Deck 17: Unemployment: Causes and Consequences

Question 1

In the insider-outsider theory, what is NOT considered as an insider power?

A) Turnover costs
B) Firm-specific training and work experience
C) Nonwage benefit
D) Low unemployment rate
E) Non-cooperation of incumbent employees with new hires

Answer 1

D

Question 2

What are the effects of EI system on labour supply, based on the income-leisure choice model?

A) More-generous EI will decrease labour force participation but increase weeks worked.
B) More-generous EI will increase labour force participation and increase weeks worked.
C) More-generous EI will decrease labour force participation and decrease weeks worked.
D) More-generous EI will increase labour force participation but the effect on weeks worked is ambiguous.
E) More-generous EI will increase labour force participation but decrease weeks worked.

Answer 2

D

Question 3

Relative to the unemployment insurance programs of other countries, the salient feature of Canada's unemployment insurance program is that:

A) it is generous to workers who have been permanently laid off.
B) the duration of benefit entitlement is long.
C) the premiums that workers and firms pay are high.
D) it awards generous benefits to part-year workers.
E) it replaces a high fraction of the wage of the lost job.

Answer 3

D

Question 4

Those who are jobless and out of the labour force:

A) are voluntarily unemployed.
B) are too productive to be hired at the going wage.
C) have chosen not to supply labour at the going wage.
D) are involuntarily unemployed.
E) have a reservation wage that is lower than the going wage.

Question 5

The most important way in which unemployment insurance benefits can have the effect of raising the rate of unemployment is by:

A) raising the cost of employing labour through the channel of payroll taxes to fund the program.
B) reducing the benefits gained from working.
C) encouraging workers to quit their jobs.
D) reducing the cost of job search, thus prolonging jobless durations.
E) encouraging workers to work part time.

Question 6

The "stopping rule" is associated with which type of unemployment?

A) High-wage unemployment
B) Persistent unemployment
C) Demand-deficient unemployment
D) Search unemployment
E) None of the choices is correct.

Question 7

One of the findings of recent labour market research regarding unemployment is that:

A) cyclical unemployment is more stable than structural unemployment.
B) even in a well-functioning competitive economy, in which the number of workers equals the number of jobs, some workers can be jobless.
C) unemployment occurs primarily as a result of inefficient labour markets.
D) in a competitive economy, the equilibrium level of unemployment is the frictional rate of unemployment.
E) while there are a number of different types of unemployment, the primary source of unemployment is the business cycle.

Question 8

The condition for the equilibrium level of efficiency wage is that:

A) The job vacancy rate is equal to the unemployment rate.
B) The efficiency of the labour force is maximized.
C) The rate of change in the aggregate wage is stabilized when the actual rate of unemployment is equal to the natural rate.
D) The elasticity of the workers' output with respect to the wage is equal to one.
E) The marginal benefit of job search is equal to the marginal cost of job search.

Question 9

All of the following are considered to be potential sources of high-wage unemployment, except:

A) implicit contracts.
B) insider-outsider theory.
C) frictional unemployment.
D) structural unemployment.
E) efficiency wages.

Question 10

The persistence of high levels of unemployment, especially in parts of continental Europe, is explained in part by all of the following, except:

A) social and labour market policies that alter the costs and benefits of job search.
B) insider-outsider models of wage setting that keep wages above equilibrium levels.
C) the loss of human capital experienced by displaced workers.
D) certain features of the unemployment insurance regimes.
E) flexibility in the labour market.

Question 11

In the efficiency wage model of the labour market:

A) the firm selects only the wage level, taking the employment level as given.
B) the firm takes into account the labour market conditions outside the firm.
C) the firm selects neither the employment level nor the wage level.
D) the firm selects only the employment level, taking the wage as given.
E) the firm selects the employment level and the wage jointly.

Question 12

Implicit contract theory is based on the view of:

A) low productivity.
B) risk-sharing.
C) wage rigidity.
D) adverse selection.
E) moral hazard.

