of structural plus frictional unemployment. The natural rate changes only slowly through time and the actual rate of unemployment varies around the natural rate b. It's the natural unemployment that we expect because there will always be these two things

What is cyclical unemployment?

a. Unemployment that correlates with the ups and downs of the business cycle. b. The difference between natural unemployment and actual unemployment c. When unemployment gets too low, the few people who are unemployed are not the most desirable workers for firms d. This causes the companies to have to up wages and offer more incentives to get workers to come over from other companies or schools

What is a "jobless recovery?"

a. When unemployment remains high long after a recession ends b. The economy is no longer in a recession, but people who were not participating before decide to participate in the labor force c. Since the labor force is increasing faster than the amount of jobs is increasing, unemployment stays up

What is "creative destruction?"

i. A term used to describe the process of an economy continually creating and destroying jobs. In any given month, 4 million jobs may be created but 3.9 million positions may be terminated ii. The economy is always changing and competitive. Businesses fail and businesses get created every day. So millions of jobs are created and lost every day

How do demographics affect the LFPR?

i. When women and black people started to be able to work more, the LFPR changed ii. The supply of labor for women is more elastic than that of men

What are the factors that can increase structural unemployment?

§ Changes in supply or demand of a position § Oil shocks § New information technologies (we don't need as many people who can repair landlines) § Globalization § Restructuring jobs away from manufacturing and towards services § Unemployment benefits § Minimum wages § Powerful unions § Employment protection laws

What is underemployment? What is the underemployment rate? How does the underemployment rate compare to the unemployment rate?

§ Underemployed workers are part time workers that want to work full time and also people who would like to work but have given up looking for a job § It usually acts like the unemployment curve because the same factors cause both