Queens College, CUNY - ECON 201

CHAPTER 7: The Labor Market, Wages, and Unemployment

MULTIPLE CHOICE

1)The quote “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours” is attributed to:

1. 1. Karl Marx                                                d.   Harry S Truman
   2. Franklin D. Roosevelt                              e.   Alan Greenspan
   3. John Maynard Keynes

2. Over the course of his or her lifetime, the average American worker will spend    hours on the job.

a.   40,000                                                     d. 100,000

b.   1 million                                                 e.   35,000

c.                                90,000

3. The labor market determines:
   1. the equilibrium wage
   2. the equilibrium quantity of employment
   3. the equilibrium wage and the quantity of employment
   4. the number of unemployed
   5. All of these answers are correct.

4. If the U.S. real output is growing, and labor income accounts for about two-thirds of this:
   1. the unemployment rate is falling
   2. on average, capital is getting poorer over time
   3. income inequality is decreasing
   4. on average, workers are getting richer over time
   5. we are not getting any better off

5. Over the past 50 years or so:
   1. the employment-population ratio always has been rising
   2. the employment-population ratio generally has been falling
   3. the unemployment-population ratio generally has been rising
   4. the employment-population ratio generally has been rising
   5. None of these answers are correct.

6. Over the past 50 years or so:
   1. the male employment-population ratio always has been rising

1. 2. the female employment-population ratio generally has been falling
   3. the male employment-population ratio generally has been rising
   4. the female employment-population ratio generally has been rising
   5. None of these answers are correct.

Refer to the following table to answer the next six questions.

                                                    Jan 2012        Jan 2013 Civilian noninstitutionalized

7. Consider Table 7.1. In January 2012, the unemployment rate was:

8. Consider Table 7.1. In January 2013, the unemployment rate was:
   1. 92.1 percent                                            d. 57.2 percent
   2. 8.6 percent                                              e.   7.9 percent
   3. 5.0 percent

11. Consider Table 7.1. Between January 2012 and January 2013, the employment population ratio

                to/at              .

1. 1. fell; 58.5 percent
   2. rose; 8.3 percent

1. 3. stayed more or less the same; 58.6 percent
   4. fell; 7.9 percent
   5. rose; 58.6 percent

12. Consider Table 7.1. Between January 2012 and January 2013, the unemployment rate   and the labor participation rate                 (rounded to 1 decimal point).
    1. rose; fell                                                  d. fell; fell
    2. rose; rose                                                e.   Not enough information is given.
    3. fell; was about the same

13. Generally, during a recession:
    1. inflation rises
    2. the natural rate of unemployment rises
    3. the employment rate rises
    4. the unemployment rate rises
    5. there is no change in the unemployment rate

Refer to the following figure to answer the next five questions.

(Source: U.S. Bureau of Labor Statistics)

14. Using Figure 7.1, which of the following year(s) are the trough of a recession?

15. Using Figure 7.1, which of the following year(s) are the trough of a recession? a.   1980                                                        d. 2010

b.   1989                                                        e.   All of these answers are correct.

c.                                2001

16. Using Figure 7.1, which of the following year(s) are the trough of a recession? a.   2001                                                        d. 2012

b.   1983                                                        e.   All of these answers are correct.

c.                                1979

17. Using Figure 7.1, identify the year of the peak of the boom: a.   1982                                                        d. 2010

b.   1992                                                        e.   1990

c.                                2005

18. Given the unemployment rate data depicted in Figure 7.1, identify the year of the peak of the boom: a.                                                        1993       d. 2010

b.   2001                                                        e.   1992

c.                                1983

Refer to the following figure when answering the next two questions.

