6Chapter-Mankiw - CHAPTER 6 Unemployment Questions for...

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Questions for Review 1. The rates of job separation and job finding determine the natural rate of unemploy- ment. The rate of job separation is the fraction of people who lose their job each month. The higher the rate of job separation, the higher the natural rate of unemployment. The rate of job finding is the fraction of unemployed people who find a job each month. The higher the rate of job finding, the lower the natural rate of unemployment. 2. Frictional unemployment is the unemployment caused by the time it takes to match workers and jobs. Finding an appropriate job takes time because the flow of informa- tion about job candidates and job vacancies is not instantaneous. Because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive. In contrast, wait unemployment is the unemployment resulting from wage rigidity and job rationing. These workers are unemployed not because they are actively search- ing for a job that best suits their skills (as in the case of frictional unemployment), but because at the prevailing real wage the supply of labor exceeds the demand. If the wage does not adjust to clear the labor market, then these workers must “wait” for jobs to become available. Wait unemployment thus arises because firms fail to reduce wages despite an excess supply of labor. 3. The real wage may remain above the level that equilibrates labor supply and labor demand because of minimum wage laws, the monopoly power of unions, and efficiency wages. Minimum-wage laws cause wage rigidity when they prevent wages from falling to equilibrium levels. Although most workers are paid a wage above the minimum level, for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above the equilibrium level. It therefore reduces the quantity of their labor that firms demand, and an excess supply of workers—that is, unemployment—results. The monopoly power of unions causes wage rigidity because the wages of union- ized workers are determined not by the equilibrium of supply and demand but by col- lective bargaining between union leaders and firm management. The wage agreement often raises the wage above the equilibrium level and allows the firm to decide how many workers to employ. These high wages cause firms to hire fewer workers than at the market-clearing wage, so wait unemployment increases. Efficiency-wage theories suggest that high wages make workers more productive. The influence of wages on worker efficiency may explain why firms do not cut wages despite an excess supply of labor. Even though a wage reduction decreases the firm’s wage bill, it may also lower worker productivity and therefore the firm’s profits.
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This note was uploaded on 02/22/2012 for the course ECON 602 taught by Professor Smith during the Spring '12 term at FSU.

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6Chapter-Mankiw - CHAPTER 6 Unemployment Questions for...

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