Question

1. What are the three categories into which the Bureau of Labor Statistics divides everyone? How does the BLS compute the labor force, the unemployment rate, and the labor-force participation rate?

2. Why is frictional unemployment inevitable? How might the government reduce the amount of frictional unemployment?

3. Are minimum-wage laws a better explanation for structural unemployment among teenagers or among college graduates? Why?

4. How do unions affect the natural rate of unemployment?

5. What claims do advocates of unions make to argue that unions are good for the economy?

6. Explain four ways in which a firm might increase its profits by raising the wages it pays.

Answer 1

1. Three categories are namely, employed, unemployed and not in the labor force.

BLS computes labor force by taking the number of individuals above the age of 16 or older who are employed/unemployed.

Unemployment rate is the number of unemployed persons / labor force.

Labor force participation rate is calculated by taking the ratio of number of people in the workforce to the civilian noninstitutional population which is aged 16 and above.

2. Frictional unemployment arises when people move from one job to another. Thus there will always be people moving from one job to another which has monthly gaps between resigning and joining, because of which it is inevitable. The government might reduce this by letting firms employ people as soon as they serve their notice so that there is no gap. By creating mechanism wherein prospective job seekers are able to quickly match the job openings.

3. Structural unemployment arises because of technological change wherein what the industry needs in terms of competence is not matched with the level of education provided in the colleges, and college graduates are paid a far higher amount. Thus minimum wage laws are a better explanation for unemployment among teenagers as teenagers are less skilled wherein their wages are low enough to be completely affected by what the minimum wages are.

4. Unions affect the natural rate of unemployment by asking for a higher wage, which leads to decline in the quantity of labour demanded as factories employ fewer number of people once there is an increase. This leads to increase in the rate of unemployment.

5. Advocates of unions claim that unions help in reducing the amount of discrimination in terms of wages and help determine better standards in work environment and number of hours worked.

6. Firm might increase the selling price marginally to cover the increase in wages, whereby profits increase. Firms might seek tax relief measures when they give in to unions demand of paying a higher wage, so that they earn more and pay less tax. Worker turnover reduces as it turns costly to hire new workers, thus same workforce increases efficiency. Higher quality workers because of higher pay increases productivity in the long run, thereby increasing profits.