(Source: OECD and Federal Reserve Economic Data, Federal Reserve Bank of St. Louis)

19. Given the unemployment rate data depicted in Figure 7.2, identify the year of the peak of the boom: a.                                                        1989       d. 2009

b.   1986                                                        e.   1972

c.                                1992

20. Given the unemployment rate data depicted in Figure 7.2, identify the year of the trough of a recession:

a.   1991                                                        d.   1973

b.   2006                                                        e.   1993

c.                                1981

21. The unemployment rate is defined as:
    1. the ratio of all adults not working to the total population
    2. the ratio of unemployed to employed members of the labor force
    3. the ratio of unemployed members of the labor force to the total labor force
    4. the ratio of discouraged workers to the total population
    5. the ratio of unemployed members of the labor force to the total population

22. The net change in employment is:
    1. new jobs
    2. the difference between job creation and job destruction
    3. called job creation
    4. the unemployment rate
    5. the labor force participation rate

23. Historically, for most Americans, the length of unemployment is:
    1. usually more than one year                    d. indefinite
    2. usually more than three months            e.   less than one week
    3. usually less than three months

24. Most of the total weeks of lost work are accounted for by:
    1. retirees
    2. people who are discouraged workers
    3. people who are incarcerated
    4. people who are unemployed for a long period of time
    5. None of these answers are correct.

25. A drawback of unemployment benefits is that:
    1. they increase job destruction
    2. they cost taxpayers over 50 percent of their incomes
    3. the payments are too large

1. 4. they always lengthen the time spent unemployed
   5. they give workers a disincentive to find work

26. The demand for labor curve is:
    1. downward sloping
    2. derived from the firm’s profit maximization problem
    3. equal to the marginal product of labor
    4. derived from the marginal product of labor
    5. All of these answers are correct.

27. The labor demand curve slopes downward because:
    1. wages are inflexible
    2. wages are higher when demand falls
    3. of the diminishing marginal product of labor
    4. of the income effect
    5. None of these answers are correct.

28. The explanation for the upward sloping supply of labor curve is that:
    1. the marginal product of capital is positive
    2. as the wage rises, the opportunity cost of leisure rises, so people work more
    3. as the wage rises, people want to work less
    4. the marginal product of labor is diminishing
    5. None of these answers are correct.

29. In the labor market, the intersection of the supply and demand for labor determines:
    1. inflation and the real wage
    2. the wage and the population, N
    3. the interest rate and the unemployment rate
    4. the wage and the employment-population ratio, L/N
    5. the wage and the number of discouraged workers

Refer to the following figure when answering the next five questions.

Figure 7.3: Labor Market

30. In the labor market depicted in Figure 7.3, an increase in the income tax would result in: a.

a shift in labor supply from  to

b.

a shift in labor demand from  to

c.

a shift in labor demand from  to

d.

a shift in labor supply from   to

e.   None of these answers are correct.

31. In the labor market depicted in Figure 7.3, an increase in the income tax would result in: a.

a shift in labor supply from  to

b.

a shift in labor demand from  to

c.

a shift in labor demand from  to

4. no change in either the labor supply or demand curves
5. None of these answers are correct.

32. In the labor market depicted in Figure 7.3, an increase in oil prices: a.

shifts labor demand from  to

b.

shifts labor supply from   to

c.

shifts labor demand from  to

4. produces no change in either the labor supply or demand curves
5. None of these answers are correct.

33. In the labor market depicted in Figure 7.3, a decrease in labor regulation:
    1. shifts labor supply from   to

b.

shifts labor demand from  to

c.

shifts labor demand from  to

d.

shifts labor supply from   to

e.   None of these answers are correct.

34. In the labor market depicted in Figure 7.3, investment in new physical capital: a.

shifts labor supply from   to

b.

shifts labor supply from   to

c.

shifts labor demand from  to

d.

shifts labor demand from  to

e.   None of these answers are correct.

35. If the income taxes on wages increase, the labor supply curve will shift left, but what happens to the unemployment rate?
    1. It unambiguously falls because the labor participation rate changes.
    2. It unambiguously falls because some workers drop out of the workforce.
    3. It unambiguously rises because some workers drop out of the workforce.
    4. It is ambiguous because some workers drop out of the workforce.
    5. None of these answers are correct.

