Review Questions
| 1. | What is the major
long-run determinant of total employment?
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| 2. | What is the major
long-run determinant of real wage rates?
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| 3. | How would a temporary
increase in the growth rate of the working-age population affect employment and real wages
in the short run?
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| 4. | How does technical
progress, including automation, affect employment in the long run?
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| 5. | How has NAFTA
affected total employment?
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| 6. | What are the effects of
a tax on labor income?
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| 7. | How does an increase in
tax rates affect tax revenues?
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| 8. | How is the
unemployment rate defined?
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| 9. | Why can unemployment
exist?
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| 10. | What is the natural
rate of unemployment?
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| 11. | What factors affect the natural rate of unemployment? |
Old Exam Questions
| 1. | Some economists have
predicted that the recent financial crisis in some Asian countries will reduce the demand
for U.S. products by those countries, resulting in the loss of U.S. jobs.
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| a. | If these job losses materialize, are they likely to be permanent? Why or why not? | |
| b. | Does your answer to part (a) depend on whether the Asian financial troubles are permanent or temporary? If so, how? If not, why not? | |
| c. | What are the major long-run determinants of total employment in the U.S. economy? | |
| d. | Even before the Asian financial
troubles (in the early 1990s, in fact), the Labor Department was projecting slower job
growth in the U.S. economy between 1990 and 2005 than was experienced between 1975 and
1990. What is the basis for these projections, and are they a cause for serious concern
about the health of the U.S. labor market?
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| Answer: The Asian financial situation is unlikely to have a large effect on the employment of labor in the United States. Total employment is determined by the aggregate supply of and demand for labor. Labor supply is unlikely to be much affected by the Asian financial situation. In the long run, the demand for labor is determined by its marginal productivity, which is also unlikely to be much affected. If the demand for U.S. exports is affected, there may be some reduction in demand for labor in those export industries. If the decline in export demand is temporary, the decline in industry-specific labor demand also would be temporary. If the decline in export demand is permanent, then labor would in the long run be reallocated to other sectors. The major long-run determinant of employment is labor supply, which is heavily influenced by the size of the working-age population. In the long run, the wage rate adjusts to clear the labor market. The predictions for slow job growth between 1990 and 2005 are based on projections of slow labor force growth, due primarily to the fact that the baby boom generation has already been absorbed into the labor market. The slowdown in employment growth is not a cause for concern about the health of the U.S. economy.
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| 2. | The U.S. unemployment
rate has recently fallen to 4.3 percent, the lowest level since early 1970. Some
economists claim that "full employment" corresponds to an unemployment rate of
5.0 percent or higher.
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| a. | Given the size of the labor force, an unemployment rate of 5.0 percent translates into about seven million unemployed workers. In what sense can the economy be at full employment with seven million workers unemployed? What might explain such a level of unemployment? | |
| b. | Monthly labor force surveys
typically show unemployment rates for teenagers that are about three times as large as
those for adults. What factors might explain this difference in unemployment rates?
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| Answer:Economists are in effect saying that the
natural rate of unemployment is 5.0 percent. The natural rate includes unemployment
arising for structural reasons (e.g., minimum wage laws) or because of frictions in the
labor market. These frictions arise because workers and jobs are not homogeneous and
because information is imperfect. Thus, some search is required to match workers with the
appropriate jobs, and there will always be some workers who are between jobs. The natural
rate of unemployment is positively related to the rate of job separation and negatively
related to the rate of job finding.
Since teenagers always have higher unemployment rates than adults, this situation probably reflects differences in the natural unemployment rates of the two groups. Teenagers have higher rates of job turnover (and thus higher frictional unemployment) than adults. They also have lower skills (and thus lower marginal productivity) than adults, so that minimum wage laws result in greater structural unemployment among teenagers than among adults. (Without some factor such as minimum wage laws, lower skills would just mean that teenagers receive lower wages than adults and would not imply that they have higher unemployment rates.) |
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Selected Textbook Problems: Answers