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Final

FINAL EXAM
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Department
Economics
Course
ECN 204
Professor
Eric Kam
Semester
Winter

Description
Final Exam Study Package All Chapters Chapter 9 Unemployment and Its Natural Rate Identifying Unemployment: -Produced by Statistics Canada. -Based on regular survey of 50,000 households = Labour Force Survey -Based on adult population (15 yrs or older) -BSL also produces the CLP statistics Labour Force Statistics: -Statistics Canada divides population into 3 groups: 1. Employed: A person is considered employed if he or she has spent most of the previous week working at a paid job 2. Unemployed: A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job 3. Not in the labour force: everyone else -The labour force is the total # of workers, including the employed and unemployed -unemployment rate aka u-rate -unemployment rate (u-rate): % of the labour force that is unemployed u-rate = 100 x # of unemployment/labour force -labour force participation rate: % of the adult population that is in the labour force labour force population = 100 x labour force/adult population Does the Unemployment Rate Measure What We Want It To? -It is difficult to distinguish between a person who is unemployed and a person who is not in the labour force -Discouraged searchers, people who would like to work but have given up looking for jobs after an unsuccessful search, dont show up in unemployment statistics -Other people may claim to be unemployed in order to receive financial assistance, even though they arent looking for work -people may misreport their labour market status to Statistics Canada, perhaps because they think it will help them get public assistance. This also makes the unemployment rate a bit less accurate - GDP is an imperfect indicator of societys well-being, and the CPI tends to overstate increases in the cost of living, yet unemployment rate remains highly useful For example, when the unemployment rate rises, it is almost always true that things are getting worse in the labour market Why Are There Always Some People Unemployed? -Theres always some unemployment, though the u-rate fluctuates from year to year -Natural rate of unemployment the rate of unemployment to which the economy tends to return in the long run in Canada, it is estimated that the natural rate of unemployment is currently between 6 and 8 percent -unemployment is a serious and complicated problem with a variety of cause, to most effectively address such a problem, we need to break it down and look at each cause separately Final Exam Study Package All Chapters -we begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the natural rate of unemployment -Cyclical unemployment the deviation of unemployment from its natural rate associated with business cycles -even when the economy is doing well, there is always some unemployment, including: -Frictional unemployment occurs when workers spend time searching for the jobs that best suit their skills and tastes short-term for most workers -Structural unemployment occurs when there are fewer jobs than workers usually longer-term Job Search: -Workers have different tastes & skills, and jobs have different requirements -Job search is the process of matching workers with appropriate jobs -Sectoral shifts are changes in the composition of demand across industries or regions of the country -Such shifts displace some workers, who must search for new jobs appropriate for their skills & tastes -The economy is always changing, so some frictional unemployment is inevitable Minimum Wage Laws: -the minimum wage may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment -this group is a small part of the labour force, so the minimum wage cant explain most unemployment in the economy -the textbook has an FYI box entitled Who earns the minimum wage? it summarizes a recent study by HRDC detailing minimum wage earners Unemployment from a Wage above the Equilibrium Level: - W Es the equilibrium wage Unions and Collective Bargaining: -the process by which unions and firms agree on the terms of employment is called collective bargaining -strike refers to when the union organizes a withdrawal of labour from the firm organized if the union and the firm cannot reach an agreement Final Exam Study Package All Chapters -when unions raise the wage above equilibrium quantity of labour demanded falls and unemployment results -Insiders; workers who remain employed, they are better off -Outsiders; workers who lose their jobs, they are worse off -some outsiders go to non-unionized labour markets, which increases labour supply and reduces wages in those markets Efficiency Wages: -theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to boost worker productivity -different versions of efficiency wage theory suggest different reasons why firms pay high wages -in the case of unions and minimum wage laws, firms that pay above-equilibrium wages do so involuntarily, the theory of efficiency wages, however, suggests that firms may willingly pay extra-high wages in order to increase the productivity of their workers -4 reasons why firms might pay efficiency wages: 1. Worker Health In less developed countries, poor nutrition is a common problem, paying higher wages allows workers to eat better, makes them healthier, more productive this is clearly not relevant in rich where equilibrium wages for nearly all workers are way more than enough to provide for the workers nutritional requirements but rich countries have a fairly small proportion of the worlds population 2. Worker Turnover hiring & training new workers is costly, paying high wages gives workers more incentive to stay, reduces turnover besides the costs of placing ads, interviewing candidates, and training new hires, new workers are usually less productive in their first few months on the job it takes time to learn how to perform their duties efficiently, for all of these reasons, turnover is costly to firms 3. Worker Quality offering higher wages attracts better job applicants, increases quality of the firms workforce if firms responded to the surplus of labour by reducing wages, then the most competent applicants may choose not to apply as they may have better opportunities elsewhere 4. Worker Effort Workers can work hard or shirk, shirkers are fired if caught Is being fired a good deterrent? Depends on how hard it is to find another job, If market wage is above equilibrium wage, there arent enough jobs to go around, so workers have more incentive to work not shirk -in many jobs, each worker can choose how hard he or she works suppose there are just two choices: working hard, or shirking neglecting ones duties and responsibilities at work -the firm suffers when its workers shirk: output and hence revenue & profit are lower. So, the firm fires workers caught shirking monitoring worker effort is costly and imperfect, and workers know theres a good chance they wont be caught if they shirk -paying workers an above-equilibrium wage gives them an incentive to work hard rather than shirk Final Exam Study Package All Chapters If their firm is the only firm paying efficiency wages, then they stand to lose a particularly good job if caught shirking If all firms are paying efficiency wages, then there will be structural unemployment due to the market wage being above its equilibrium level In this case, the incentive to work rather than shirk is the prospect of an extended spell of unemployment. This is why Shapiro & Stiglitz titled their 1984 AER article Equilibrium Unemployment as a Worker Discipline Device. Explaining the Natural Rate of Unemployment: Summary -The natural rate of unemployment consists of frictional unemployment It takes time to search for the right jobs Occurs even if there are enough jobs to go around structural unemployment When wage is above equilibrium, not enough jobs Due to min. wages, labour unions, efficiency wages cyclical unemployment the short-term fluctuations in unemployment associated with business cycles Chapter 10 The Monetary System What Money is and Why Its Important: -without money, trade would require barter; the exchange of one good or service for another -every transaction would require a double coincidence of wants; the unlikely occurrence that two people each have a good the other wants Simply means that two people have to want each others stuff To ensure a double coincidence of wants you introduce $ -Most people would have to spend time searching for others to trade with a huge waste of resources -this searching is unnecessary with money, the set of assets that people regularly use to buy g&s (goods and services) from other people -money is nothing, money is everything/anything -Example: Im an economics professor, but Im a consumer, too. Suppose I want to go out for a beer. Under a barter system, I would have to search for
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