Question

Suppose the government passes a law making it more difficult for firms to fire workers. One example might be a law requiring severance pay for fired workers. The goal of this law is to reduce the rate of job separation without affecting the rate of job finding. Use this information to answer the following three questions. (Assume the size of the labor force remains constant.)

1. the natural rate of unemployment will (fall/rise).

2. The rate of job separation will decrease, and the average spell of (unemployment/employment) will rise

3. For any given decrease in s, making it more costly for firms to fire an employee may also (multiple choice)

a. cause unemployed workers to select a new job more quickly. This would increase f and, if the increase in f is large enough, decrease U/L.

b. make it more costly for firms to hire an employee. This would decrease f and, if the reduction in f is large enough, increase U/L.

c. decrease the spell that employees work for the same employer. This would increase f and, if the increase in f is large enough, decrease U/L.

d. cause firms to expect more employee effort for the same pay. This would decrease f and, if the reduction in f is large enough, increase U/L.

Answer 1

Answer 1:

Fall. This will reduce frictional unemployment in the economy because employees will be less likely to look for new jobs when their employer does not remove them easily and since naturate rate of unemployment = frictional rate of unemployment + Structural rate of unemployment, a decrease in frictional rate of unemployment in the economy will reduce the natural rate of unemployment in the economy.

Answer 2:

Employment. The policy making it difficult for the firms to fire workers, will decrease the rate of job separation and this will increase the average spell of employment in the economy.

Answer 3: Option b.make it more costly for firms to hire an employee. This would decrease f and, if the reduction in f is large enough, increase U/L.

As it becomes difficult for the firms to fire workers, this will make it more costly for the firm to hire a worker.This decreases f and this can lead to increase in the level of unemployment rate in the labor market.

Option a is incorrect because it will make it difficult for unemployed worker to search for job.Option c is incorrect because it would increase the spell that an employee work for the same employer because firing becomes costly.Option d is incorrect because it would not increase unemployment rate.