1. Explain the reasoning behind and give an example of the following three possible explanations for unemployment:
(a) Efficiency wages
(b) structural unemployment
(c) frictional unemployment
2. Suppose that initially the Pennsylvania economy is in equilibrium with no unemployment: L s = -1,000,000 +200w and L d = 19,000,000 - 300w, where w is annual wages and E is employment. Then structural unemployment arises because the demand for labor falls in Pennsylvania but the wage is inflexible downward and no one migrates out-of-state. If labor demand falls to Ld' = 18,000,000 - 300w, how many workers will be unemployed in Pennsylvania? What is the unemployment rate?
3. Suppose the supply curve for labor in a competitive industry is given by L s = 10 + w and the demand curve for labor is L d = 40 - 4w. What is the equilibrium wage and employment? What is the unemployment rate? Suppose now that all firms pay an efficiency wage of $8/hr. How many workers lose their jobs? What is the increase in the size of the labor force? What is the increase in the labor force participation rate? What is the new unemployment rate?
4. Two individuals, Ms. S and Ms. T, just graduated from college and are looking for jobs. Both individuals have only limited amounts of savings. As a result, their reservation wages are identical. However, Ms. S had the opportunity to take this class, so her skills are superior to those of Ms. T. Answer the following questions, providing graphs to demonstrate what is occurring where appropriate.
(a) How does the expected duration of unemployment compare across the two individuals?
(b) How does the wage each individual expects to receive compare across the two individuals?
(c) Once each has begun working, we observe that Ms. T is at a higher-paying job. How can you (or can you?) reconcile these facts with the job search model from class?
5. If children increase the reservation wage of women (since it is only worthwhile to work if wages exceed the cost of childcare), what is the predicted effect of children on the duration of job search and expected wage once employed for women with young children? If the government decides to subsidize child care, lowering the cost of child care and thereby lowering the reservation wages of women with young children, what effect would the subsidy have on the duration of job search and expected wage once employed compared to the world with no subsidy?
6. If white workers in the US have access to better job search information (e.g., due to greater internet access or access to other job networks) than minorities, does this constitute one possible explanation of the racial earnings gap? Explain.
7. Is the following assertion true, false, or uncertain? "Increasing the level of unemployment benefits will prolong the average length of unemployment spells. Hence, a policy of raising UI benefits is not socially desirable." Explain.
8. Suppose that unemployment insurance system is structured such that Bmin = 200, Bmax = 500, and B = 100 + 0.5w in between, where w is the previous weekly wage and B is the level of weekly UI benefits. Graph this benefit formula and calculate the benefits and replacement rates for workers who earned $100, $500, and $2000 in the last week of working.
9. Spector (2015) discusses the theoretical predictions regarding partial unemployment insurance for part-time workers seeking full-time employment on the number of part-time employed. Explain.
10. Suppose that labor demand for burger flippers at fast food restaurants in a small city is Ld = 300 -20w, where E is the number of workers and w is the hourly wage. The equilibrium wage is $4/hr. The government, however, enacts a binding minimum wage of $5/hr. (a) How does the minimum wage affect employment in these fast food restaurants? Show graphically, as well as estimate the effects on employment in the fast food sector. (b) Suppose that in the city above there is a sector to which the minimum wage law does not apply. In this sector, Ls = -100 + 80w and Ld = 300 - 20w before the passage of the minimum wage law. Suppose that all workers who lose their job due to the minimum wage legislation seek work in the uncovered sector. What happens to the wage and employment level in the uncovered sector? Show graphically and explain.
11. In the reading by Kuhn (2013), he discusses one reason why the rise in unemployment due to the Great Recession may understate the true decline in the economy relative to prior recessions. What is the reason?