Deck 13: Employment and Unemployment: Who Is Out of Work and Why

Question 1

How is unemployment calculated in the United States? How do you react to the argument that actual unemployment problems might be obscured by measurement techniques?

Answer 1

Unemployment in the United States is calculated using the Current Population Survey (CPS), which is conducted by the U.S. Census Bureau for the Bureau of Labor Statistics (BLS). The CPS surveys approximately 60,000 households each month to gather data on employment and unemployment.

The BLS defines unemployed individuals as those who are not currently employed, available for work, and actively seeking employment. The unemployment rate is then calculated by dividing the number of unemployed individuals by the total labor force (which includes both employed and unemployed individuals).

As for the argument that actual unemployment problems might be obscured by measurement techniques, there is some validity to this concern. The official unemployment rate may not fully capture the extent of unemployment in the country, as it does not account for discouraged workers who have given up looking for work, underemployed individuals who are working part-time but would prefer full-time employment, or individuals who have temporarily left the labor force.

Additionally, the official unemployment rate does not capture individuals who are working in low-paying or unstable jobs that do not fully utilize their skills and education. This means that the true extent of unemployment and underemployment may be higher than what is reflected in the official statistics.

It is important for policymakers and researchers to consider these limitations when analyzing the state of the labor market and to use additional measures, such as the U-6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, to gain a more comprehensive understanding of unemployment in the United States. By acknowledging these measurement issues, we can better address the actual unemployment problems and work towards implementing effective solutions.

Question 2

How do you reconcile the classical model's maintenance that there is no such thing as long-run involuntary unemployment with the obvious real world fact that there is considerable long-run involuntary unemployment?

Answer 2

The classical model of economics maintains that there is no such thing as long-run involuntary unemployment because it assumes that wages and prices are flexible and will adjust to clear the labor market. In this model, any unemployment that exists is considered voluntary, as workers are choosing to remain unemployed at the current wage rate.

However, in the real world, we observe considerable long-run involuntary unemployment despite the assumptions of the classical model. This can be attributed to several factors that the classical model does not fully account for.

One factor is the presence of labor market rigidities, such as minimum wage laws, labor union bargaining power, and other regulations that prevent wages from adjusting freely. These rigidities can lead to a situation where the market-clearing wage is above the equilibrium wage, resulting in involuntary unemployment.

Another factor is the existence of imperfect information and search frictions in the labor market. Workers may not always be aware of all available job opportunities, and firms may struggle to find suitable candidates for their job openings. This can lead to long-term unemployment for some individuals.

Additionally, macroeconomic factors such as recessions, technological changes, and shifts in global competition can also contribute to long-run involuntary unemployment. These factors can lead to a mismatch between the skills demanded by employers and the skills possessed by the unemployed, resulting in persistent unemployment.

In order to reconcile the classical model with the real-world phenomenon of long-run involuntary unemployment, economists have developed alternative theories, such as Keynesian economics, which emphasize the role of aggregate demand in determining employment levels. These theories argue that government intervention, through fiscal and monetary policies, can help reduce long-run involuntary unemployment by stimulating demand and addressing labor market rigidities.

Overall, while the classical model may provide valuable insights into the functioning of the labor market, it is important to recognize its limitations in explaining the existence of long-run involuntary unemployment in the real world. By considering additional factors and alternative theories, economists can better understand and address this important economic issue.

Question 3

Explain the concept of the natural rate of "unemployment." How does one account for the fact that in the United States the natural rate appears to have trended downward over the last three decades?

Answer 3

The natural rate of unemployment refers to the level of unemployment that exists in an economy when it is operating at full potential or at its natural level of output. It is the level of unemployment that is consistent with the long-run trend in the economy and is not influenced by cyclical factors such as fluctuations in economic activity.

The natural rate of unemployment is determined by structural factors such as the skills and mobility of the workforce, the efficiency of labor market institutions, and the level of job search and matching efficiency. It is also influenced by demographic factors such as the age distribution of the population and labor force participation rates.

In the United States, the natural rate of unemployment has appeared to trend downward over the last three decades. This trend can be attributed to several factors. One factor is the increasing level of education and skills in the workforce, which has improved the efficiency of job matching and reduced the incidence of long-term unemployment. Another factor is the decline in the bargaining power of labor unions and the increased flexibility of labor markets, which has made it easier for workers to find new jobs and for employers to adjust their workforce in response to changing economic conditions.

Additionally, changes in government policies and programs, such as welfare reform and workforce development initiatives, have also contributed to the downward trend in the natural rate of unemployment by encouraging labor force participation and reducing barriers to employment.

