Chapter 10 Prashanja Makro

1) What are the three categories into which the Bureau of Labor
Statistics divides everyone?

Answer
The BLS categorizes each adult (16 years of age and older) as
1) employed,
2) unemployed, or
3) not in the labor force.
2) How does the BLS compute the labor force, the unemployment
rate, and the labor-force participation rate?
Answer
The labor force consists of the sum of the employed and the unemployed.
The unemployment rate is the percentage of the labor force that is unemployed.
The labor-force participation rate is the percentage of the total adult population that is in the
labor force.
3) Is unemployment typically short term or long term? Explain.
Answer
Unemployment is typically short term. Most people who become unemployed are able to
find new jobs fairly quickly. But some unemployment is attributable to the relatively few
workers who are jobless for long periods of time.
4) Why is frictional unemployment inevitable? How might the

government reduce the amount of frictional unemployment?
Answer
Frictional unemployment is inevitable because the economy is always changing. Some firms
are shrinking while others are expanding. Some regions are experiencing faster growth
than other regions. Transitions of workers between firms and between regions are
accompanied by temporary unemployment.
The government could help to reduce the amount of frictional unemployment through
public policies that provide information about job vacancies in order to match workers and
jobs more quickly, and through public training programs that help ease the transition of
workers from declining to expanding industries and help disadvantaged groups escape
poverty.
5) Are minimum-wage laws a better explanation for structural
unemployment among teenagers or among college graduates?
Why?
Answer
Minimum-wage laws are a better explanation for unemployment among teenagers than among
college graduates. Teenagers have fewer job-related skills than college graduates do, so their
wages are low enough to be affected by the minimum wage. College graduates' wages
generally exceed the minimum wage.
6) How do unions affect the natural rate of unemployment?

Unions may affect the natural rate of unemployment via the effect on insiders and outsiders.
Because unions raise the wage above the equilibrium level, the quantity of labor demanded
declines while the quantity supplied of labor rises, so there is unemployment. Insiders are those
who keep their jobs. Outsiders, workers who become unemployed, have two choices: either get
a job in a firm that is not unionized, or remain unemployed and wait for a job to open up in the
union sector. As a result, the natural rate of unemployment is higher than it would be without
unions.
7) What claims do advocates of unions make to argue that unions are

good for the economy?
Advocates of unions claim that unions are good for the economy because they are an antidote
to the market power of the firms that hire workers and they are important for helping firms
respond efficiently to workers' concerns.
8) Explain four ways in which a firm might increase its profits by

raising the wages it pays.
Four reasons why a firm's profits might increase when it raises wages are: (1) better paid
workers are healthier and more productive; (2) worker turnover is reduced; (3) the firm can
attract higher quality workers; and (4) worker effort is increased.
9) Using a diagram of the labor market, show the effect of an increase
in the minimum wage on the wage paid to workers, the number of
workers supplied, the number of workers demanded, and the
amount of unemployment.
At the initial minimum wage (m1), the quantity of labor supplied L1S is greater than the
quantity of labor demanded L1D, and unemployment is equal to L1S - L1D. An increase in the
minimum wage to m2 leads to an increase in the quantity of labor supplied to L2S and a
decrease in the quantity of labor demanded to L2D. As a result, unemployment increases as the
minimum wage rises
Which of the following is not a cause of frictional unemployment?
a. the destruction of manufacturing jobs
b. a worker leaving a job to find one with better benefits
c. minimum-wage laws ****
d. unemployment insurance
Suppose there are a large number of men who used to work or seek work who now no longer
do either. Other things the same, this makes
a. the number of people unemployed rise but does not change the labor force.
b. the number of people unemployed rise but makes the labor force fall.
c. both the number of people unemployed and the labor force fall. *****
d. the number of people unemployed fall but does not change the labor force.
If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7
percent, then by definition there is
a. cyclical unemployment amounting to 0.5 percent of the labor force. ***
b. frictional unemployment amounting to 0.5 percent of the labor force.
c. structural unemployment amounting to 0.5 percent of the labor force.
d. search unemployment amounting to 0.5 percent of the labor force.
The natural unemployment rate includes

a. both frictional and structural unemployment. ****
b. neither frictional nor structural unemployment.
c. structural, but not frictional unemployment.
d. frictional, but not structural unemployment.
Which of the following does not help reduce frictional unemployment?
a. government-run employment agencies
b. public training programs
c. unemployment insurance ****
d. All of the above help reduce frictional unemployment.
When a minimum-wage law forces the wage to remain above the level that balances supply
and demand, the result is a
a. shortage of labor and a shortage of jobs.
b. shortage of labor and a surplus of jobs.
c. surplus of labor and a shortage of jobs. ***
d. surplus of labor and a surplus of jobs.

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1) What are the three categories into which the Bureau of Labor

Statistics divides everyone?

3) Is unemployment typically short term or long term? Explain.

4) Why is frictional unemployment inevitable? How might the

6) How do unions affect the natural rate of unemployment?

7) What claims do advocates of unions make to argue that unions are

8) Explain four ways in which a firm might increase its profits by

The natural unemployment rate includes

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