36. An increase in the income taxes on wages results in:
    1. the labor demand curve shifting left
    2. the labor supply curve shifting left
    3. the labor supply and demand curves shifting left
    4. the labor demand curve shifting right
    5. neither the labor supply nor demand curves shifting

37. A decrease in the income tax will result in:
    1. the labor demand curve shifting right
    2. the labor demand curve shifting left
    3. the labor supply curve shifting left and the labor demand curve shifting right
    4. the labor supply curve shifting right
    5. neither the labor supply nor demand curves shifting

38. An increase in labor regulations results in:
    1. the supply curve shifting left

1. 2. the labor demand curve shifting left
   3. the labor supply curve shifting left and the labor demand curve shifting right
   4. the labor demand curve shifting right
   5. neither the labor supply nor demand curves shifting

39. Because of the dynamics of the workforce, for example, whether workers become discouraged when there are changes in the economy:
    1. the unemployment rate is not necessarily an accurate gauge of the labor market
    2. the unemployment rate is a precise gauge of the labor market
    3. tone should only consider the employment population ratio rather than the unemployment rate
    4. at times the labor demand curve is upward sloping
    5. None of these answers are correct.

40. Any institutional fixed wage set above the equilibrium wage is called:
    1. the market wage                                    d. a real rigidity
    2. the minimum wage                                e.   a wage ceiling
    3. a wage rigidity

41. Wage rigidity:
    1. helps the labor market achieve equilibrium
    2. prevents the capital market from realizing equilibrium
    3. prevents the labor market from realizing equilibrium
    4. prevents unemployment
    5. None of these answers are correct.

42. If the minimum wage is set below the equilibrium market wage:
    1. it increases unemployment
    2. it is effective and reduces unemployment
    3. it equals the black market wage
    4. it is lower than firms are willing to pay for labor
    5. None of these answers are correct.

43. One consequence of wage rigidity is:
    1. lower rates of unemployment                d. a lower unemployment rate
    2. less labor market volatility                     e.   None of these answers are correct.
    3. labor market stability

Refer to the following figure when answering the next two questions.

44. Consider the labor market depicted in Figure 7.4.

Wage,  , is called               and                unemployment.

1. 1. a wage ceiling; does nothing to              d. the market wage; increases
   2. a wage rigidity; increases                       e.   a wage rigidity; decreases
   3. the market wage; does nothing to

45. Consider the labor market depicted in Figure 7.4. Wage,                         , is called      and .
    1. wage rigidity; reduces unemployment
    2. wage rigidity; decreases labor market volatility
    3. a flexible wage; increases labor market volatility
    4. wage rigidity; increases labor market volatility
    5. the market wage; increases unemployment

46. The rise in the employment-population ratio largely is due to:
    1. a shrinking U.S. population
    2. more teenagers entering the labor force
    3. more women entering the labor force
    4. an increase in immigrant workers
    5. It is unexplained.

47. The cause(s) of increased female participation in the labor market is/are:
    1. changing social norms
    2. technological changes in managing fertility
    3. increased discrimination
    4. the baby boom
    5. All of these answers are correct.

48. The gradual rise in unemployment in the 1960s and 1970s, in part, is explained by:
    1. the Vietnam War
    2. increased female participation in the labor force
    3. the baby boomers
    4. All of these answers are correct.
    5. None of these answers are correct.

