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31

The unemployment rate

The unemployment rate is calculated as the percentage of the labour force that is unemployed.

unemployment rate = number unemployed/ labour force

multiplied by 100

32

Discouraged workers

Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics

33

3 causes of natural unemployment

Frictional
Structural
Classical

34

Frictional unemployment

Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. Search for the jobs that are best suit their tastes and skills. Inevitable because the economy is always changing.

35

Structural unemployment

Mismatch between the skills required and offered

36

‘classical unemployment’ occurs due to

Minimum-wage laws.
Unions.
Efficiency wages

37

minimum wages

When the minimum wage is set above the level that balances supply and demand, it creates unemployment.

13/8/18

38

Unions

A union is a worker association that bargains with employers over wages and working conditions.
In the 1970s and 1980s, when unions were at their peak, more than half of the Australian workforce was unionized. A union is a type of cartel attempting to exert its market power.

39

Efficiency wages

Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.
The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level.

40

THE THEORY OF EFFICIENCY WAGES
A firm may prefer higher-than-equilibrium wages for the following reasons:

Worker health
Worker turnover
Worker effort
Worker quality

41

The production function

Y = F(L, K, H, N, A)

Y = quantity of output

F( ) is a function that shows how the inputs are combined - available production technology

L = quantity of labour
K = quantity of physical capital
H = quantity of (intangible) human capital
N = quantity of natural resources
A = (intangible) technological knowledge

42

Production functions basic explanation

Economists often use a production function to describe the relationship between the quantity of inputs used in production and the quantity of output from production.
The inputs used to produce goods and services are called the factors of production

43

Constant returns to scale

A production function has constant returns to scale if, for any positive number x,
xY = F(xL, xK, xN, H, A)
That is, a doubling of all inputs causes the amount of output to double as well

44

Productivity

The factors of production directly determine productivity.
natural resources, N
physical capital, K
human capital, H
technological knowledge, A

The data shows that sustained economic growth per capita is all about productivity (efficiency), A and H
While N and K are important, their effect on growth disappears over time.

45

The Effect of K

One way to raise productivity is to invest more current resources in the production of capital

46

Diminishing Returns

However, as the stock of capital rises, the extra output produced from an additional unit of capital falls; this property is called diminishing returns (to capital) Because of diminishing returns, an increase in the saving rate leads to higher growth only for a while

47

Diminishing returns and the catch-up effect

In the long run, the higher saving rate leads to a higher level of productivity and income, but not to higher growth in these variables
The catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
It is often called ‘convergence’ across countries (as opposed to ‘divergence’ which refers to a widening gap between countries)

48

The Effect of H

In Australia, each year of schooling raises a person’s wage, on average, by about 8 percent. Thus, one way the government can enhance the standard of living is to provide schools and encourage the population to take advantage of them.

49

The effect of A

The advance of technological knowledge has led to higher standards of living.
Most technological advance comes from private research by firms and individual inventors.
Government can encourage the development of new technologies through research grants, tax breaks, and the patent system

50

Productivity definition

The quantity of goods and services that a worker can produce for each hour of work.

51

Surplus of labour

Photo in favourites 16/8

52

Rule of 70

70/growth rate = no. of years it takes to double

53

categories of unemployment

Natural rate of unemployment (long run)

Cyclical rate of unemployment (short run)

54

Natural rate of unemployment (long run)

Unemployment that does not go away on its own even in the long run (always positive). The amount of unemployment that the economy normally (on average) experiences.

55

Cyclical rate of unemployment (short run)

Year to year fluctuations in unemployment around its natural rate. Associated with the short term ups and downs of the business cycle

56

Classical unemployment

The real wage in the labour market is above the market clearing level that equates supply of and demand for labour.

57

Although technological knowledge and human capital are closely related, there is an important difference. Which of the following statements is correct?

a. Human capital is the society’s understanding about how the world works, whereas technological knowledge is the resources spent transmitting this understanding to the labour force

b. Technological knowledge is the bridge that links physical and natural resources with human capital

c. Technological knowledge is the society’s
understanding about how the world works, whereas human capital is the resources spent transmitting this understanding to the labour force

d. Technological knowledge is the society’s understanding of human capital

C

58

8. The production function is given as Y = F(L, K, N, H, A ), where Y is the quantity of output, A is the level of available production technology, L is the quantity of labour, H is the quantity of human capital and N is the quantity of natural resources. This equation provides:

a. a summary for the four determinants of productivity

b. a summary for the four determinants of production

c. a foundation for measuring inflation

d. a measure of the availability of natural resources

B

59

8. The production function is given as Y = F(L, K, N, H, A ), where Y is the quantity of output, A is the level of available production technology, L is the quantity of labour, H is the quantity of human capital and N is the quantity of natural resources. This equation provides a summary for the four determinants of production

These determinants are the factors of production or inputs used in the production process and consequently a nation’s particular endowment of these “determinant” factors, does in fact determine the maximum amount of output that the economy is capable of producing.

60

Suppose that a firm is faced with an excess supply of workers. What would the firm do? Explain with standard economic theory and with efficiency wage theory.

a. Standard economic theory: assuming a firm maximises its profit, it should lower wages until the supply of workers is equal to the demand. This will reduce production costs and raise profits.

b. Efficiency-wage theory suggests that it might be profitable for a firm to keep wages above the equilibrium level in order to reduce worker turnover, increase worker quality, increase worker effort, and perhaps to increase worker health and therefore worker productivity.