Unemployment

Unemployment

Exercise 1: Use the following information and answer the question. Total civil population=250, occupied=150, unemployed=12.

1. Find the labor force
2. How many people are out of the labor force
3. What this the participation level ?
4. what is the unemployment level
5. What is the non-employment rate?

Solution : a) Labor force: 150+12=162 (it is the population that can work) b)250-162=88 (who are they? Babies, sick people, retired, students,..) c) 162/250 (% of people that can/want actually to work) d) 12/162=7.4% e) (250-150)/250=40% (everybody that is not participating).

Exercise 2: Given the efficiency wages theory, what are the effects of an increase in (real) salary W on:

1. on the level of  resignations
2. on productivity

Solution:  a) an increase in the salary makes the job more attractive, thus less people will quit the job.  b) the opportunity cost of losing the job increases, thus a worker will tend to be more productive (and less negligent).

Exercise 3: Explain how the following shocks affect the nominal salary:

1. a drop in P
2. a drop in u
3. a drop in the unemployment benefits

Solution: a) In the short run, no effect because of the sticky wages theory. However, in the medium/long run, this will cause a drop also in the nominal salary. b) Workers have more bargaining power, thus higher wages c) Being unemployed is scarier, thus people are more careful in not losing their job and willing to accept lower wages.

Exercice 4: Assume that W/P=0.5-3u+z. You also know that z=0.5 and μ=0.2. Then:

1. Find the real wage
2. the natural unemployment rate
3. Redo your calculus for a drop in the unemployment benefits from 0.5 to 0.4.
4. What happen if the markup increase from 0.2 to 0.4?
5. Restore the initial assumption: z=0.5. What happen if the firms operate in perfect competition?

Solutions: a) W/P=1/(1+0.2)=0.83 b) 0.5-3(u)+0.5=0.83, thus 1-0.83=3u, u=5.67% c) W/P=0.83 while  0.9-0.83=3u; u=2.33% d) W/P=1/(1.4)=0.71 and u=(0.9-0.71)/3=6.3%. e) PC means that μ=0, thus W/P=1 and 1=1-3u, u=0.

The medium Run

Exercise 5: Using the AS equation explain how each of the following shock affects the price level:

1. An increase in Pe by 5%
2. A drop in Pe by 2%
3. An increase in the price markup
4. An increase in Y

Solutions: To answer this question recall the AS formula: [pic 2]. Where PeF(1-Y/L)=W. Thus: a) the nominal wage increases by 5% and so does P (1:1 relation) b) P decreases by 2% (and so does W) c) increase in prices given a certain level of W. Notice that the increase in markup, leads to a drop in salary and an increase in the natural level of unemployment. As Yn=f(N) and as N=(1-u)L, the natural output level drop! This leads to a drop in the  d) drop in unemployment that strengthen the position of unions and therefore wages increases and so does the P.