49. The “natural rate of unemployment” is the unemployment rate that would prevail:
    1. during changes in the business cycle
    2. if the economy were in neither a boom nor a recession
    3. if people voluntarily leave work
    4. during seasonal changes in the economy
    5. if the unemployment rate were zero

50. The natural rate of unemployment is the unemployment rate that would prevail:
    1. if inflation is zero
    2. if there are no discouraged workers
    3. if the economy were in neither a boom nor a recession
    4. during seasonal changes in the economy
    5. if the unemployment rate is zero

51. The natural rate of unemployment is decomposed into:
    1. cyclical and frictional unemployment
    2. structural and seasonal unemployment
    3. structural and frictional unemployment
    4. seasonal and frictional unemployment
    5. structural, frictional, and seasonal unemployment

52. Frictional unemployment is the unemployment that results from:
    1. workers losing jobs during recession
    2. workers losing jobs during seasonal changes
    3. workers changing jobs in a dynamic economy
    4. prevailing labor market institutions
    5. workers leaving the labor force

53. Structural unemployment is the unemployment that results from:
    1. workers leaving the labor force
    2. workers changing jobs in a dynamic economy
    3. workers losing jobs during seasonal changes

1. 4. workers losing jobs during recession
   5. prevailing labor market institutions

54. Cyclical unemployment is the unemployment that results from:
    1. prevailing labor market institutions
    2. workers losing jobs during recession
    3. workers changing jobs in a dynamic economy
    4. workers losing jobs during seasonal changes
    5. workers leaving the labor force

55. Unemployment is given by             and the natural rate of unemployment is        .
    1. Frictional + Structural + Cyclical unemployment; Frictional + Structural unemployment
    2. Frictional + Structural – Cyclical unemployment; Frictional + Structural unemployment
    3. Frictional + Cyclical unemployment; Frictional + Cyclical unemployment
    4. Structural + Cyclical unemployment; Structural unemployment
    5. Cyclical unemployment; Frictional + Structural unemployment

56. Conventional wisdom is that most of the natural rate of unemployment is due to:
    1. bad fiscal policy                                      d. structural unemployment
    2. frictional unemployment                        e.   bad monetary policy
    3. cyclical unemployment

Refer to the following table when answering the next three questions.

57. Consider the data in Table 7.2. Using the “bathtub model” of unemployment, in 2015 the natural rate of unemployment is:
    1. 19.6 percent                                            d. 0.2 percent
    2. 10.0 percent                                            e.   90.9 percent
    3. 9.1 percent

58. Consider the data in Table 7.2. Using the “bathtub model” of unemployment, in 2016 the natural rate of unemployment is:
    1. 14.3 percent                                            d. 85.7 percent

1. 2. 14.6 percent                                            e.   16.7 percent
   3. 0.2 percent

59. Consider the data in Table 7.2. In           the natural rate of unemployment was the higher of the two years at              percent.

a.   2016; 14.3                                               d. 2016; 10

b.   2015; 9.1                                                 e.   2015; 14.3

c.                                2015; 16.7

60. One possible explanation for a high steady-state level of unemployment is:
    1. the existence of a small number of institutional restrictions
    2. a shrinking labor force
    3. perfectly flexible wages
    4. a high job separation rate
    5. a rising job finding rate

61. In the “bathtub model” of unemployment, in the steady state:
    1. employment is constant
    2. the change in unemployment is zero
    3. the natural rate of unemployment rate is zero
    4. cyclical unemployment equals frictional unemployment
    5. the job separation rate is zero

62. In the “bathtub model” of unemployment, the key equation is:

a.                                                                              d.

b.                                                                               e.       

c.                                

63. A key reason that unemployment in the United States is so low compared to most of Europe is because of:
    1. no cyclical unemployment                      d. low structural unemployment
    2. low frictional unemployment                 e.   no structural unemployment
    3. high structural unemployment

64. In the 1960s, European unemployment rates were        as/compared to the United States and now are               .

1. 1. much higher; much higher                     d. about the same; much lower
   2. much lower; about the same                  e.   None of these answers are correct.
   3. much lower; much higher

65.                 historically has generally had the lowest unemployment rate since 1960.
    1. The United States                                    d. The United Kingdom
    2. Japan                                                       e.   Germany
    3. France

66. Europe’s relatively high unemployment rates can be attributed to:
    1. adverse shocks
    2. inefficient labor market institutions
    3. strong labor unions
    4. generous unemployment insurance
    5. All of these answers are correct.

