Tutorial 6

Unemployment

I. Terms

1. labor force
2. unemployment rate
3. labor-force participation rate
4. natural rate of unemployment
5. cyclical unemployment
6. discouraged workers
7. frictional unemploymentt
8. structural unemployment
9. unemployment insurance
10. efficiency wages

II. Short-Answer Questions

1. Is unemployment typically short term or long term? Explain.

2. Why is frictional unemployment inevitable? How might the government
reduce the amount of frictional unemployment?
3. Are minimum-wage laws a better explanation for structural unemployment
amongg teenagers or among college graduates? Why?
4. How do unions affect the natural rate of unemployment? What claims do
advocates of unions make to argue that unions are good for the economy?
5. Explain four ways in which a firm might increase its profits by raising the
wages it pays.
6. Does the minimum wage cause much unemployment in the market for
accountants? Why or why not?

III. Practice problems

1. The Bureau of Labor Statistics announced that in April 2010, of all adult
Americans,
139,455,000 were employed, 15,260,000 were unemployed, and 82,614,000
were not in the labor force. Use this information to calculate:
a. the adult population
b. the labor force
c. the labor-force participation rate
d. the unemployment rate
2. Economists use labor-market data to evaluate how well an economy is using
its most valuable resource—its people. Two closely watched statistics are the
unemployment rate and the employment-population ratio. Explain what
happens to each of these in the following scenarios. In your opinion, which
statistic is the more meaningful gauge of how well the economy is doing?
a. An auto company goes bankrupt and lays off its workers, who
immediately start looking for new jobs.
b. After an unsuccessful search, some of the laid-off workers quit looking
for new jobs.
c. Numerous students graduate from college but cannot find work.
 d. Numerous students graduate from college and immediately begin new
jobs.
3. Are the following workers more likely to experience short-term or long-term
unemployment? Explain.
a. A construction worker laid off because of bad weather
b. A manufacturing worker who loses her job at a plant in an isolated area
c. A stagecoach-industry worker laid off because of competition from
railroads
d. A short-order cook who loses his job when a new restaurant opens
across the street
e. An expert welder with little formal education who loses her job when
the company installs automatic welding machinery
4. Consider an economy with two labor markets— one for manufacturing
workers and one for service workers. Suppose initially that neither is
unionized.
a. If manufacturing workers formed a union, what impact on the wages
and employment in manufacturing would you predict?
b. How would these changes in the manufacturing labor market affect the
supply of labor in the market for service workers?
c. What would happen to the equilibrium wage and employment in this
labor market?

5. Structural unemployment is sometimes said to result from a mismatch between

the job skills that employers want and the job skills that workers have. To
explore this idea, consider an economy with two industries: auto
manufacturing and aircraft manufacturing.
a. If workers in these two industries require similar amounts of training,
and if workers, at the beginning of their careers could choose which
industry to train for, what would you expect to happen to the wages in
these two industries? How long would this process take? Explain.
b. Suppose that one day the economy opens itself to international trade
and, as a result, starts importing autos and exporting aircraft. What
would happen to demand for labor in these two industries?
c. Suppose that workers in one industry cannot be quickly retrained for
the other. How would these shifts in demand affect equilibrium wages
both in the short run and in the long run?
d. If for some reason wages fail to adjust to the new equilibrium levels,
what would occur?

IV. Multiple- Choice Questions

1. The amount of unemployment that the economy normally experiences is known as

a. Efficiency wage unemployment.
b. Frictional unemployment.
c. Cyclical unemployment.
d. The natural rate of unemployment.

2. According to the Bureau of Labor Statistics, a husband who chooses to stay home
and take care of the household is
 a. Unemployed.
b. Employed.
c. Not in the labor force.
d. A discouraged worker.

3. An accountant with a CPA designation who has been unable to find work for so
long that she has stopped looking for work is considered to be
a. Employed.
b. Unemployed.
c. Not in the labor force.
d. Not in the adult population.

