Exercises: The labour market and unemployment

Define the economically active population (labour force) and inactive population, and classify: an employed nurse, a Sixth Form student, a retiree, an unemployed person looking for work, and a person caring for their family without seeking paid employment.

Name the four types of unemployment and assign each case to its type: a waiter at a ski resort in summer, a cashier replaced by self-service checkouts, a recent graduate who takes months to find their first job, and a factory worker made redundant during a recession.

The figure shows the labour market of an imaginary country: labour supply and demand, the equilibrium wage, and a minimum wage set above it.

1. a) Read the equilibrium wage and minimum wage from the graph.
2. b) Explain what imbalance occurs when setting the minimum wage above equilibrium.

Define, according to the Labour Force Survey (EPA), who counts as employed, who as unemployed and who as inactive. Give a specific example of each among people you know (real or fictitious) and justify the classification.

What is the activity rate (the active population over the population aged $16$ and over) and why does a country want it to rise? Explain what historical change made it grow so much in Spain in recent decades (the entry of women into paid work).

Distinguish between a permanent contract and a temporary contract. Explain what advantages and disadvantages each one has for the worker and for the firm, and why young people get so many temporary contracts.

What is collective bargaining and who sits at the table (representatives of the workers and of the firms)? Explain what a collective agreement is and name two things it usually regulates (wages, working hours).

What is the national minimum wage, who sets it in Spain and what is it for? Explain in your own words why there is a wage floor even though the market could pay some workers less.

In a region, there are $20.000$ active people and $3.000$ unemployed people.

1. a) Calculate the unemployment rate and the number of employed people.
2. b) If $1.000$ unemployed people stop looking for work and become inactive, what happens to the unemployment rate? Recalculate and comment on the result.

A bicycle factory closes because e-scooters take over the urban market.

1. a) What type of unemployment do its workers experience? Justify your answer.
2. b) Propose an appropriate corrective measure for that type of unemployment and explain how it would work.

Distinguish between active and passive labour market policies and classify these measures: retraining courses for the unemployed, unemployment benefit, youth hiring subsidies, and income support. What is the objective of each set of measures?

In a country there are $20$ million people aged $16$ or over, of whom $12$ million are active and $2$ million are unemployed.

1. a) Calculate the activity rate and the unemployment rate.
2. b) Calculate the number of employed people and explain the relationship between the active, the employed and the unemployed.

A region's unemployment rate falls from $14\ \%$ to $13\ \%$, but that same year $100.000$ people have left the labour force (they stopped looking for work).

1. a) Explain how unemployment can fall without any jobs being created.
2. b) What data would you look at, besides the unemployment rate, to know whether the labour market is really improving (employed, active, social security registration)? Justify each one.

A person takes three months to find their first job after graduating, even though there are vacancies in their sector.

1. a) What type of unemployment are they experiencing and why is it considered almost "physiological" (normal in any economy)?
2. b) Reason why a little of this unemployment can even be a sign of a healthy market (searching for a good match) and what policies reduce it (vacancy information, job portals, careers guidance).

A mining basin closes its last pits: thousands of $50$-year-old workers with highly specialised trades are left without work in an area with no other industries.

1. a) What type of unemployment is this and how does it differ from what a waiter would suffer at the end of the summer?
2. b) Explain why retraining courses are not enough if no companies come to the area, and what complementary measures would be needed (infrastructure, attracting firms, mobility aid).

A welding course for $200$ unemployed people places $60$ of them within six months.

1. a) Is it a success or a failure? Explain what comparison group you would use to find out (how many would have found work without the course?).
2. b) What other data would you ask for to evaluate the policy (quality and duration of the jobs, wages, cost per person placed)?

In a coastal municipality with $12.000$ inhabitants, the unemployment rate rises from $4,5\ \%$ in August to $24,8\ \%$ in January. The Councillor for Employment states: "To put an end to this problem, we do not need to spend money on training or retraining: it is enough for the city council to subsidise tourism businesses so that they do not close in winter."

1. a) Economically refute the councillor's statement by identifying the type of unemployment and analysing the viability, opportunity cost, and sustainability of keeping businesses open without sufficient demand.
2. b) Design an alternative medium-term contingency plan that combines seasonal adjustment measures with diversification into another productive activity. Justify which two labour market indicators you would use to assess whether your plan has been successful after four years.

The debate over the minimum wage: some argue that raising it destroys jobs; others maintain that it improves workers' lives and barely affects hiring.

1. a) Use the labour market model to represent the argument of those who oppose raising it.
2. b) What data would you request to find out which effect dominates in reality? Reason why this debate is empirical and not just theoretical.