67. Of the richest countries,            work the most hours per week.

68. According to data presented in the text, the country with the lowest number of working hours per week from 1993–1996 was:
    1. Italy                                                         d. the United Kingdom
    2. Japan                                                       e.   the United States
    3. Canada

69. Which of the following is not a potential reason for offering a wage above the market wage?
    1. A higher wage contributes to improved worker health.
    2. A higher wage makes the opportunity cost of losing a job higher, thus reducing “shirking.”
    3. It reduces moral hazard.
    4. Higher wages attract more productive workers.
    5. Higher wages signal prestige and thus attract workers from elite schools.

70. What was the amount that            offered to his workers per day?
    1. Andrew Carnegie; $1                              d. Franklin D. Roosevelt; $10
    2. Donald Trump; $500                               e.   John D. Rockefeller; $20
    3. Henry Ford; $5

71. The idea that you value receiving $1,000 today more than in 10 years in the future is called:
    1. real rate of return                                  d. utility maximization
    2. compound interest                                  e.   intertemporal substitution
    3. present discounted value

72. The equation                                 means you:
    1. would prefer to receive $386 today rather than $1,000 in 10 years
    2. are indifferent between receiving $386 today and $1,000 in 10 years
    3. would prefer to receive $1,000 in 10 years rather than $386 today
    4. are indifferent between receiving $386 today and $1,000 in 100 years
    5. Not enough information is given.

73. You win the lottery, which pays $1 million in 20 annual $50,000 payments. Your friends ask how much that would be if you received a single lump sum payment today. You do not have your calculator, but you show them the following equation to help them solve it themselves, assuming the interest rate is 10 percent:

a.                      d. 

b.                                                                   e.  

c.                                

74. Consider the simplified payment system for the victims of 9/11:

• The family of a 65-year-old service worker earning $10,000 a year receives $300,000 in compensation.
• The family of a 30-year-old bond trader earning $175,000 a year receives $4.35 million.

Which statement most accurately describes the difference in the payments between the service worker and the bond trader?

1. 1. The present value of the bond trader’s lifetime income is greater than the service worker’s.
   2. Because of her age, the bond trader had less savings to rely on, so her family received more compensation.
   3. The future value of the bond trader’s lifetime income is less than the service worker’s.
   4. Such a discrepancy in compensation would never be the case.
   5. None of these answers are correct.

75. By 2005, the college wage premium was about         than the wage of the typical worker with a high school education.
    1. 50 percent more                                     d. 90 percent more

1. 2. 10 percent more                                     e.   None of these answers are correct.
   3. 100 percent more

76. Beginning in              , the wage premium began           .
    1. 1980; slowing down                                d. 1970; accelerating
    2. 1980; accelerating                                  e.   1970; rising
    3. 1963; trending down

77. The percentage of total hours worked by the supply of college-educated workers compared to the percentage of total hours worked by high school-educated workers has been:
    1. constant
    2. climbing steadily to about 20 percent
    3. falling steadily to about 50 percent
    4. climbing steadily to about 50 percent
    5. None of these answers are correct.

Refer to the following figure when answering the next four questions.

78. Consider Figure 7.5. Given what we know about the number of hours worked by college graduates and the wage premium received by college graduates, which equilibrium in the figure characterizes these empirical observations, on average?
    1. d.

the intersection of   and                               the intersection of   and

1. 2. e.   None of these answers are correct.

the intersection of   and

c.

the intersection of   and

79. Consider Figure 7.5. Given what we know about the difference between college- and high school educated-workers, which equilibrium characterizes the college graduate experience, on average?
    1. d.

the intersection of   and                               the intersection of   and

1. 2. e.   None of these answers are correct.

the intersection of   and

c.

the intersection of   and

80. Consider Figure 7.5. If the demand curve for college graduates is characterized by          , which of the following describes why the demand for labor for college graduates is higher than that for high school

students, characterized by ?

