1. Which of the following people are counted as unemployed?
A person out of work and actively searching for work
A person in prison
A person who wants to work but stopped searching six months ago
A person who works part-time but who wants full-time work
2. According to Figure 30.1, what adults are considered not to be in the labor force?
3. If we count “discouraged workers” as unemployed when calculating the unemployment rate, does the rate more than double, less than double, or remain unchanged?
4. Decide whether each of the following are frictional, structural, or cyclical unemployment:
The economy gets worse, so General Motors shuts down a factory for four months, laying off workers.
General Motors lays off 5,000 workers and replaces them with robots. The workers start looking for jobs outside the auto industry.
About 10 workers per month at a General Motors plant quit their jobs because they want to live in another town. They start searching for work in the new town.
5. Let’s connect the minimum wage model back to the supply and demand model of Chapter 8. Is a minimum wage a price ceiling or a price floor? Does it create a surplus or a shortage in the labor market?
6. In France, why do employment protection laws tend to have negative effects on the young, already unemployed, and minority workers?
7. Let’s look at how the unemployment rate changes during and after a typical recession. In Figure 30.6, does the unemployment rate tend to reach its peak during the recession, or does it usually reach its peak after the recession?
8. According to Figure 30.9, during which decade was the natural unemployment rate the highest?
9. Take a look at Figure 30.11. About how big is the difference in labor force participation rates between countries with the highest implicit tax rate on older men compared with countries with the lowest implicit tax rate? Round to the nearest 10%.
10. Based on the ideas in this chapter, name three labor market policy changes that would be likely to decrease the rate of structural unemployment. There are many more than three possible answers.
1. When the following events happen, does the unemployment rate rise, fall, or stay the same?
Workers are laid off and start looking for work.
People without jobs who are looking for work find work.
People without jobs and looking for work give up and stop looking.
People without jobs and not looking for work become encouraged and decide to start looking for work.
People without jobs and not looking for work take a job immediately.
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2. Let’s see how many jobs have to be destroyed for one net job to be created. As noted in the text, millions of jobs are created and destroyed every month. Suppose that 5 millions jobs are destroyed every month and about 5.25 million jobs are created. What is net job creation? What is total job destruction divided by net job creation? So how many total jobs are destroyed for every net job created?
3. Take a look at Table 30.2. If you have to pick a country to lose your job in, and you know you’re going to be out of work for one year, which country offers the highest one-year average replacement rate? Which offers the highest two-year average replacement rate? If you’re going to be out of work for three years, which country offers the highest average rate of wage replacement?
4. When a government raises the minimum wage by $2.00 per hour, where would we expect more jobs to be lost: in the fast-food industry or in city government? Why?
5. Let’s see how GDP per person can be affected by changes in the fraction of citizens who work. This fraction is better known as the employment-population ratio. To keep things simple, let’s assume that every employed worker produces $50,000 worth of output. If the employment-population ratio is 50%, what is GDP per person? If the employment-population ratio rises to 55%, what is GDP per person?
6. Calculate the unemployment rate and the labor force participation rate in the following cases:
Employed: 100 million. Population: 200 million. In labor force: 110 million.
Unemployed: 10 million. Population: 200 million. Employed: 90 million.
In labor force: 30 million. Population: 80 million. Unemployed: 3 million.
7. Goldin and Katz looked for the link between birth control and women’s labor force participation by examining the difference between states that acted early to make birth control legal and states that waited until later. Which states do you think had the biggest jump in women joining the labor force: states that legalized birth control earlier or those that legalized it later? (Note: Goldin and Katz provide evidence for the correct answer in their paper.)
8. Here’s a story economists tell one another: A Nobel Prize-winning economist flew to New York City for a conference. He got into a cab, and started talking with the cab driver. The cab driver said, “Oh, you’re an economist? Let me tell you, this economy is terrible. I’m an unemployed architect.” The economist immediately replied, “No you’re not, you’re an employed cab driver.” According to the way the U.S. government measures unemployment, who is right?
9. Between 1984 and 2001, the U.S. government made it much easier to get disability payments and the number of disabled people more than doubled from 3.8 million to 7.7 million. Most of the people who try to qualify for disability payments have a tough time finding jobs, and spend a lot of time “out of work and actively searching for work.” Once people start receiving disability payments, however, they rarely work again and continue to get the disability payments for decades: These citizens then count as “out of the labor force.” What effect did reducing the requirements to get disability payments have on the unemployment rate?
10. It’s been said that “once you reach the top of the ladder of opportunity, the first thing to do is pull up the ladder behind you.” Let’s consider the implications of this adage for labor market outcomes.
When doctors, schoolteachers, and beauticians encourage the government to make it more difficult for people to enter their industries, does this tend to lower or raise the supply of these professionals?
If government requires higher educational and training standards for doctors, schoolteachers, and beauticians, does this tend to raise or lower the demand for the services of these professionals?
In equilibrium, taking into account your answers to parts a and b, what is the total effect of this lobbying on the wages of these professionals: Do wages rise, fall, or is the total effect ambiguous? Does the total number of people employed in these professions rise, fall, or is the total effect ambiguous?
11. “The unemployment rate also fails to capture all of the people who have given up looking for work,” reports the NewYork Times. This is one of many complaints about how the U.S. government measures the unemployment rate.
