ECON 402 Midterm 1 Study Guide.docx

Insiders employed union workers whose interest is to

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Insiders : Employed union workers whose interest is to keep wages high. Outsiders : Unemployed non-union workers who prefer eq’m wages, so there would be enough jobs for them. The wage ratio equals the average weekly earnings of union members divided by that of non-union members o 3 . Efficiency wages Why employers might be interested in paying more than they have to Theories in which higher wages increase worker productivity by: Attracting higher quality job applicants Increasing worker effort, reducing “ shirking” (avoiding or neglecting responsibility) o Incentive to keep your job because it’s hard to find a new job and you are penalized for being fired Reducing turnover, which is costly to firms Improving health of workers (in developing countries) Firms willingly pay above-equilibrium wages to raise productivity. Result: structural unemployment. Median Duration of Unemployment o The duration of unemployment typically rises in recessions—but its rise in 2008– 2010 is unprecedented. o Typically people in U.S. find jobs quickly Most of the unemployed people are long-term unemployed Explaining the Trend o The minimum wage The real minimum wage and natural u-rate have similar trends. o Union Membership Since early 1980s, the natural rate and union membership have both fallen. But, from 1950s to about 1980, the natural rate rose while union membership fell. o Sectoral Shifts 1970–1986: volatile oil prices create jarring sectoral shifts 1986–2005: oil prices less volatile, so fewer sectoral shifts 2006–2012: oil price volatility increases – will the natural u-rate rise again?
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ECON 402 Midterm 1 Study Guide o Demographics 1970s: The Baby Boomers were young. Young workers change jobs more frequently (high value of s ). Late 1980s through today: Baby Boomers aged. Middle-aged workers change jobs less often (low s ). Why unemployment rose in Europe but not the U.S. o Shock Technological progress has shifted labor demand from unskilled to skilled workers in recent decades. o Effect in United States An increase in the “ skill premium” – the wage gap between skilled and unskilled workers Average income in the U.S. has increased- real income of 2/3 of Americans as not increased in the past 20 years o Effect in Europe Higher unemployment, due to generous govt benefits for unemployed workers and strong union presence. CHAPTER SUMMARY o 1. The natural rate of unemployment Definition: the long-run average or “steady state” rate of unemployment Depends on the rates of job separation and job finding o 2. Frictional unemployment Due to the time it takes to match workers with jobs May be increased by unemployment insurance o 3. Structural unemployment Results from wage rigidity: the real wage remains above the equilibrium level Caused by: minimum wage, unions, efficiency wages o 4. Duration of unemployment Most spells are short term
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