Chapter 7, Problem 1QAP

(a)

To determine

Whether the participation rate in the U.S has remained constant at 60% since 1950 or not.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

The labor force participation rate has risen steadily since 1950. The participation rate in 2006 was 66 per cent of the civilian workforce. Since the 1950s, the participation rate has risen primarily due to the rise of women in the work force. One in three women became a member of the work force in 1950. One in three women is in the workplace today. Thus, the participation in the U.S has increased since, 1950.

(b)

To determine

Whether the flow out and into the employment is very small as compared to the labor force for each month or not.

Answer to Problem 1QAP

The given statement is true.

Explanation of Solution

The estimated number of monthly flows to and from jobs is about 7.8 million. There are about 151.4 million people in the labor force. Therefore, the movement into and out of jobs is roughly 5 percent of the workforce. Even though 7.8 million is a very large amount, flows in and out of jobs are very small compared to the size of the labor market.

(c)

To determine

Whether less than 10% of unemployed people exit unemployment pool each year or not.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

Around 45 per cent of unemployed workers leave unemployment per month on average. In fact, unemployment averages around two to three months. Using figures, the total number of unemployed a month is 6.2 million and the total number of unemployed people who leave unemployment is 2.8 million per month.

(d)

To determine

Whether the unemployment rate is higher in recession and low in expansion or not.

Answer to Problem 1QAP

The given statement is true.

Explanation of Solution

The rate of unemployment is closely tied to expansions and recessions. Unemployment rate appears to be low during expansions and high during recessions. During the 1982 recession, for example, unemployment peaked at 9.7 per cent, which is a very high unemployment rate. By comparison, the unemployment rate in 2000 was about 4%, a relatively low unemployment rate. Thus, the given statement is true.

(e)

To determine

Whether most of the workers are paid reservation wage or not.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

Usually, most workers get paid equals their reservation wage. That is, the majority of workers earn a salary that is high enough that they choose to be working rather than unemployed. Although this can fluctuate slightly during recessions, overall workers usually get paid a salary that exceeds their reservation pay. Thus, the above statement is false.

(f)

To determine

Whether workers who does not belong to union have no bargaining power or not.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

Bargaining power depends on two factors: how difficult it will be to replace the worker, and how hard to find a new job for the worker. When replacing the worker will be very costly, they have plenty of bargaining power because the employer would want to reduce the costs of replacing the worker. If a worker can quickly find a job they have greater bargaining power because they have nothing to lose. They will easily get a new job, if they get fired. Hence, the given statement is false.

(g)

To determine

Whether the best interest of the employers is to pay higher wage then reservation wage or not.

Answer to Problem 1QAP

The given statement is uncertain.

Explanation of Solution

Paying more than the reservation wage depends on the type of job. In general, paying more than a reservation wage for staff would reduce the turnover of the employees. However, in some sectors, such as pre-9/11 airport management, the approach is to recruit staff on their reservation wage and accept a high turnover rate. Hence, the given statement is uncertain.

(h)

To determine

Whether natural rate of unemployment is unaffected by policy change or not.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

The natural unemployment rate is affected by the change in policies. Two changes in policy have a major impact on the natural unemployment rate. Firstly, the rise in unemployment benefits would result in an increase in the natural unemployment rate. Secondly, less strict implementation of antitrust laws would lead to a rise in the natural unemployment rate. Thus, the given statement is false.