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Chapter 10 Summary.pdf

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Bridget O' Shaughnessy

Summary of Lecture Notes from Chapter 10 and Practice Questions KEY POINTS: 1. The unemployment rate is the percentage of those who would like to work but do not have jobs. Statistics Canada calculates this statistic monthly based on a survey of thousands of households. 2. The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labour force after an unsuccessful search. 3. In the Canadian economy, most people who become unemployed find work within a fairly short period of time. The fraction of those who find themselves unemployed for periods longer than six months is relatively small. Public policy solutions to the unemployment problem should be directed toward providing help to those experiencing long bouts of unemployment. 4. One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. Employment insurance is a government policy that, while protecting workers’ incomes, increases the amount of frictional unemployment. 5. A second reason why our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labour supplied and reduce the quantity demanded. The resulting surplus of labour represents unemployment. 6. A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labour. 7. A fourth reason for unemployment is suggested by the theory of efficiency wages. According to this theory, firms find it profitable to pay wages above the equilibrium level. High wages can improve worker health, lower worker turnover, increase worker effort, and raise worker quality. CHAPTER OUTLINE: I. Unemployment can be divided into two categories. A. The economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences. B. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. II. Identifying Unemployment A. How Is Unemployment Measured? 1. Statistics Canada surveys about 50,000 households every month. 1 2 ☞ Chapter 10/ Unemployment and Its Natural Rate 2. Statistics Canada places each adult (aged 16 or older) into one of three ALTERNATIVE CLASSROOM EXAMPLE: The country of Bada has collected the following information: in the labour force. Population 3. Definition of labour force: the total number of workers, including both Employed 180,000 Unemployed the30,000yed and the unemployed. Labor force = Number of employed + Number of unemployed Labour Force = 180,000 + 30,000 = 210.000 Unemployment rate = (30,000/210,000) × 100% = 14.3% Labour-force participation rate = (210,000/240,000) × 100% = 87.5%e of the labour force that is unemployed. Number of unemployed  Unemployment rate =   × 100%  Labor force  5. Definition of labour-force participation rate the percentage of the adult population that is in the labour force.  Labor force  Labor -force participation rate =   × 100%  Adult population  6. Table 10.1 shows unemployment and labour-force participation rates for various sub-groups of the Canadian population. a. Women have lower labour-force participation rates than men in the same age group, but have similar rates of unemployment. b. Young people aged 15 to 24 have much higher rates of unemployment than older people. c. Teenagers have lower labour-force participation rates than adults, but have higher unemployment rates. 7. Figure 10.2 shows the Canadian unemployment rate since 1966. C. Does the Unemployment Rate Measure What We Want It To? 1. Measuring the unemployment rate is not as straightforward as it may seem. 2. There is a tremendous amount of movement into and out of the labour force. a. Many of the unemployed are new entrants or reentrants looking for work. b. Many unemployment spells end with a person leaving the labour force as opposed to actually finding a job. Chapter 10/ Unemployment And Its Natural Rate ☞ 3 3. There may be individuals who are calling themselves unemployed to qualify for Employment Insurance, yet they are not trying hard to find work. These individuals are more likely not a part of the true labour force, but they will be counted as unemployed. 4. Definition of discouraged searchers: individuals who would like to work but have given up looking for a job. a. These individuals will not be counted as part of the labour force. b. Thus, while they are likely a part of the unemployed, they will not show up in the unemployment statistics. 5. Table 10.2 presents other measures of labour underutilization calculated by Statistics Canada. D. How Long Are the Unemployed without Work? 1. Another important variable that policymakers may be concerned with is the duration of unemployment. 2. Most spells of unemployment are quite short. E. Why Are There Always People Unemployed? 1. In an ideal labour market, wages would adjust so that the quantity of labour supplied and the quantity of labour demanded would be equal. 2. However, there is always unemployment even when the economy is doing well. The unemployment rate is never zero; it fluctuates around the natural rate. a. Definition of natural rate of unemployment : the rate of unemployment to which the economy tends to return in the long run. b. Figure 10.4 shows the difference between the actual observed unemployment rates and the natural unemployment rate. The difference between the two rates is the cyclical unemployment rate. c. Definition of cyclical unemployment : the deviation of unemployment from its natural rate. d. Definition of frictional unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. e. Definition of structural unemployment : unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one. 4 ☞ Chapter 10/ Unemployment and Its Natural Rate III. Job Search A. Definition of job search: the process by which workers find appropriate jobs given their tastes and skills. B. Because workers differ from one another in terms of their skills and tastes and jobs differ in their attributes, it is often difficult for workers to match with the appropriate job. C. Why Some Frictional Unemployment Is Inevitable 1. Frictional unemployment often occurs because of a change in the demand for labour among different firms. a. When workers decide to stop buying a good produced by Firm A and
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