O firms fail job performance is unacceptable or

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o Firms fail, job performance is unacceptable, or particular skills are no longer needed. Unemployment Insurance inadvertently increases amount of frictional unemployment and raises natural rate. o However leads to better matching between workers and jobs. o 100 percent experience rated vs. partially experience rated Rate each firm pays into the unemployment-insurance system Wage Rigidity: the failure of wages to adjust to a level at which labor supply equals labor demand. Causes Structural Unemployment. Real wage adjusts to equilibrate labor supply and demand, however wages are not always flexible. Sometimes real wage is stuck above market-clearing level, in this case quantity of labor supplied exceeds the quantity demanded. o Reduces the rate of job finding and raises level of unemployment. Caused by: 1. Minimum Wage 2. Unions 3. Efficiency Wages Structural Unemployment: unemployment resulting from wage rigidity and job rationing. Fundamental mismatch between the number of people who want to work and the number of jobs that are available.
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Long-Run vs. Short-Run Unemployment Short-term unemployment most often measured by Frictional Long-term unemployment most often measured by structural If goal is to lower the natural rate, policies must aim at the long-term unemployed, because these individuals account for a large amount of unemployment. However, the long-term unemployed constitute a small minority of those who become unemployed. Most people who become unemployed find work within a short time. Discouraged Workers: individuals that want jobs but, after unsuccessful searches, have given up looking. Discouraged workers are counted as being out of the labor force and do not show up in unemployment statistics. Rising European Unemployment Long-standing policy of generous benefits for unemployed workers “the dole” Recent shock of a technologically driven fall in the demand for unskilled workers relative to skilled workers. o In U.S. this shock is seen through a fall of wages rather than rise in unemployment. Europeans work fewer hours than Americans o Europeans face higher tax rates than Americans European tax rates have risen significantly over the past several decades. o More unions in Europe, more collective bargaining CHAPTER 9 Recession: when the economy experiences a period of falling output and rising unemployment. A period of at least two consecutive quarters of declining real GDP Decline in growth of consumption and investment. Okun’s Law: increases in the unemployment rate should be associated with decreases in real GDP. Leading Economic Indicators: variables that tend to fluctuate in advance of the overall economy. 1. Average workweek of production workers in manufacturing longer workweek due to strong demand for products, indicates firms are likely to increase hiring and production in the future.
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