Question

A. What type of unemployment (frictional or structural unemployment) does the policy below target? i. Reducing the generosity of unemployment insurance benefits ii. Implementing government employment agencies to increase accessibility of information about job vacancies iii. Regulating unions to reduce union's impact on wages iv. Increasing public funding to help retrain workers displaced from jobs in declining industries B. Suppose that due to COVID -19, the United States experiences a reduction in productivity - that is an adverse shock to the production function. What happens to the labor demand curve? Briefly explain in words.

Answer 1

Part A

i) Frictional Unemployment

Frictional Unemployment is caused when people quit the job and wait for getting the right type of job as per their requirements in terms of salary, work culture, skillset etc. By reducing unemployment benefits people will become less choosy about jobs and will be ready to accept jobs that are almost close to their expectations, thus reducing frictional Unemployment.

ii) Frictional Unemployment

Frictional Unemployment is also called search and wait Unemployment. It means job seekers wait and search for right opportunity. Government Employment agencies can bridge the gap between jobseekers and employers. These can agencies can provide proper information to the jobseekers about the opportunities available in market and thus vacant positions can be filled speedily, thus reducing frictional unemployment.

iii) Structural Unemployment

Structural unemployment results from inability of labor market to arrive at the market-clearing wage at which the number of workers are just equal to the number of jobs. Major factors that cause wages to stay above the equilibrium level include (a) minimum wage, (b) collective bargaining, (c) efficiency wages etc. If unions can bargain for wages above the market clearing level, they will cause real wage unemployment. In this case reducing the influence of trades unions (or reducing Minimum wages) will help solve this real wage unemployment.

iv) Structural Employment

Structural Unemployment occurs when the skills possessed by the workers become obselete and are no longer demanded by employers, thus rendering them unemployed. By increasing funding to provide proper training to the laid off workers, more workers can be trained to master and acquire new skills as required by the employers in the market, thus reducing Structural Unemployment.