Deck 28: The Natural Rate of Unemployment

Question 1

According to the theory of efficiency wages, firms operate less efficiently if wages are above the equilibrium level.

Answer 1

False

Question 2

Economists and policymakers should focus on solving problems of short-term unemployment, since long-term unemployment will be resolved eventually.

Answer 2

False

Question 3

Janet loses her job and decides to sit around at home for a few weeks. Ceteris paribus:

A) The unemployment rate is unaffected, and the labour-force participation rate increases
B) The unemployment rate increases, and the labour-force participation rate is unaffected
C) The unemployment rate increases, and the labour-force participation rate increases
D) The unemployment rate increases, and the labour-force participation rate decreases

Answer 3

The unemployment rate increases, and the labour-force participation rate decreases

Question 4

Cyclical unemployment refers to:

A) year-to-year fluctuations of unemployment around its natural rate
B) the experience with unemployment of a typical worker over his or her life cycle
C) long-term trends in unemployment
D) none of the above

Question 5

Job-search unemployment is different from unemployment arising from minimum-wage laws, unions and efficiency wages because in the former case, workers are searching for the jobs that best suit them, while in the latter, workers are waiting for jobs to open up.

Question 6

Which of the following equations is correct?

A) Labour force = Population - Labour not in the labour force
B) Labour force = Population - Number of unemployed
C) Labour force = Number of employed + Number of unemployed
D) Labour force = Adult population - Number of unemployed

Question 7

The main reason for the fall in union membership is that more people are educated and able to manage their own wages.

Question 8

Economists and policymakers must equally consider the problems of short-term unemployment and long-term unemployment in the economy.

Question 9

The natural rate of unemployment is:

A) unchanging
B) inevitable
C) always increasing
D) affected by minimum wage laws

Question 10

Which of the following is the correct statement?

A) There is no easy way for policymakers to reduce the economy's natural rate of unemployment, but it is easy to alleviate the hardships of the unemployed
B) There is no easy way for policymakers to reduce the economy's natural rate of unemployment and at the same time alleviate the hardships of the unemployed
C) There is no easy way for policymakers to alleviate the hardships experienced by the unemployed, but it is easy to reduce the economy's natural rate of unemployment
D) None of the above

Question 11

An economy's natural rate of unemployment refers to the lowest rate of unemployment the economy experiences over the business cycle.

Question 12

If the minimum wage is set above the equilibrium wage level, then less people could be hired compared with the equilibrium level.

Question 13

If David recently graduated and is looking for a job, then, ceteris paribus, the unemployment rate will fall and the labour-force participation rate will fall.

Question 14

Efficiency wages are:

A) one explanation for the natural rate of unemployment
B) wages paid for time-motion studies
C) the lowest wage an employer can pay
D) none of the above

Question 15

Surplus labour in the market creates pressure to increase market wages, in the absence of minimum-wage legislation.

Question 16

Firms may find it profitable to pay wages above the equilibrium level in order to give workers an incentive to avoid shirking their responsibilities.

Question 17

The labour-force participation rate:

A) equals one minus the unemployment rate
B) measures the percentage of the total adult population in the labour force
C) measures the percentage of the number of employed in the labour force
D) equals one minus the labour force

Question 18

Most of the economy's unemployment problem is attributable to the relatively few workers who are jobless for long periods of time.

Question 19

Students are regarded as employed in studies and are recorded as unemployed, but not in the labour force.

Question 20

The percentage of employees that have joined unions in Australia has fallen over the past 60 years.

Question 21

Sectoral shifts in the economy:

A) decrease job search
B) increase productivity
C) temporarily cause unemployment
D) do all of the above

Question 22

Which of the following statements is correct about minimum wages?

