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Week 14, Day 1 - Chapter 15 Overheads (revised)

Week 14, Day 1 - Chapter 15 Overheads (revised) - Chapter...

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Chapter 15 – Labour Markets, Unemployment, and Inflation Natural Rate of Unemployment Types of Unemployment Frictional Unemployment Structural Unemployment Seasonal Unemployment Cyclical Unemployment Changes in the Natural Rate of Unemployment Okun’s Law Disequilibrium in the Labour Market The Phillips Curve The Short-Run Phillips Curve The Long-Run Phillips Curve When the economy is at Y P , full employment exists and the actual unemployment rate is at its natural rate of unemployment. However, full employment does not mean a zero rate of unemployment. In Canada, it is estimated that the natural rate of unemployment is 7% (or as low as 6%). The natural rate of unemployment is made up of 3 types of unemployment. The actual unemployment rate consists of these 3 types and a fourth. Types of Unemployment 1) Frictional unemployment results from workers searching for work. The labour market is constantly churning; some people enter the labour market while others leave and jobs are created while others are destroyed. Furthermore, since workers have different preferences and abilities and jobs have different attributes, it takes time for workers and jobs to be matched up. Frictional unemployment depends on demographics, sectoral shifts, and government policies. Young workers are more likely to change jobs than older workers and have a higher incidence of job search. Women also tend to have a higher incidence of job search due to childrearing. Therefore, the younger the population is or the greater the proportion of women in the labour force is, the higher the frictional unemployment is.
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However, more recently in Canada, women have had lower incidences of job search because they tend to work in industries that are less sensitive to the business cycle, the increase in women entering the labour force has slowed considerably, and EI changes mean that more women on maternity leave can return to their previous jobs. Sectoral shifts (changes in economic activity between industries) arise from technological change, globalization, and changes in household tastes and contribute to frictional unemployment. For example, Canada’s manufacturing industries have declined while its resource industries have flourished as a result of trade with China. Government policies such as the EI system, which decreases the marginal cost of job search and increases the time spent searching, affect frictional unemployment. If all unemployment was frictional, then the number of unemployed people would be equal to the number of job vacancies (ie there is no surplus of labour). 2) Structural unemployment refers to a surplus of job seekers and arises when the wage rate is held persistently above the equilibrium level. If the wage rate is held at W F (above the equilibrium), the quantity of labour supplied exceeds the quantity of labour demanded. The surplus represents structural unemployment.
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Structural unemployment is the result of minimum wages, labour unions, hysteresis, and efficiency wages.
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