Review Questions

rates have been very similar. In recent years, unemployment rates in the United States have compared favorably with unemployment rates in most other high-income economies.

8.3 What Causes Changes in Unemployment over the Short Run

Cyclical unemployment rises and falls with the business cycle. In a labor market with flexible wages, wages will adjust in such a market so that quantity demanded of labor always equals the quantity supplied of labor at the equilibrium wage. Economists have proposed many theories for why wages might not be flexible, but instead may adjust only in a “sticky” way, especially when it comes to downward adjustments: implicit contracts, efficiency wage theory, adverse selection of wage cuts, insider-outsider model, and relative wage coordination.

8.4 What Causes Changes in Unemployment over the Long Run

The natural rate of unemployment is the rate of unemployment that the economic, social, and political forces in the economy would cause even when the economy is not in a recession. These factors include the frictional unemployment that occurs when people either choose to change jobs or are put out of work for a time by the shifts of a dynamic and changing economy. They also include any laws concerning conditions of hiring and firing that have the undesired side effect of discouraging job formation. They also include structural unemployment, which occurs when demand shifts permanently away from a certain type of job skill.

Self-Check Questions

1 . Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are “not in the labor force?” What are the proportions of employed, unemployed and not in the labor force in the population? Hint: Proportions are percentages. 2 . Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the February 2015 unemployment rate computed earlier? 3 . Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level? 4 . Whose unemployment rates are commonly higher in the U.S. economy: a. White or non-White people? b. The young or the middle-aged? c. College graduates or high school graduates? 5 . Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation? 6 . Is the increase in labor force participation rates among women better thought of as causing an increase in cyclical unemployment or an increase in the natural rate of unemployment? Why? 7 . Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?

Review Questions

8 . What is the difference between being unemployed and being out of the labor force? 9 . How do you calculate the unemployment rate? How do you calculate the labor force participation rate? 10 . Are all adults who do not hold jobs counted as unemployed? 11 . If you are out of school but working part time, are you considered employed or unemployed in U.S. labor statistics? If you are a full time student and working 12 hours a week at the college cafeteria are you considered employed or not in the labor force? If you are a senior citizen who is collecting social security and a pension and working as a greeter at Wal-Mart are you considered employed or not in the labor force? 12 . What happens to the unemployment rate when unemployed workers are reclassified as discouraged workers? 13 . What happens to the labor force participation rate when employed individuals are reclassified as unemployed? What happens when they are reclassified as discouraged workers? 14 . What are some of the problems with using the unemployment rate as an accurate measure of overall joblessness? 15 . What criteria do the BLS use to count someone as employed? As unemployed? 16 . Assess whether the following would be counted as “unemployed” in the Current Employment Statistics survey. a. A husband willingly stays home with children while his wife works. b. A manufacturing worker whose factory just closed down. c. A college student doing an unpaid summer internship. d. A retiree. e. Someone who has been out of work for two years but keeps looking for a job. f. Someone who has been out of work for two months but isn’t looking for a job. g. Someone who hates her present job and is actively looking for another one. h. Someone who decides to take a part time job because she could not find a full time position. 17 . Are U.S. unemployment rates typically higher, lower, or about the same as unemployment rates in other high-income countries? 18 . Are U.S. unemployment rates distributed evenly across the population? 19 . When would you expect cyclical unemployment to be rising? Falling? 20 . Why is there unemployment in a labor market with flexible wages? 21 . Name and explain some of the reasons why wages are likely to be sticky, especially in downward adjustments. 22 . What term describes the remaining level of unemployment that occurs even when the economy is healthy? 23 . What forces create the natural rate of unemployment for an economy? 24 . Would you expect the natural rate of unemployment to be roughly the same in different countries? 25 . Would you expect the natural rate of unemployment to remain the same within one country over the long run of several decades? 26 . What is frictional unemployment? Give examples of frictional unemployment. 27 . What is structural unemployment? Give examples of structural unemployment. 28 . After several years of economic growth, would you expect the unemployment in an economy to be mainly cyclical or mainly due to the natural rate of unemployment? Why? 29 . What type of unemployment (cyclical, frictional, or structural) applies to each of the following: a. landscapers laid off in response to a drop in new housing construction during a recession. b. coal miners laid off due to EPA regulations that shut down coal fired power c. a financial analyst who quits his/her job in Chicago and is pursing similar work in Arizona d. printers laid off due to drop in demand for printed catalogues and flyers as firms go the internet to promote an advertise their products. e. factory workers in the U.S. laid off as the plants shut down and move to Mexico and Ireland.

Critical Thinking Questions

30 . Using the definition of the unemployment rate, is an increase in the unemployment rate necessarily a bad thing for a nation? 31 . Is a decrease in the unemployment rate necessarily a good thing for a nation? Explain. 32 . If many workers become discouraged from looking for jobs, explain how the number of jobs could decline but the unemployment rate could fall at the same time. 33 . Would you expect hidden unemployment to be higher, lower, or about the same when the unemployment rate is high, say 10%, versus low, say 4%? Explain. 34 . Is the higher unemployment rates for minority workers necessarily an indication of discrimination? What could be some other reasons for the higher unemployment rate? 35 . While unemployment is highly negatively correlated with the level of economic activity, in the real world it responds with a lag. In other words, firms do not immediately lay off workers in response to a sales decline. They wait a while before responding. Similarly, firms do not immediately hire workers when sales pick up. What do you think accounts for the lag in response time? 36 . Why do you think that unemployment rates are lower for individuals with more education? 37 . Do you think it is rational for workers to prefer sticky wages to wage cuts, when the consequence of sticky wages is unemployment for some workers? Why or why not? How do the reasons for sticky wages explained in this section apply to your argument? 38 . Under what condition would a decrease in unemployment be bad for the economy? 39 . Under what condition would an increase in the unemployment rate be a positive sign? 40 . As the baby boom generation retires, the ratio of retirees to workers will increase noticeably. How will this affect the Social Security program? How will this affect the standard of living of the average American? 41 . Unemployment rates have been higher in many European countries in recent decades than in the United States. Is the main reason for this long-term difference in unemployment rates more likely to be cyclical unemployment or the natural rate of unemployment? Explain briefly. 42 . Is it desirable to pursue a goal of zero unemployment? Why or why not? 43 . Is it desirable to eliminate natural unemployment? Why or why not? Hint: Think about what our economy would look like today and what assumptions would have to be met to have a zero rate of natural unemployment. 44 . The U.S. unemployment rate increased from 4.6% in July 2001 to 5.9% by June 2002. Without studying the subject in any detail, would you expect that a change of this kind is more likely to be due to cyclical unemployment or a change in the natural rate of unemployment? Why?

Problems

45 . A country with a population of eight million adults has five million employed, 500,000 unemployed, and the rest of the adult population is out of the labor force. What’s the unemployment rate? What share of population is in the labor force? Sketch a pie chart that divides the adult population into these three