Overall, the downward trend in the natural rate of unemployment in the United States over the last three decades can be attributed to a combination of structural, demographic, and policy-related factors that have improved the efficiency and flexibility of the labor market.

Question 4

Consider the three basic "types" of unemployment-frictional, structural, and cyclical. Construct a brief employment biography for a hypothetical individual in each of these three categories.

Question 5

What are the costs of unemployment?

Question 6

By the early 1960s, the then dominant conventional wisdom in American economics held that we possessed the tools to virtually eliminate cyclical unemployment. Within a decade, that idea was in tatters. How do you account for this reversal in American economic thought and policymaking? Contrast this with current circumstances.

Question 7

Explain some of the possible undesirable economic effects of pursuing an overly expansionary stabilization policy in an effort to attain "full employment."

Question 8

What were the social and economic objectives of President Lyndon Johnson's Great Society program? How do you account for its apparent failure to attain its objectives?

Question 9

How do you account for the rise of "stagflation" in the 1970s?

Question 10

In 1981, President Ronald Reagan brought a new approach to stabilization policy to the White House. Explain "Reaganomics" and evaluate its performance, especially noting its record with respect to unemployment.

Question 11

Why in the recent period have both cyclical and structural unemployment emerged as the most troubling aspects of the country's unemployment problems?

Question 12

Wage inflexibility, lack of skills, discrimination, and geographic immobility have all been cited as important factors contributing to the mismatch unemployment problems of structural unemployment. What public policy approach would you recommend in dealing with each of these factors?

Question 13

Draw a diagram of the Phillips Curve. Explain the relationship it shows. Provide a rationale for the existence of the relationship. Explain why doubts about the relationship emerged over time.

Question 14

Explain how adaptive expectations and rational expectations theories offer a challenge to the effectiveness of expansionary fiscal policy.

Question 15

What direct job-creation efforts do you feel are appropriate for the federal government to undertake to deal with high and chronic unemployment?

Question 16

Some economists believe the recent problems of high unemployment rates will be eased in the future as the result of certain demographic and other changes in the nature and composition of the American workforce. What are these changes and how will they affect unemployment problems?

Question 17

What do you personally see as the near-term future (five year) trend in American unemployment rates? Explain the reasons for your view.

Question 18

Use an AD-AS model to show how expansionary fiscal policy could alleviate low real GDP and employment.

Question 19

Structural unemployment may be caused by skill deficiencies, labor market discrimination, and immobile labor.

Question 20

Those under the age of 16 are not counted as part of the civilian labor force.

Question 21

Less than half of all Americans are gainfully employed.

Question 22

The "natural rate of unemployment" is about equal to frictional unemployment plus structural unemployment.

Question 23

The actual rate of unemployment is always below the natural rate of unemployment.

Question 24

Historically, we have usually associated unemployment as an economic problem with downturns in the business cycle.

Question 25

Throughout the 1980s, 90s, and early 2000s the natural rate of unemployment trended downward.

Question 26

The Employment Act of 1946 formally committed the federal government to the pursuit of high employment policies.

Question 27

Frictional unemployment refers to job losses resulting directly from a downturn in business activity.

Question 28

Studies indicate that when the unemployment rate rises, so do crime rates.

Question 29

The Keynesian cure to the unemployment of the 1930s was to urge an increase in government spending.

Question 30

"Fine tuning" was a popular economic belief during the New Economics years. It maintained that federal macroeconomic policy could handle both the problem of unemployment and the threat of inflation.

Question 31

The stagflation of the 1970s had the effect of converting great numbers of Ameri? can economists and politicians to the New Economics.

Question 32

An economy operating at full employment, as existed in the United States in the late 1960s, cannot have more guns (for Vietnam) without giving up some consumer goods.

Question 33

The supply shocks of the 1970s had the beneficial effect of pushing prices downward as the result of a growing shortage in critical materials.

Question 34

Budget balance was a central feature of Reagan's economic strategy during the 1980s.

Question 35

Budget balance is a central feature of Obama's economic strategy to counter the recession of 2007-2009.

Question 36

Old as structural unemployment is, it is probably a bigger problem today because we have recently had a slow growth rate that makes it more difficult to reabsorb structurally displaced workers.

Question 37

Workers should be more mobile and able to move "where the jobs are" today because so many American families are two-wage-earner families.

Question 38

The Work Force Investment Act of 1998 was designed to address the problems of displaced workers and structural unemployment.

