Question

Explain in detail

1. What are the three types of unemployment and explain how do they change over the business cycle?
2. Define the nominal wage rate and the real wage rate. Can the nominal wage rate increase faster than the real wage rate, if yes, then why?

Answer 1

1.Types of Unemployment :

Unemployment   are three types ,there are ;

(1) Cyclical Unemployment

(2) Frictional Unemployment

(3) Structural Unemployment

explanation is given below :

• There are three major types of unemployment including cyclical, frictional, and structural. Let's take a look at each one of them through the eyes of workers in the town of Ceelo. As a matter of fact, I'd like to introduce you to a few of them and then find out what type of unemployment they're experiencing.
• Cindy just graduated from college, and she's looking for work by scanning job sites, reading newspaper listings and attending job fairs. Good for you, Cindy. Cindy's dad, Matt, is a manufacturing worker in Ceelo who loves to pull levers and wear hard hats. Matt's Uncle Fred works as a temporary Santa Claus each holiday season; in particular, he loves to work at commodities trading firms on Wall Street. Fred's brother Frohm is a high school gym teacher who is desperately trying to teach kickboxing to the school's guinea pigs with the help of students. He was hired as a second gym teacher last year.
• Okay, so this is the town of Ceelo, and these are the workers we're talking about. Now, let's talk about the economy.

(1) Cyclical Unemployment :

• Over time, the economy experiences many ups and downs. That's what we call cyclical unemployment because it goes in cycles. Cyclical unemployment occurs because of these cycles. When the economy enters a recession, many of the jobs lost are considered cyclical unemployment.
• Cyclical unemployment is a form of unemployment that relates to cyclical trends in the business cycle. Whenever the economy contracts (i.e. falls into a recession) unemployment increases, because firms have to lay off workers in order to cut costs. However, cyclical unemployment is temporary. That means, once the recession is over, many of the workers have a good chance to find another job in the same field.
• For example, during the Great Depression, the unemployment rate surged as high as 25%. That means one out of four people were willing and able to work, but could not find work! Most of this unemployment was considered cyclical unemployment. Eventually, unemployment came down again. As you can see, at least part of unemployment can be explained by looking at the cycles, or the ups and downs of the economy.

(2) Frictional Unemployment :

• Frictional unemployment occurs because of the normal turnover in the labor market and the time it takes for workers to find new jobs. Throughout the course of the year in the labor market, some workers change jobs. When they do, it takes time to match up potential employees with new employers. Even if there are enough workers to satisfy every job opening, it takes time for workers to learn about these new job opportunities, and for them to be considered, interviewed and hired.
• Frictional unemployment describes a form of unemployment that arises due to workers who are in the process of moving between jobs. This includes workers who voluntarily quit their job to look for a better one, people who are on job search because they just recently moved to a new area, etc. There are plenty of reasons why people move from one job to another. Therefore, it is important to note that frictional unemployment can never be fully eliminated. The reason for this is that in reality, information is always imperfect. This makes the process of finding a job complicated and time consuming.
• When Cindy graduates from college, she begins looking for work. Let's say it takes her four months to land a new job. During this time, she is frictionally unemployed.

(3) Structural Unemployment :

• Structural unemployment describes a form of unemployment that arises from a mismatch between the skills offered by workers and the skills demanded by employers. This situation usually occurs because of changes in demographics, industrial reorganization, or technological innovation. To adapt to those changes, firms constantly need new skills while some existing skills become outdated. As a result, some workers will find it hard to get a new job, because their skill set is simply not needed anymore.
• To illustrate this, think about cars. Before the automobile was invented, people traveled in horse-drawn carriages. Thus, demand for coachmen was high. However, after the invention of the automobile, the market for horse-drawn carriages eventually collapsed and it became increasingly difficult for coachmen to find employment.

Classes of Unemployment :

• Cyclical unemployment is one of the main classes of unemployment as recognized by economists. Other types include structural, frictional, and institutional unemployment. Rather than being caused by the ebbs and flows of the business cycle, structural unemployment is caused by fundamental shifts in the makeup of the economy—for example, jobs lost in the buggy-whip sector once automobiles came to dominate.
• It is a mismatch between the supply and demand for certain skills in the labor market. Frictional unemployment is short-term joblessness caused by the actual process of leaving one job to start another, including the time needed to look for a new job. Institutional unemployment consists of the component of unemployment attributable to institutional arrangements such as high minimum wage laws, discriminatory hiring practices, or high rates of unionization.
• In most cases, several types of unemployment exist at the same time. With the exception of cyclical unemployment, the other classes can occur even at the peak ranges of business cycles, when the economy is said to be at or near full employment.

(2) .NOMINAL WAGE :

• A nominal wage is the rate of pay employees are compensated. If you're paid $15.00 per hour, your nominal wage is $15.00 per hour. The most important thing to know about a nominal wage is that it is not adjusted for inflation. Inflation is an increase in the general price level in an economy. Money wages is another term used by some people for nominal wages.

REAL WAGES :

Wages paid to U.S. workers are expected to increase by 1 percent in 2018. Experts predict that Argentina will experience a real salary growth of 7.3 percent. India, Vietnam, Thailand and Ecuador will see an increase of 4.4 percent to 4.7 percent. This growth is largely determined by improvements in labor productivity.

Real wages depend on inflation. If they rise more quickly than inflation, employees will earn more and have higher purchasing power. When inflation increases faster than real wages, living costs go up and purchasing power declines.

When you're running a business, it's important to have a thorough understanding of the nominal vs real wage. Employees care about the real wage because it's what reflects the true cost of labor. It also shows how living standards have changed. Basically, real wages determine the amount of goods and services a salary can buy. They depend on a number of factors, such as:

• Purchasing power
• Inflation
• Subsidiary earnings
• Work conditions
• Regularity or irregularity of employment
• Extra work without payment
• Future prospects

For example, a real wage of $1,000 per month in a small town may provide a more comfortable life and allow employees to get more for their money than a similar amount in a big city. If inflation is 3 percent and wages increase by 2 percent, the real wage will be -1 percent. In this case, purchasing power will drop despite real wage growth. Employees will afford fewer products and services despite earning more.

Difference between Nominal and Real Wages :

• Inflation is what makes the difference between nominal and real wages. The amount of money received by a worker does not depend on the inflation rate in the market. This is called a nominal wage. It refers to the payments made to employees in money form only, which is the official nominal wage definition.
• Nominal wages or money wages are largely based on the organization’s payment policy and government regulations. They don't reflect the market conditions and are not derived from any formula. Their sole purpose is to compensate for the time and effort put into work. For example, if an employee receives $20 per hour or $3,200 per month, then that is their nominal wage.
• Under certain circumstances, money wages can increase, but the purchasing power will drop or remain the same. For instance, if an employee made $2,000 five years ago and earns $2,700 today, their nominal wage is higher now. However, he or she cannot purchase as many products with $2,700 today as he or she could with $2,000 five years ago because of the increase in prices.
• The money wage rate does not reflect an employee's real earnings. Additionally, it only considers the current point in time, not the market conditions or economic growth experienced over the years. Real wages, by comparison, take these factors into account and determine purchasing power.