Chapter 11: Unemployment and Labor Force Participation

what did Joseph Schumpeter argue?

capitalism is an evolutionary process

what is a necessary consequence of economic growth?

some unemployment

derived demand

demand resulting from the demand of another good. ex. labor

why is labor a derived demand?

because it is based on firms’ decisions to supply a good in another market.

what does the slope of the diminishing marginal product of labor look like?

downward sloping

what does the labor supply curve reflect about workers?

their decisions about the labor-leisure tradeoff in respond to changes in opportunity cost (wage)

what determines the equilibrium wage?

labor supply and labor demand

what is the marginal product of labor equal to?

equilibrium wage

what will a decrease in the demand for labor do to the unemployment rate?

leave it constant

are aggregate labor demand & supply or individual markets more competitive?

aggregate labor demand & supply

is labor completely interchangeable?

no. there are transition costs, inc. unemployment

are wages sticky or flexible?

sticky. they don’t adjust easily

working-age population

those age 16 or older who aren’t in the military or institutionalized

employed

working-age people who are working for pay. both full & part-time.

unemployed

working-age people w/o a job who have actively looked for work in the past month.

labor force

the sum of the employed + unemployed

unemployment rate

unemployed/labor force * 100

best indicator of how well the labor market is working

what does unemployment tell us about the economy?

kit is underperforming, AKA labor that could be used for productivity is being wasted.

why is unemployment rate an incomplete indicator?

it does not include discouraged & underemployed workers.

discouraged workers

jobless individuals who’ve given up looking for work but still want a job.

or they’ve looked in the past yr but not the past month

not included in labor force. leads to underestimation of employment rate.

underemployment

part-time workers who want a full-time position. involuntary

labor force participation rate (LFPR)

LF/adult pop * 100

the percentage of the adult, noninstitutionalized, civilian population who are working/actively looking for work

doesn’t inc. discouraged workers or unemployment

what do LFPR rates affect?

GDP growth rates

frictional unemployment

short-term unemployment caused by the ordinary difficulties of matching employee to employer

what do innovation and competition drive?

progress

how does “creative destruction” relate to jobs & economic progress?

progress is bout creating new jobs and destroying the old.

structural unemployment

persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs

why is long-term unemployment more problematic in Europe?

labor regulations

effects of structural unemployment

loss of economic output, higher stress levels, lower happiness lvls

causes of structural unemployment

large, economy-wide shocks

restructuring due to globalization

new information technologies

shift from manufacturing → service economy

labor regulations increasing structural unemployment

unemployment benefits

min. wages

powerful unions

employment protection laws (ex. at-will doctrine)

what does union/minimum wage do to the cost of labor?

raises it from market equilibrium to union/min. wage (makes it more expensive)

what do firms do to Qd when union/min wage applies?

they reduce it. this creates unemployment Qs-Qd

who do minimum wages especially effect?

young workers with limited skill. creates more unemployment among them

median wage

half of all workers earn less than the median & half more

are minimum wages higher relative to the median wage in W. Europe or the U.S.?

W. Europe

unions

an association fo workers that bargains collectively with employers over wages, benefits, and working conditions

what do employment protection laws do?

create valuable insurance for workers with full-time jobs

make labor markets less flexible and dynamic

inc. the duration of unemployment

inc. unemployment rates among young, minority, or otherwise “riskier” workers

active labor market policies + examples

policies that focus on getting unemployed workers back to work

job retraining

job-search assistance

work tests

early employment benefits

labor regulations (inc. structural unemployment)

unemployment beenfits

min. wages

powerful unions

employment protection laws

natural rate of unemployment

a society’s natural, long-term unemployment rate

frictional + structural unemployment

cyclical unemployment

unemployment correlated with the business cycle. recessions

what do Keynesian economists believe about cyclical unemployment?

that it is caused by decreases in AD. inflation dec, workers too expensive to hire.

what does faster growth in GDP do to unemployment?

decreases it

what happened to female labor force participation rates when the manufacturing sector declined & the service sector rose (more int. trade)? (structural)

it grew.