4. Which of the following statements is true?

a. Women ages 20 and older tend to have somewhat lower unemployment rates
compared to men.
b. The labor-force participation rate of men is rising.
c. Blacks have a lower unemployment rate than whites.
d. Most spells of unemployment are long term, but most unemployment observed
at any given time is short term.
e. All of the above are true.

5. A minimum-wage law tends to

a. Create more unemployment in high-skill job markets than in low-skill job
markets.
b. Create more unemployment in low-skill job markets than in high-skill job
markets.
c. Have no impact on unemployment as long as it is set above the competitive
equilibrium wage.
d. Help all teenagers because they receive a higher wage than they would
otherwise.

6. Which one of the following types of unemployment results from the wage being
held above the competitive equilibrium wage?
a. structural unemployment
b. cyclical unemployment
c. frictional unemployment
d. sect oral unemployment
e. None of the above is correct.

7. If, for any reason, the wage is held above the competitive equilibrium wage,
a. unions will likely strike and the wage will fall to equilibrium.
b. the quality of workers in the applicant pool will tend to fall.
c. the quantity of labor supplied will exceed the quantity of labor demanded and
there will be unemployment.
d. the quantity of labor demanded will exceed the quantity of labor supplied and
there will be a labor shortage

8. Which of the following is not a characteristic of minimum-wage workers? They

tend to be
a. young.
 b. less educated.
c. full-time.
d. in the food service and drinking place industry.

9. Which of the following government policies would fail to lower the

unemployment rate?
a. reduce unemployment benefits
b. establish employment agencies
c. establish worker training programs
d. raise the minimum wage
e. establish right-to-work laws

10. Sectoral shifts tend to raise which type of unemployment?

a. frictional unemployment
b. structural unemployment
c. unemployment due to unions
d. unemployment due to efficiency wages

11. Which of the following is an example of a reason why firms might pay efficiency
wages?
a. At equilibrium wages, workers often quit to find better jobs.
b. At equilibrium wages, workers sleep when the boss is not looking because
workers are not deeply concerned about being fired.
c. At equilibrium wages, only minimally qualified workers apply for the job.
d. At equilibrium wages, workers cannot afford a healthy diet so they fall asleep
at work due to a lack of energy.
e. All of the above are true.

12. Some frictional unemployment is inevitable because

a. Efficiency wages may hold the wage above the equilibrium wage.
b. Of minimum-wage laws.
c. There are changes in the demand for labor among different firms.
d. Of unions.
e. Of all of the above.

13. Unions might increase their efficiency in the case where they
a. Raise the wage for insiders above the competitive equilibrium.
b. Offset the market power of a large firm in a “company town.”
c. Lower the wage of local outsiders.
d. Threaten a strike but don’t actually follow through, so there are no lost hours
of work.

14. Which of the following statements about efficiency wage theory is true?
a. Firms do not have a choice about whether they pay efficiency wages or not
because these wages are determined by law.
b. Paying the lowest possible wage is always the most efficient (profitable).
c. Paying above the competitive equilibrium wage tends to cause workers to
shirk their responsibilities.
d. Paying above the competitive equilibrium wage may improve worker health,
lower worker turnover, improve worker quality, and increase worker effort.
15. Unions tend to increase the disparity in pay between insiders and outsiders by
a. Increasing the wage in the unionized sector, which may create an increase in
the supply of workers in the nonunionized sector?
b. Increasing the wage in the unionized sector, which may create a decrease in
the supply of workers in the nonunionized sector?
c. Decreasing the demand for workers in the unionized sector.
d. Increasing the demand for workers in the unionized sector.

16. Which of the following types of unemployment will exist even if the wage is at
the competitive equilibrium?
a. unemployment due to minimum-wage laws
b. unemployment due to unions
c. unemployment due to efficiency wages
d. frictional unemployment

17. If unemployment insurances were so generous that it paid laid-off workers 95

percent of their regular salary,
a. The official unemployment rate would probably understate true
unemployment.
b. The official unemployment rate would probably overstate true unemployment.
c. There would be no impact on the official unemployment rate.
d. Frictional unemployment would fall.
e. None of the above is true.