A) Minimum wages are a predominant cause of unemployment in the economy
B) Minimum wages do not cause unemployment
C) Minimum wages have an important effect on certain groups with particularly high unemployment rates
D) Minimum wages are binding in every labour market equally

Question 23

According to the theory of efficiency wages:

A) firms may choose to pay a wage above the competitive equilibrium level to reduce worker turnover
B) firms will pay a higher wage to impose a cost on shirking
C) firms will pay a high wage to provide an incentive to work hard
D) all of the above

Question 24

Efficiency-wage theory suggests that to improve workers performance, firms should:

A) fire all existing workers and hire new ones
B) spend more money and effort on monitoring
C) raise wages above the market equilibrium level
D) give incentive pay to employees for dobbing in their fellow workers who are shirking

Question 25

If an unemployed person stops looking for work, then, ceteris paribus:

A) the labour-force participation rate decreases
B) the size of the labour force falls
C) the labour-force participation rate increases
D) both A and B are correct

Question 26

Fred decides to hire some additional mechanics to work in his expanded automotive business. The going wage is $16 per hour. Efficiency-wage theory suggests that Fred should offer:

A) very little as the automotive industry is a sunset industry
B) the minimum wage which is $14 per hour, since some mechanics would be willing to work at that level
C) more than $16 per hour, so as to attract a better pool of applicants
D) enough to attract the number of applicants necessary to fill the jobs available

Question 27

The unemployment rate is never zero because:

A) some wages are always above the market equilibrium level
B) there will always be some people who choose not to work
C) of the presence of discouraged workers
D) of maximum wage laws

Question 28

Which of the following causes of unemployment is not associated with a wage rate above the equilibrium level?

A) Unions
B) Job search
C) Efficiency wages
D) Minimum wage laws

Question 29

Graph 28-1

The government has introduced the minimum wage law. The minimum wage is set at W₁ as shown in Graph 28-1. After introducing the minimum wage law, the quantity of labour supplied is _______

A) L₀, the quantity of labour demanded is L₀ and the amount of unemployed labour is zero
B) L₀, the quantity of labour demanded is L1and the amount of unemployed labour is L₀-L₁
C) L₂, the quantity of labour demanded is L₀ and the amount of unemployed labour is L₂-L₀
D) L₂, the quantity of labour demanded is L₁ and the amount of unemployed labour is L₂-L₁

Question 30

Graph 28-1

Effective collective bargaining will:

A) increase the demand for union workers
B) raise the wage of union workers
C) decrease the supply of labour in the non-unionised parts of the economy
D) none of the above

Question 31

Which of the following causes of unemployment is not associated with an excess supply of labour?

A) Minimum wage laws
B) Unions
C) Job search
D) Efficiency wages

Question 32

Mary has been out of the paid workforce in order to raise her children. Now she decides to do paid work and is looking for a job. Which of the following is the correct statement?

A) The number of unemployed increases, and the labour force decreases
B) The number of unemployed increases and the labour force is unaffected
C) The number of unemployed is unaffected, and the labour force increases
D) The number of unemployed increases, and the labour force increases

Question 33

Most spells of unemployment are:

A) short , and most unemployment observed at any given time is long-term
B) long , and most unemployment observed at any given time is long-term
C) short, and most unemployment observed at any given time is short-term
D) long , and most unemployment observed at any given time is short-term

Question 34

Graph 28-1

A union is:

A) the decision of one firm to merge with another
B) an employee bargaining association limited to professional sports
C) a group of employers who band together for the purpose of bargaining with employees
D) a worker association that bargains with employers over wages and working conditions

Question 35

Most of the economy's structural unemployment problem is attributable to:

A) relatively large numbers of workers who are jobless for relatively long periods of time
B) relatively large numbers of workers who are jobless for relatively short periods of time
C) relatively few workers who are jobless for relatively long periods of time
D) relatively few workers who are jobless for relatively short periods of time

Question 36

Which of the following causes of unemployment would most likely be affected by more accessible information about job opportunities?

A) Collective bargaining
B) Minimum wage laws
C) Job search
D) Efficiency wages

Question 37

Graph 28-1

The theory of efficiency wages explains why:

A) unions strike for higher wages
B) it might be inefficient to pay workers the competitive equilibrium wage
C) the actual unemployment rate varies around the long-run equilibrium unemployment rate
D) it is efficient for workers to work hard for their wages

Question 38

Job search:

A) explains why firms pay higher than the competitive equilibrium wage
B) is due to the failure of wages to balance labour supply and labour demand
C) is the process of matching workers with appropriate jobs
D) all of the above

Question 39

Which of the following contributes to the natural rate of unemployment?

