Week 5 - Labour Force

Question 1

Describe the micro model of employment

Answer 1

Firms demand labour as an input into production. The labour supply curve describes the entire supply of labour (represents employees) .

The model assumes that the market will clear and includes no unemployment.

Question 2

Describe the effect of an increase in income tax on the labour market

Answer 2

The tax reduces after tax wages, labour supply (upwards shift) contracts, employment declines and wages increase.

Question 3

Describe the effect of automaker’s subsidy being withdrawn

Answer 3

The break even point for hiring is raised as less money results in less demand for labour. Consequently, wages and employment fall (leftwards shift in demand curve)

Question 4

Describe the effect of a floor on wages

Answer 4

At the higher wage rate, an excess of supply is creates. This mismatch causes unemployment to rise as the market can’t clear.

Question 5

Formula for the participation rate

Answer 5

those in the labour force/ total working age population

Question 6

Define employed people

Answer 6

those who have worked at least 1 hour in the week before the survey

Question 7

Define unemployed people

Answer 7

those who have not worked at all in the week before the survey, who were actively looking for work in the past 4 weeks. They must also be ready to work

Question 8

What are 3 issues with unemployment statistics?

Answer 8

• In a recession, people tent to leave the labour force (edu or discouraged) making unemployment look lower
• Under-employment is hard to capture
• people claiming to be unemployed when they’re not can lead to it being overstated

Question 9

Factors that impact employment prospects

Answer 9

Education improves prospects

Older workers are unemployed longer (ageism and specialisation)

Unemployment rates are higher among young people

Question 10

Define cyclical unemployment

Answer 10

Caused by shifts in the business cycle. Falling activity leads to less production and lay offs. When the economy recovers, the rate continues to rise for a time due to lag

Question 11

Define full employment

Answer 11

No cyclical unemployment - only frictional and structural

Question 12

Define the natural rate of unemployment

Answer 12

rate of unemployment when the economy operates at potential GDP

Question 13

define frictional unemployment

Answer 13

short term unemployment arising from the time taken to match workers and jobs

Question 14

Define seasonal unemployment

Answer 14

caused by factors such as the weather, tourism, Christmas etc

Question 15

Define structural unemployment

Answer 15

Arises from the persistent mismatch between skills and requirements

Question 16

What is the actual rate if unemployment?

Answer 16

Frictional + structural (aka natural) + cyclical

Question 17

What are 5 costs of unemployment?

Answer 17

1) loss of GDP through lower L and the opportunity cost of slack human capital
2) loss or deterioration of human capital
3) retraining costs
4) financial costs to the government through benefits and loss of tax revenue
5) social costs such as loss of income, crime, health etc

Question 18

How can rising unemployment in the 60s and 70s be explained?

Answer 18

Exogenous shocks can cause long term unemployment.

Many you workers entered the labour force at this time as the baby boomers became old enough to work. The decline in the 80s and 90s was due to the ageing of them

Question 19

Explain the variables in the bathtub model

Answer 19

endogenous: employment and unemployment
exogenous: job search rate and job finding rate

Question 20

Formula for the bathtub model

Answer 20

labour = employment + unemployment

channge in unemployment = employed who lose jobs - unemployed finding jobs