Check Your Understanding

1. Question

   Explain the following.

   1. Frictional unemployment always exists.

      Frictional unemployment is unemployment due to the time workers spend searching for jobs. It is inevitable because workers may leave one job in search of another for a variety of reasons. Furthermore, there will always be new entrants in the labor force who are seeking a first job. During the search process, these individuals will be counted as part of the frictionally unemployed.

   2. Frictional unemployment accounts for a larger share of total unemployment when the unemployment rate is low.

      When the unemployment rate is low, frictional unemployment will account for a larger share of total unemployment because other sources of unemployment will be diminished. Thus, the share of total unemployment composed of the frictionally unemployed will rise.

2. Question

   Why does collective bargaining have the same general effect on unemployment as a minimum wage? Illustrate your answer with a diagram.

   A binding minimum wage represents a price floor below which wages cannot fall. As a result, actual wages cannot move toward equilibrium. A minimum wage therefore causes the quantity of labor supplied to exceed the quantity of labor demanded. Because this surplus of labor reflects unemployed workers, it affects the unemployment rate. Collective bargaining has a similar effect—unions are able to raise the wage above the equilibrium level. This will act like a minimum wage by causing the number of job-seekers to be larger than the number of workers firms are willing to hire. Collective bargaining causes the unemployment rate to be higher than it otherwise would be, as shown in the accompanying figure.

3. Question

   Suppose the United States dramatically increases benefits for unemployed workers. Explain what will happen to the natural rate of unemployment.

   An increase in unemployment benefits reduces the cost to individuals of being unemployed, causing them to spend more time searching for a new job. Thus, the natural rate of unemployment would increase.