A) Unions
B) Efficiency wages
C) Job search
D) All of the above

Question 40

Graph 28-1

In Graph 28-1, without a minimum wage law, the equilibrium market wage is:

A) W₀, and the equilibrium market quantity of labour hired is L₀
B) W₀, and the equilibrium market quantity of labour hired is L₁
C) W₁, and the equilibrium market quantity of labour hired is L₁
D) W₁, and the equilibrium market quantity of labour hired is L₀
E) W₁, and the equilibrium market quantity of labour hired is L₂

Question 41

Suppose that a firm is faced with an excess supply of workers. What would the firm do? Explain with standard economic theory and with efficiency wage theory.
ANS:
a. Standard economic theory: assuming a firm maximizes its profit, it should lower wages until the supply of workers is equal to the demand. This will reduce production costs and raise profits.
b. Efficiency-wage theory suggests that it might be profitable for a firm to keep wages above the equilibrium level in order to reduce worker turnover, increase worker quality, increase worker effort, and perhaps to increase worker health and therefore worker productivity.

Question 42

What is the theory of efficiency wages?

Question 43

When a union raises the wage above the equilibrium level, ceteris paribus:

A) it reduces the quantity of labour supplied
B) it increases the quantity of labour demanded
C) it results in surplus of labour in the labour market
D) it decreases unemployment

Question 44

Which of the following statements about unemployment benefits is correct?

A) Unemployment benefits reduce search efforts but raise unemployment
B) Unemployment benefits increase the income uncertainty that workers face
C) Unemployment benefits improve the ability of the economy to match each worker with the most appropriate job
D) Unemployment benefits do not protect workers against income loss

Question 45

Which of the following statements about unemployment is incorrect?

A) Graduates that are actively searching for work are classed as unemployed
B) The highest levels of unemployment tends to be reported in the most affluent neighbourhoods in Australia
C) Cyclical unemployment is associated with economic activity
D) Structural unemployment is associated with obsolescence

Question 46

Which of the following statements is an example of moral hazard?

A) A car driver with car insurance drives more safely
B) A babysitter allows children to watch more television than the children's parents would wish
C) Buyers of private health insurance know more about their own health problems than do health funds
D) Sellers of used cars know their cars' defects whereas buyers often do not

Question 47

Identify the principal, the agent and the moral hazard inherent in each of the following situations.
a. In order to reduce personal injury claims, insurance companies successfully lobby legislators to pass laws requiring the use of seatbelts in automobiles.
b. A university provides free employee health insurance, which reduces the direct cost to the faculty and staff of visiting the doctor and the dentist.

Question 48

Unemployment rate is:

A) Number of unemployed × 100
Population
B) Number of unemployed × 100
Adult population
C) Number of unemployed × 100
Labour force
D) Number of unemployed × 100
Number of employed

Question 49

Wages at a rate greater than the minimum level can:

A) create productivity gains if managed correctly
B) encourage higher quality candidates to apply for positions
C) encourage a labour surplus
D) all of the above

Question 50

In 2010 in Australia, 11.1497 million people were employed, and 0.629 million people were unemployed. The adult population was 18.014.150 million. Therefore, the labour force was:

A) 5.92 million
B) 11.012 million
C) 11.778 million
D) 16.324 million

Question 51

Which of the following does not cause unemployment?

A) Unions
B) Minimum wage laws
C) Job matching programs
D) Efficiency wages

Question 52

Discuss the 'unionisation' debate. What are the positive and negative effects when a union raises the wage above the equilibrium level?

Question 53

Explain how a government policy encouraging a parent to stay at home with their young children would reduce unemployment.

Question 54

Explain when minimum laws are binding and result in unemployment.

Question 55

If the adult population is 18.01 million, and the participation rate is 65.4%, what is the total amount of the labour force?

Question 56

Why is job-search unemployment inevitable?

Question 57

Explain the worker-effort variant of efficiency wage theory with moral hazard.

Question 58

What is the distinction between the natural rate of unemployment and cyclical unemployment?

Question 59

In each of the following situations, explain why there is asymmetric information, and identify the problem of adverse selection.
a. The sale of life insurance
b. The sale of used computers