4 Unemployment Exam Review

45 flashcards covering key concepts, mechanisms, and implications related to unemployment as discussed in the lecture notes.

[HIGH] [DEFINITION] Q: What is the Natural Rate of Unemployment (NRU)?

A: The steady-state unemployment rate determined by job separation (s) and job finding (f).

[HIGH] [EQUATION + INTERPRETATION] Q: What does NRU = s / (s + f) represent?

A: The proportion of the labour force that is unemployed in steady state.

[HIGH] [STEADY STATE] Q: What characterizes unemployment flows in steady state?

A: Inflows into unemployment equal outflows from unemployment.

[HIGH] [COMPARATIVE STATICS] Q: How do changes in s and f affect unemployment?

A: Higher s increases unemployment; higher f decreases unemployment.

[HIGH] [CALCULATION] Q: If s = 0.10 and f = 0.05, what is the natural rate of unemployment?

A: NRU = 0.10 / (0.15) = 2/3.

[HIGH] [DEFINITION] Q: What is frictional unemployment?

A: Unemployment caused by time needed for workers and jobs to match.

[HIGH] [MECHANISM] Q: How do sectoral shifts affect unemployment?

A: They increase frictional unemployment by raising job turnover and mismatches.

[MEDIUM] [DEMOGRAPHICS] Q: Why do young workers increase average unemployment?

A: They experience higher job turnover.

[MEDIUM] [NRU LINK] Q: How do demographic changes affect the natural rate of unemployment?

A: Groups with higher turnover increase the natural rate.

[HIGH] [DEFINITION] Q: What is structural unemployment?

A: Unemployment caused by real-wage rigidity above equilibrium.

[HIGH] [CAUSES] Q: What causes real-wage rigidity?

A: Minimum wages, unions, and efficiency wages.

[HIGH] [MECHANISM] Q: When does real-wage rigidity create unemployment?

A: When wages are stuck above equilibrium, reducing employment.

[HIGH] [POLICY EFFECT] Q: How do firing restrictions affect unemployment?

A: They reduce job separation (s) but may reduce job finding (f), making the effect on NRU ambiguous.

[HIGH] [POLICY RULE] Q: How should any labour-market policy be evaluated?

A: By analyzing its effects on job separation (s) and job finding (f).

[HIGH] [PRODUCTIVITY MECHANISM] Q: When does a productivity shock increase unemployment?

A: When real wages are rigid; employment falls and unemployment rises.

[HIGH] [CONTRAST] Q: What happens under flexible wages after a productivity decline?

A: Wages fall and unemployment does not change.

[TRAP] [EXAM TRAP] Q: What is a common mistake about firing restrictions?

A: Assuming lower firing always reduces unemployment.

[TRAP] [EXAM TRAP] Q: What is a common mistake about productivity and unemployment?

A: Assuming lower productivity always increases unemployment.

[HIGH] [DISTINCTION] Q: What is the difference between natural and cyclical unemployment?

A: Natural unemployment exists at full employment; cyclical unemployment arises from recessions.