Chapter 13, Problem 6MCQ

To determine

The question requires us to determine the factor which generates structural unemployment.

Explanation of Solution

Generally, the government sets minimum wage laws and efficiency wages above the equilibrium wage rate. The higher wages in both situations cause the employers to demand fewer workers and at the same time, few workers who have higher skills will be bound to get the wage set by the government. Thus, structural unemployment in the market will increase.

Labor unions generate structural unemployment in the market. In many cases, unions are able to negotiate greater compensation from employers on behalf of all of a company's employees than the individual negotiation could have done. The goal of this procedure, collective bargaining, is to shift the balance of bargaining power more in favor of employees and away from employers. So, in the end, employers have two options, one is to raise the wage, and the second is to replace the skilled worker with workers who are ready to work at lower pay. So, such unions generate structural unemployment in the market because by threatening businesses with a labor strike, or a collective refusal to work, labor unions are able to bargain more favorable terms. For businesses that struggle to find replacements for striking workers, the prospect of a strike can have highly negative effects.

Generally, an improvement in technology will have two impacts on the labor market:

1. Firms will replace the existing workers with skilled workers
2. Firms will provide training for new technology to the existing workers

The structural unemployed will increase due to the technological improvement in the economy.

Therefore, minimum wage law, new technology, efficiency wage, and labor unions lead to higher structural unemployment in the economy.

Option “e” is correct.

Economics Concept Introduction

Structural unemployment is the unemployment that results when workers available for work lack the skills required for the job, or when the number of people seeking jobs is more than the jobs available in the labor market at the given wage rate.