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But as hinted at in the chapter, the U.S. government actually does count these “discouraged workers,” and it includes them in the “U-4,” “U-5,” and “U-6” definitions of unemployment. The government also has a few other measures of the labor market: It just so happens that the media typically ignore these measures. Let’s look at these measures in 2007 and 2008 as the U.S. economy slowed and the official “unemployment rate” rose to see if we get a different story.
|
|
September 2007 |
September 2008 |
|---|---|---|
|
Official unemployment rate |
4.7% |
6.1% |
|
U-4 (includes discouraged workers) |
4.9% |
6.4% |
|
U-5 (also counts a few part-time workers as unemployed) |
5.5% |
7.1% |
|
U-6 (counts many part-time workers as unemployed) |
8.4% |
11.0% |
|
Employment as percentage of population |
62.9% |
62.0% |
|
Source: Bureau of Labor Statistics, Table A-12, Alternative Measures of Labor Underutilization, http://www.bls.gov. |
||
Answer the following questions:
For each of the five measures, calculate the rise in the unemployment rate (or, in one case, the fall in the employment rate).
Do any of these alternate measures indicate that the rise in the unemployment rate was larger than the official measure would indicate? Which ones?
Do any of these alternate measures indicate that the rise in the unemployment rate was twice as big as the official measure? (That might serve as a rough measure of whether our official measure is off by a lot.) Which ones?
Which of these alternate measures indicate at first glance that the labor market is actually a little better than the official measure? What is it about the denominator of this value that makes this change smaller than the rest?
(Source: Patrick McGeehan, City’s unemployment rate falls to its lowest level in 30 years, New York Times, November 17, 2006.)
1. Long-term, structural unemployment is higher in Europe than in the United States, but some European countries have it worse than others. Take a look at Table 30.1. Spain has a lower fraction of long-term unemployment than the other European countries, but a higher rate of unemployment than the other European countries in that table. What can we conclude about the kind of unemployment taking place in Spain?
2.
If European governments set rules for marriage the same way they set rules for employment—with tough, preset rules that make it hard to end the relationship—would you expect rates of divorce to rise, fall, or can’t you tell with the information given?
Would the length of marriages rise, fall, or can’t you tell with the information given?
Would married couples probably be happier (more productive) or less happy (less productive) than under more flexible marriage rules? The last of these three questions might have more than one correct answer.
3. When are workers more likely to get a job: six weeks before their unemployment benefits run out, or a week before their unemployment benefits run out? (Note: The correct answer to this question is solidly backed up by U.S. job data.)
4. Take a look at Figure 30.4. In that figure, we’re holding “job quality” or “working conditions” constant, and looking at how changes in wages impact the quantity of labor supplied and demanded. In many union negotiations, the union and its workers don’t push for higher wages. Instead, they push for better working conditions: safer machines, better insurance coverage, or cleaner restrooms.
So now let’s model this: Let’s hold wages constant, and look at how changes in working conditions impact the quantity supplied and quantity demanded of labor. Thus, set it up just like a real-life labor negotiation. Draw a conventional supply and demand chart, but on the vertical axis, just put “job quality—high or low” instead of “wage” Then, show what happens to the amount of unemployment created when a union successfully negotiates a higher-than-equilibrium job quality.
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5. Even though most Americans who become unemployed are only unemployed for a short period of time, when you look at who is unemployed at a given moment in time, you’ll find that most of the unemployed have been without a job for quite a while. Let’s imagine a simple economy to see how to resolve this paradox. In this economy, there are two types of workers: Type A workers take one month to find a new job and Type B workers take 10 months to find a new job.
Each month, let’s assume that one Type A and one Type B worker lose their jobs. Notice that we’re assuming that half of all people who lose their jobs today will find new jobs in a month. But, as we shall see, this implies that most of the unemployed will have been unemployed for a long period.
In the long run (or “steady state”), there will be 11 workers out of work in this simple society at any given point in time. Show that this is true by keeping track of the “pool” of unemployed workers in this society for two years. You can start off assuming that the pool is empty at time zero—that no one is unemployed—but you’d get the same steady-state answer regardless of your starting point. You can prove that 11 will be out of work just with pencil and paper or much more quickly with Excel. To help you out, here’s an example of what the pool of unemployed will look like in month 7. Keep going with this calculation until you see that the number of workers in the pool no longer changes month to month—this is called the “steady state.”
|
The Unemployment Pool: Month 7 |
|
|---|---|
|
Shallow End (Type A’s) |
Deep End (Type B’s) |
|
1 Type A worker enters pool (loses job). |
1 Type B worker enters pool. |
|
1 Type A worker exits pool (find works). |
6 Type B workers are already in the pool. |
|
|
0 Type B workers exit the pool. |
|
Total: 1 Type A worker is in the pool (unemployed). |
Total: 7 Type B workers are in the pool (unemployed). |
In the steady state—that is, when your pool starts having the same numbers every month—how many of the 11 workers in the unemployment pool have been unemployed for “one month”? How many of the 11 workers in the unemployment pool have been unemployed for more than one month?
If you see an economy where most currently unemployed workers have been out of work for a long time, does this mean that most people who have been unemployed in the last few years were unemployed for a long time? How does this example illustrate your answer?
Who is more likely to ask politicians for stronger labor unions and laws, making it harder to fire workers: insiders who have jobs or outsiders who don’t have jobs?
* After age 65, Social Security payments are not reduced at all by earnings. Between the ages of 62 and 65, a worker’s Social Security payment is reduced when the worker continues to work but payments beginning at age 65 are increased in rough proportion—thus, there is very little penalty to continuing work even at age 62. See Gruber, J., and P. Orszag. 2003. Does the Social Security earnings test affect labor supply and benefits receipt? National Tax Journal 56(4): 755—773.