Despite the fact that $45\ \%$ of young Spaniards aged $25$ to $29$ hold a higher education degree (above the EU average), the youth unemployment rate doubles the European rate and coexists with business complaints of labour shortages in technical and service sectors.

1. a) Justify why high academic education and high youth unemployment coexist by analysing overqualification, skills mismatch, and contractual duality. Explain the economic mechanism connecting these factors with productivity and labour turnover.
2. b) A policymaker proposes granting a direct allowance of $400\ \text{€}$ per month to any unemployed person under $25$ years old. Predict the effects of this measure on the youth labour force participation rate and the reservation wage, and design an alternative measure based on incentives for training contracts or the school-to-work transition, justifying why it would be more efficient.

Two companies in the logistics sector address the seasonality of their orders in different ways: Company A resorts to very short-term temporary contracts that it terminates as soon as the workload decreases; Company B maintains a permanent workforce and responds to demand peaks with versatile cross-training, flexible working hours, and overtime. A labour reform drastically restricts temporary hiring and increases penalties for its unjustified use.

1. a) Predict the impact of this legal change on Company A regarding its labour productivity, its incentives to invest in human capital, and its average labour cost in the short and long term. Justify your answer by contrasting the incentives of the company and workers with those of Company B.
2. b) An analyst states: "The reform is an undeniable success because the temporary employment rate has dropped by $10$ percentage points in two years." Argue what other data and indicators (such as the average duration of contracts, the use of probationary periods, or total hours worked) you would request to verify whether real stability has been achieved or if precariousness has shifted toward arrangements such as permanent seasonal/discontinuous contracts (fijos discontinuos).

In a fictitious labour market, the equilibrium wage would be $6\ \text{€}$ an hour. A minimum wage of $8\ \text{€}$ is set: at that level, firms demand $1$ million workers and $1,3$ million people want to work.

1. a) Quantify the imbalance and represent it with the labour market model.
2. b) Set out the arguments of defenders and critics of the minimum wage with these data, and reason what elasticities the real effect on employment depends on.
3. c) What empirical evidence would you ask for to settle the question?

Look at the following labour market data: the unemployment rate for people without post-compulsory secondary education is $18,2\ \%$, for Advanced Vocational Training (Formación Profesional de Grado Superior) graduates it is $8,1\ \%$, and for university graduates it is $7,4\ \%$. However, $30\ \%$ of university graduates work in jobs that do not require higher education qualifications, and the average entry wage in their first job is barely $5\ \%$ higher than that of advanced vocational training technicians.

1. a) Interpret these data and refute the statement: "Pursuing a university degree is always the option that guarantees the best labour market integration and economic return compared to any training alternative." Support your reasoning using the concepts of opportunity cost, overqualification, and human capital theory versus signalling.
2. b) Design a public policy intervention aimed at young people at risk of early school leaving to facilitate their entry into sectors with unfilled vacancies. Justify the economic incentives you would offer to both students and hiring companies, and point out a possible negative externality or disincentive that should be prevented in its implementation.

In a fictional country, after a crisis phase, the Government announces that "the official unemployment rate has dropped from $15,1\ \%$ to $12,3\ \%$ in one year, demonstrating a strong employment recovery." However, the total volume of hours worked in the economy has fallen by $1,8\ \%$, social security contribution revenues have stagnated, and surveys show an increase in households facing serious difficulties making ends meet.

1. a) Justify how it is mathematically and economically possible for the unemployment rate to fall while the total volume of hours worked and wage income decrease. Analyse at least two situations (such as involuntary part-time employment or the discouraged worker effect) that explain this discrepancy without being reflected in an increase in official unemployment.
2. b) Design an alternative quantitative indicator of "labour force underutilisation" that overcomes the limitations of the standard unemployment rate. Specify which variables you would include in the numerator and the denominator, and predict which employment policy decisions would change if the authorities used your indicator instead of the official rate.

Faced with a recession that shifts the demand for goods to the left, if the labour market operated as a competitive market for ordinary goods, wages would immediately fall until equilibrium was restored, preventing involuntary unemployment. In economic reality, strong "downward wage rigidity" is observed, and firms usually resort to mass layoffs.

1. a) Justify why a firm suffering a drop in revenue does not usually find it worthwhile to apply an across-the-board wage cut of $10\ \%$ to the entire workforce, preferring instead to lay off $10\ \%$ of its employees. Develop your answer relying on efficiency wage theory (effort, adverse selection, and work morale) and collective bargaining constraints.
2. b) Graphically represent this demand shock with sticky wages in the labour supply and demand model and interpret the adjustment through quantities (the resulting unemployment). Predict how the magnitude of unemployment will differ between a country with centralised collective bargaining agreements and strict wage indexation clauses and one with decentralised firm-level bargaining.