Question 13

The theory of unemployment "hysteresis" is associated with all of the following, except that:

A) A natural rate of unemployment can rise in response to high actual unemployment.
B) In a recession, many of the long term unemployed experience a decline in the intensity of their search effort.
C) Individuals who have been unemployed for a long time may suffer a deterioration in their labour market skills.
D) Short-run adverse shocks to the labour market may have permanent effects.
E) Efficiency wages cause the actual wage paid to be higher than the equilibrium wage.

Question 14

According to the theory of job search, unemployment can be viewed as:

A) a human capital investment in information regarding the availability of jobs.
B) a result of a risk-sharing arrangement between the worker and the firm.
C) involuntary in the sense that the jobless workers are willing to work at the going wage.
D) being persistent over time.
E) voluntary in the sense that the jobless workers would be employed if the transactions wage were lowered.

Question 15

Structural unemployment occurs because:

A) when workers and firms need time to locate each other and to digest the information about the suitability and the value of the job match.
B) the economy has its natural cycle of good times alternating with bad times.
C) skills that jobless workers have to offer are incompatible with the skills that firms require in order to fill their vacant positions.
D) many jobs are seasonal in nature, and the affected workers are unable to find jobs during the off-season.
E) information about available jobs for which the worker is qualified takes time to develop.

Question 16

Frictional unemployment arises:

A) whenever the number of workers willing to work at the going wage exceeds the number of workers that firms are willing to hire.
B) when workers and firms need time to locate each other and to digest the information about the suitability and the value of the job match.
C) because skills are specific to a job, and there is some inertia in workers acquiring new skills.
D) whenever friction between the firm and the worker lead to the worker leaving the firm.
E) whenever there is a mismatch between the skills of jobless workers and the skills that employers desire for their vacant positions.

Question 17

Canada's unemployment insurance system is thought to have what impact on labour supply?

A) A positive impact by lowering reservation wages
B) No impact at all
C) A positive impact by prolonging jobless durations
D) A positive impact by drawing workers with marginal labour force attachment into the labour force
E) A negative impact by subsidizing leisure

Question 18

Which of the following is NOT derived from the recent research regarding "displaced workers'?

A) A major part of the earnings loss arises from re-employment at wages substantially below their pre-displacement levels.
B) Among permanent job losers in Canada, displaced workers represent a large percentage.
C) Earnings losses from permanent job loss are very large.
D) Displaced workers suffer long term earnings losses.
E) Older displaced workers are less likely to become re-employed than their younger counterpart.

Question 19

The efficiency wage hypothesis states that firms can increase productivity and profits by:

A) paying wages that vary according to the reservation wages of workers.
B) paying higher wages.
C) paying lower wages.
D) paying wages that vary according to the marginal productivity of workers.
E) paying wages that vary according to the degree of risk aversion of workers.

Question 20

Which of the following factor does NOT play a key role in determining the value of the optimal search?

A) Social and labour market policies
B) Dispersion of wage offers
C) The expected duration of the job
D) The size of the labour force.
E) Institutional mechanisms related to labour market information

Question 21

Aside from constitutional issues, few policies are more uniquely Canadian than the unemployment insurance program, now named the Employment Insurance program. This wide-reaching program has profound effects in many of Canada's labour markets. As the textbook indicates, there have been numerous commissions over the years that have recommended reform, most of which have not been implemented. Your mission here is to summarize the extensive literature, both theoretical and empirical, concerning the role that unemployment insurance plays in labour markets.
• What are the primary economic effects of Canada's UI program on the job search activity of unemployed Canadians? Although you should resort to the job search approach as your analytical
framework, keep your analysis to an intuitive, non-technical, non-graphical level.
• What are the primary economic effects of the UI program on firm behaviour, particularly on layo decisions? You should resort to the implicit contract approach as your analytical framework.
• What are the effects on the labour supply behaviour of those who are not currently eligible, especially those with low labour force attachment?
• What is the overall effect of the UI program on labour force participation and unemployment? Is positive or negative, and why?