1. 1. There is a growing number of college graduates.
   2. There are fewer college graduates than high school graduates.
   3. College graduates have a higher marginal product.
   4. College graduates are smarter than high school graduates.
   5. None of these answers are correct.

81. Consider Figure 7.5. If the demand curve for college graduates is characterized by          , which of the following is a reason why the demand for labor for college graduates is higher than that for high

school students, characterized by ?

1. 1. skill-based technological change
   2. low saving rates
   3. fewer college graduates than high school graduates
   4. a growing number of college graduates
   5. specialization

82. According to data presented in the text, the country with the highest degree of income inequality in 2010 was:
    1. the United Kingdom                                d. France
    2. the United States                                    e.   Italy
    3. Sweden

83. According to the study conducted by Piketty and Saez, the rise in income inequality in recent decades has been because:
    1. of the rise of the “service” economy
    2. globalization has exported manufacturing jobs to developing countries
    3. of increased compensation for CEOs
    4. of lower borrowing costs
    5. of rising capital income

TRUE/FALSE

1. Unemployment due to institutional frictions is called structural unemployment.

2. Since the end of World War II, the percentage of women in the workforce has been falling.

3. If the number of employed is 145,926, the number of unemployed is 6,849, and the number of discouraged workers is 77,676, the unemployment rate is about 4.5 percent.

4. If the civilian noninstitutionalized population is 230,108, the number of employed is 145,926, the number of unemployed is 6,849, and the number of discouraged workers is 77,676, the unemployment rate is about 3.0 percent.

5. Unemployment generally falls during economic booms.

6. Unemployment due to workers shuffling from one job to the next is called cyclical unemployment.

7. The average unemployment benefit of an American worker is about $300 per week and lasts 26 weeks.

8. Large unemployment benefits give workers an incentive to find work.

9. For most Americans, the length of unemployment is usually less than three months.

10. The labor demand curve is derived from the marginal product of labor.

11. When a firm purchases more capital, ceteris paribus, the demand for labor will fall.

12. An increase in the income tax causes the labor demand curve to shift inward.

13. The supply of labor curve slopes upward because, with a higher wage, the opportunity cost of leisure rises.

14. Wage rigidity decreases labor market volatility.

15. If the minimum wage is set below the equilibrium wage, it will have no effect on unemployment.

16. Of the richest countries, the Japanese spend more hours working than any other country’s workers.

17. The idea that you value receiving $1,000 today more than 10 years in the future is called compound interest.

18. The equation

means that you would prefer receiving $621 today rather than $1,000 in five years.

19. In 2005, the wage premium for a college-educated worker was about 50 percent above that of a high school–educated worker.

20. One explanation for the college wage premium is that demand for skill-based knowledge is rising.

21. The unemployment rate in Europe has always been higher than the rate in the United States.

22. In the “bathtub model” of unemployment, the job finding rate equals the job separation rate.

23. The natural rate of unemployment is equal to frictional plus cyclical unemployment.

NOT: It is equal to frictional plus structural unemployment.

24. The natural rate of unemployment is equal to frictional plus structural unemployment.

25. According to the text, the country with the highest level of income inequality is France.

SHORT ANSWER

Figure 7.6: Labor Force Participation Rate: 2000–2012

(Source: U.S. Bureau of Labor Statistics)

1. Consider the following data:

For each period:

1. 1. Calculate the labor participation rate.
   2. Calculate the unemployment rate.
   3. Calculate the employment population ratio.
   4. What is the number of discouraged workers?
   5. Comment on your results.
   6. Consider Figure 7.6 above. What might explain the decline in the labor participation rate from 2000 to 2012?