IAN MARC D. PUBLICO BSED 2 SOC.

STUD

Module 4
Suggested Learning Activities/Exercises

1. What determines the natural rate of unemployment?

The natural unemployment rate is mainly determined by the economy's supply side, and
hence production possibilities and economic institutions. If these institutional features involve
permanent mismatches in the labor market or real wage rigidities, the natural rate of
unemployment may feature involuntary unemployment.

2. Describe the difference between frictional unemployment and structural unemployment.

Frictional unemployment involves people transitioning between jobs; it has nothing to
do with the economic cycle and is voluntary. Structural unemployment is a direct result of shifts
in the economy, including changes in technology or declines in an industry.

3. Give three explanations the real wage may remain above the level that equilibrates labor
supply and labor demand.
Three reasons why the real wage may remain above the level that equilibrates labor
supply and labor demand are: minimum wage laws, efficiency wages and the monopoly powers
of unions. Minimum wage laws prevent wages from falling to their equilibrium level. In most
cases, people who work for the minimum wage that is guaranteed by the law, are unskilled and
with less or no experience so in that case the minimum wage will raise their wage above
equilibrium. Efficiency wage is based on the idea that higher wages are increasing workers
productivity. Connection between wages and productivity may help in understanding why
business do not cut wages despite an excess supply in the labor. The monopoly power of union
by collective bargaining determine the wage of workers. In this case wage is not being
determined by the equilibrium of supply and demand but through negotiations of unions and
business. This kind of agreement raises wage equilibrium so probably, firm is going to employ
fewer people.

Practice Task/Assessment

1. Answer the following questions about your own experience in the labor force:

a. When you or one of your friends is looking for a part-time job, how many weeks does it
typically take? After you find a job, how many weeks does it typically last?

b. From your estimates, calculate (in a rate per week) your rate of job finding f and your rate of
job separation s. (Hint: If f is the rate of job finding, then the average spell of unemployment is
1/f.)

c. What is the natural rate of unemployment for the population you represent?
 a) For the part time job I was looking, it took me six weeks to find it, and it lasted 3 months (12
weeks) since it was an internship.

b)

Job finding: f = 1/6 = 0.166 jobs per week;

Job separation: s = 1/12=0.083 jobs per week.

c)

The natural rate of unemployment formula is: U/L = s+(s*f).

When we add values from the previous part, natural rate of unemployment for the group I
represent is the following: U/L = 0.083 + (0.083*0.166) = 0.096. If on average, when looking for a
part time job, you need six weeks to find a jobs and the job lasted 12 week, the unemployment
rate of that group is 0.096 percent.

2. In this chapter we saw that the steady-state rate of unemployment is U/L = s/(s + f ). Suppose that the
unemployment rate does not begin at this level. Show that unemployment will evolve over time and
reach this steady state. (Hint: Express the change in the number of unemployed as a function of s, f, and
U. Then show that if unemployment is above the natural rate, unemployment falls, and if
unemployment is below the natural rate, unemployment rises.).

Answer

: Assuming the total labor force to be constant, then the change of the number

of unemployed workers is

∆Ut+1 = s(L − Ut) − fUt .

Divide both sides with L, we have

∆Ut+1/L = s(1 − Ut/L) − fUt/L,

which leads to

∆U

t+1

L
= (s + f)[

s+

f − UtL ].

Therefore ∆U

t+1

> 0 when UtL <

s+

f , and ∆U

t+1

< 0 when UtL >

s+

. That is to say
when the unemployment rate is above the natural rate, unemployment falls. Otherwise, unemployment
rises.

3. The president is considering placing a tariff on the import of Japanese luxury cars. Discuss the
economics and politics of such a policy. In particular, how would the policy affect the U.S. trade deficit?
How would it affect the exchange rate? Who would be hurt by such a policy? Who would benefit?

In the simplest terms, a trade deficit occurs when a country imports more than it exports. A trade deficit
is either inherently entirely good or bad. A trade deficit can be a sign of a strong economy and, under
certain conditions, can lead to stronger economic growth for the deficit-running country in the future

.Interest rates, money supply, and financial stability all affect currency exchange rates. Because of these
factors, the demand for a country's currency depends on what is happening in that country. First, the
interest rate paid by a country's central bank is a big factor.

When the government or Federal Reserve uses monetary or fiscal policy to expand the economy, this
increases our income and our demand for imports, and ultimately lowers the exchange rate.
Contractionary policies have the opposite [Link] decreases the demand for dollars and decreases
the exchange rate.

With a high exchange rate, there are many advantages: Imports become relatively cheaper. For example
the price for imported raw materials becomes cheaper; the cost of production for firms becomes less.
This could lead to decreased prices for consumers.

4. Suppose that Congress passes legislation making it more difficult for firms to fire workers. (An
example is a law requiring severance pay for fired workers.) If this legislation reduces the rate of job
separation without affecting the rate of job finding, how would the natural rate of unemployment
change? Do you think it is plausible that the legislation would not affect the rate of job finding? Why or
why not?

The natural rate of unemployment formula is U/L = s+(s*f) which is our starting point. If the new law
decreases “s” – rate of job separation without affecting “f” – rate of job finding, then the natural rate of
unemployment will fall.

In my opinion, new policy could have effect on the rate of job finding. First of all, with this new law,
employers will be more careful if and when they hire new workers, since it would be expensive for them
to fire workers if they are not satisfied with their work. On the other hand, potential workers will not
accept any job offer. Because of the law, employers will have higher expectations of them leading to
more working hours, stressful working environment, etc. Depending on the reach of new policy and how
strict it is, in long term it could raise the rate of unemployment.