Question 39

An individual hospitalized for habitual drug addiction is:

A) not counted as part of the population
B) not counted as part of the civilian labor force
C) counted as "officially unemployed"
D) counted as "employed"

Question 40

Which of the following will qualify as "officially unemployed"?

A) a part-time worker who is regularly seeking a full-time job
B) a member of the United Auto Workers union currently on strike against GM
C) a "hard-core" unemployed individual who has ceased looking for work and has never received unemployment benefits
D) all of the above
E) none of the above

Question 41

"Voluntary unemployment" refers to:

A) workers who have resigned or retired due to age
B) workers who find leisure preferable to employment
C) workers who face wages well above their own wage expectations
D) part-time employment
E) workers who went on vacation

Question 42

Full employment refers to:

A) a historically acceptable level of unemployment corresponding to an economy that is operating at full capacity
B) 100 percent employment
C) zero unemployment
D) part-time workers succeeding in finding full-time jobs
E) a forty-hour work week

Question 43

Smith has lost her job as sales manager of the Ajax corporation because of declining sales in the recent recession. Her job loss is an example of:

A) structural unemployment
B) frictional unemployment
C) cyclical unemployment
D) full employment unemployment

Question 44

If a worker is out of work because of maternity and her company has no maternity leave plan, her unemployment will probably be classified as:

A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) all of the above
E) none of the above

Question 45

Structural unemployment:

A) is a "cost" of technological progress
B) is a "cost" of society educating its citizens poorly
C) is a "cost" of increasing American "competitiveness" in the world
D) all of the above
E) none of the above

Question 46

The economic costs of unemployment include:

A) lost tax revenues
B) rising government expenditures for social spending
C) lost output
D) all of the above
E) none of the above

Question 47

Among the problems that surfaced in the 1970s application of the New Economics was the result that:

A) unemployment was unresponsive to aggregate demand
B) war was essential for maintaining full employment
C) price inflation appeared as a serious problem before full employment was attained
D) business opposed the New Economics theory

Question 48

During the 1970s, economic data steadily reported:

A) rising or high unemployment rates
B) high or rising price levels
C) slowed economic growth
D) all of the above
E) none of the above

Question 49

The principal reason that American policymakers failed to reduce demand pressures upon prices in the late 1960s and in the 1970s was that:

A) they simply didn't understand demand-pull inflation
B) they were fearful of the political effects of actions that were required
C) unemployment was too high
D) "fine tuning" was working

Question 50

Reflecting upon the results of policymaking in 1970s, 1980s, and 2000s:

A) we find our counter-cyclical abilities to be greater than ever
B) we can see that full employment policies work sooner or later
C) the growth of federal deficits has limited the ability to deal with stabilization problems
D) unemployment is no longer a serious problem

Question 51

Which of the following factors helps to explain the "mismatch unemployment" problems that characterize structural unemployment?

A) wage inflexibility
B) lack of skills
C) discrimination
D) all of the above
E) none of the above

Question 52

Worker mobility in responding to job losses is hampered by:

A) insufficient information
B) inadequate transportation
C) the fact that many families are two-wage-earner families
D) all of the above
E) none of the above

Question 53

The labor force participation rate is calculated as:

A) civilian labor force/noninstitutional civilian population
B) employed + unemployed
C) unemployed/civilian labor force
D) employed/noninstitutional civilian population
E) payroll employment/civilian labor force

Question 54

The civilian labor force is:

A) civilian labor force/noninstitutional civilian population
B) employed + unemployed
C) unemployed/civilian labor force
D) employed/noninstitutional civilian population
E) payroll employment/civilian labor force

Question 55

The unemplyment rate is calculated as:

A) civilian labor force/noninstitutional civilian population
B) employed + unemployed
C) unemployed/civilian labor force
D) employed/noninstitutional civilian population
E) payroll employment/civilian labor force

Question 56

Unemployment and labor force data come from:

A) surveys of local Chambers of Commerce
B) GDP estimates from the Bureau of Economic Analysis
C) the Current Employment Statistics Survey
D) the Current Population Survey

Question 57

Some observers argue that official unemployment data are not accurately representing the unemployment problem because:

A) some workers become discouraged by economic conditions and drop out of the labor force
B) the Bureau of Labor Statistics fudges the data to make it look better
C) certain unpaid workers are counted as employed
D) people who are temporarily absent because of illness are not counted as unemployed

Question 58

The United States nonaccelerating inflation rate of unemployment is:

A) much higher than other OECD countries
B) in the middle range of NAIRU estimates of OECD countries
C) the lowest of all OECD countries
D) none of the above