Terms in this set (32)
What is the natural rate of unemployment?
the average rate of unemployment around which the economy fluctuates
What happens to unemployment in a recession
the actual unemployment rate rises above the natural rate
what happens to unemployment in a boom
the actual unemployment rate falls below the natural rate
What is L?
L=# of workers in labor force
what is E?
E=# of employed workers
What is U?
U=# of unemployment
what is U/L?
U/L= unemployment rate
What assumption is true about L?
1. L is exogenously fixed
What is s?
s = rate of job separation → fraction of employed workers that become separated from their jobs
What is f?
f = rate of job finding → fraction of unemployed workers that find jobs
Is s and/or f exogenous? endogenous?
s and f are exogenous
What is the steady state condition?
The labor market is in steady state, or long-run equilibrium, if the unemployment rate is constant
What is the equilibrium U- rate
U/L = s/(s+f)
What will a policy do to the natural rate of unemployment?
A policy will reduce the natural rate of unemployment only if it lowers s or increase f
What are the two reasons that unemployment exists?
f < 1 because of job search and wage rigidity
What is frictional unemployment?
frictional unemployment is caused by the time it takes workers to search for a job
Why does frictional unemployment occur?
- Workers have different abilities/ preferences
- jobs have different skill requirements
- Geographic mobility of workers not instant
- flow of information about vacancies and jobs candidates is imperfect
What is a sectoral shift?
Sectoral shifts is when changes in the composition of demand among industries or regions
What are 2 examples of sectoral shifts
1. technological change: more jobs repairing computer fewer jobs repairing typewriters
2. A new international trade agreement: labor demand increases in export sectors, decreases in import-competing sectors
How does public policy and job search affect employment?
- government employment agencies: disseminate info about job openings to better match workers & jobs
- Public job training programs: help workers displace from declining industries get skills needed for jobs in growing industries
What is unemployment insurance?
UI pays part of a worker's former wage for a limited time after the worker loses their job
Does UI increase or decrease frictional unemployment?
UI increases friction unemployment because it reduces opportunity cost of being unemployed and the urgency of finding work
What is the benefits of UI?
- allowing workers more time to search
- may lead to better matches between jobs and workers
-leads to greater productivity and higher incomes
What are the three reason for wage rigidity
1. minimum-wage laws
2. labor unions
3. efficiency wages
How does minimum wage affect unemployment
The minimum wage . may exceed the equilibrium wage of unskilled workers , but this does explain the majority of the natural rate of unemployment as most workers' wages are well above the minimum wage
How does labor unions affect unemployment? What is the difference between insiders and outsiders?
unions exercise monopoly power to secure higher wages for their members and when those wages exceed the equilibrium wage, unemployment rises
insiders= employed union workers who keep the wages high
outsiders= non-union workers who take a lower wage so there is enough jobs
What is efficiency wages?
Theories where higher wages increase workers productivity by:
- attracting higher quality job applicants
- increasing worker effort, reducing "shirking"
- reducing turnover which is costly to firms
- improving health workers (in developing countries)
What results from firms paying above-equilibrium wages to boost productivity?
firms willingly pay above-equilibrium wages to raise productivity which causes structural unemployment
What does the natural rate of unemployment depend on?
depends on the rates of job separation and job finding
What is the duration of unemployment?
Most spells are short term; most weeks of unemployment are attributable to a small number of long-term unemployed persons
What are the possible explanations for the unemployment rate rising in the U.S. through the 1960-1980s?
- trends in real minimum wage
-prevalence of sectoral shifts
- aging of the baby boomers
What are the possible explanation for the unemployment rate rise in Europe since the 1970s?
- generous unemployment benefits
- strong union presence
- technology-driven shift in demand away from unskilled workers