Question

1.

Define and explain Frictional, Structural and Cyclical unemployment. What is NAIRU?

2.

Show the effect of a minimum wage on a labour market where the equilibrium wage is

below the legislated minimum wage. Use the labour demand and supply model but don’t

consider any effects outside of the basic model.

3.

Explain the basic Consumption – Leisure choice model. Show what happens to the model if

there is an increase in the wage rate. Include the income and substitution effects.

4.

Show how to determine the cost minimizing mix of capital and labour using a graph. How

would the graph change if the cost of labour rose relative to the cost of capital?

Answer 1

Question 1

ANSWER : Frictional unemployment can be otherwise called as search unemployment. Frictional unemployment occurs when an individual transfer from one job to other or search a job. More clearly, the frictional unemployment is the time between one job and search for other job or time between transfer from one job to other. This kind of frictional unemployment can occur either voluntarily or involuntarily.

Structural unemployment occur due to structural changes in the economy. When there is changes in technology, the skills possessed by labour will not sometime match with the jobs that economy offers to them This will create structural unemployment. For example, when a new machine is introduced, it will replace many labourers. Their skills may not know to operate a machine. Thus these labourers will be unemployed due to the introduction of a new machine. This kind of unemployment is called structural unemployment.

Cyclical unemployment occurs due to cyclical fluctuations in the employment. In a business cycle , there will be contractions and expansions. During the period of contraction, there may be loss of job due to negative growth and reduction in labor. This type of unemployment is called cyclical unemployment.

Non accelerating inflation rate of unemployment is abbreviated as NAIRU. It is a particular rate of unemployment which will not cause an increase or increase in inflation in the economy.