CHAPTER 21

UNEMPLOYMENT AND THE PHILLIPS CURVE

Grading
* straightforward questions & definitions
** challenging questions
*** more challenging questions

MULTIPLE CHOICE QUESTIONS

1. People leave the labour force when they (*)

a. find employment.
b. become unemployed.
c. retire.
d. work in the informal sector.
e. All of the above

2. Which of the following statements is true? In South Africa (*)

a. rising unemployment has been associated with increased foreign competition.

b. school-leavers, who cannot find employment, qualify for unemployment
benefits.
c. most unemployment is frictional unemployment.
d. all unemployment is voluntary.
e. there is a negative correlation between unemployment and crime.

3. If a country’s rate of unemployment increases then we can conclude that (**)

a. the country is experiencing jobless growth.

b. no new jobs are being created.
c. GDP growth must be falling.
d. the proportion of people of working age who want employment and who
cannot find employment is increasing.
e. all of the above are true.

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4. During an economic downturn, sales fall and some workers lose their jobs. This
unemployment is referred to as (*)

a. seasonal unemployment.
b. frictional unemployment.
c. cyclical unemployment.
d. structural unemployment.
e. technological unemployment.

5. Simon resigns his job as an economist in Durban and moves to Port Elizabeth to
be closer his parents. It takes Simon three months to find new employment as an
economist in Port Elizabeth. During these three months, Simon was (**)

a. structurally unemployed.
b. seasonally unemployed.
c. cyclically unemployed.
d. casually unemployed.
e. frictionally unemployed.

6. Which of the following situations describe structural unemployment? (**)

i. Jenny is qualified as an economist, but cannot find employment

because employers prefer to hire male economists.
ii. Joseph used to work in a gold mine and lost his job after the price
of gold fell and the mine closed.
iii. Jo is a typist and cannot find employment because she does not
know how to use a word processor (personal computer).
iv. Jerry lives in Durban and cannot find work as a ski instructor.
v. Jim can only find work as a tourist guide on the Cape Wine Route
during the summer months.

a. i, ii and iii
b. i, ii, iii and iv
c. ii, iii and iv
d. i, iv and v
e. i, ii and iv

7. Reasons on the demand-side of the labour market for increasing unemployment

in South Africa could include (**)

i. an increase in population growth.

ii. an increase in the capital intensity of production.

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 iii. an increase in immigration.
iv. a decrease in the production of goods and services.
v. an increase in the cost of employing labour.

a. i, iii and v
b. i, ii and iv
c. ii, iv and v
d. ii and iv
e. i and iii

8. Which of the following might be expected to generate employment? (**)

a. Economic growth that is capital intensive

b. Higher taxes for small businesses
c. An increase in the wage rate, ceteris paribus
d. A fall in the productivity of workers
e. The promotion of exports and investment

9. Which of the following would not be expected to generate employment? (**)

a. Easier access to credit for small business

b. Public works programmes
c. An increase in imports
d. An increase in the labour intensity of production
e. A decrease in the relative price of labour

10. In an industry, if wages increase more than the productivity of workers increases,
we would expect (**)

a. an upward pressure on prices.

b. a decrease in unemployment.
c. investment in the industry to increase.
d. costs of production to fall.
e. the demand for labour to rise.

11. A rightward shift of the Phillips curve (**)

a. indicates that the trade-off between inflation and unemployment has become
less severe.
b. is associated with deflation.
c. might be the result of a decrease in the price of imported capital goods.
d. indicates an expansion in economic output.

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 e. indicates that every level of inflation is associated with more unemployment
than before.

12. Stagflation refers to (*)

a. stagnant prices.
b. hyperinflation.
c. the trade-off between inflation and unemployment.
d. rising inflation accompanied by rising unemployment.
e. jobless growth.

13. An incomes policy (*)

a. is a supply-side response to the problem of inflation.

b. seeks to control inflation by reducing or controlling production costs.
c. is usually associated with the agreement from trade unions to link wages to
productivity measures.
d. is usually associated with calls to firms to limit their profit margins.
e. is characterised by all of the above.

14. The expanded definition of unemployment in South Africa includes those people
who (**)

a. do not work full time.

b. are available for employment but who are not actively seeking employment.
c. do not earn a wage above the minimum wage.
d. work in the informal sector.
e. a and b above.

15. In South Africa, the strict rate of unemployment is different from the broad rate of
unemployment because the strict rates excludes (**)

a. people working in the informal sector.

b. people who are involuntarily unemployed.
c. people who work in subsistence agriculture.
d. discouraged work-seekers who are not actively looking for work.
e. all of the above.

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DISCUSSION QUESTIONS

1. a. Discuss, using an appropriate diagram or diagrams, the trade-off between

unemployment and inflation.
b. If you could participate in economic policy-making in South Africa, which of
these two economic problems, inflation or unemployment, would you prioritise
and why? In your response, include a discussion of the costs of both
unemployment and inflation.

2. a. Briefly describe the distribution of unemployment in South Africa.

b. What kinds of monetary and fiscal policies could be introduced to reduce
unemployment?
c. Why would we expect these policies to have inflationary consequences?
Illustrate your answer diagrammatically.

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 Chapter 22: Unemployment and the Phillips curve

ANSWERS TO MULTIPLE CHOICE QUESTIONS

1. c
The labour force consists of all people of working age (ages 15 to 64) who are
working or who want to work. It therefore includes people working in the informal
sector, and the unemployed, but it excludes people who have retired. (p. 562)
2. a
Increased foreign competition has been associated with job losses in South Africa.
Structural unemployment benefits in South Africa are limited to workers who have
contributed to unemployment schemes, therefore, school-leavers do not qualify.
Frictional unemployment is unavoidable. Of greater concern is structural
unemployment. The correlation between unemployment and crime is positive. (pp.
564–565)
3. d
An increase in the rate of unemployment means an increase in the proportion of the
working population who wanted to work but who would not find employment. No
information is provided in the question about economic growth, so it is not possible to
make any conclusions about the nature of this growth, whether it is increasing or
decreasing, and whether or not it is associated with an increase in employment.
4. c
Cyclical unemployment, also known as demand-deficiency unemployment, increases
during economic slowdowns when the demand for goods and services falls and
employers reduce their demand for labour. (p. 564)
5. e
Simon encountered the normal time lag between looking for work and finding work.
During this relatively short period, he was frictionally unemployed. (p. 564)
6. b
Structural unemployment may derive from discrimination (Jenny), a structural decline
in certain industries (Joseph), a decrease in the demand for people with particular
skills (Jo), and a mismatching between skills and demand (Jerry). Jim, however, is
seasonally unemployed because he has employment, but only during the summer
season. (pp. 564–565)
7. c
The demand-side of the labour market refers to the demand for labour, which
decreases if the costs of employing labour increase, if production becomes more
capital intensive, and if there is a fall in the demand for output that labour produces.
An increase in the population growth rate and in immigration affects the supply of
labour. (pp. 564–565)
8. e
An increase in the international demand for South African goods and an increase in
investment in South Africa should stimulate greater production and employment. The

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 Chapter 22: Unemployment and the Phillips curve

more capital-intensive production is, however, the smaller the positive impact will be
on labour demand and employment. Higher taxes, an increase in wage rates (without
accompanying increases in productivity) and a fall in productivity would increase the
costs of production, putting upward pressure on prices and downward pressure on
demand. (pp. 565–567)
9. c
If imports increase, demand for domestically produced goods will fall, as will the
demand for labour to produce these goods. Small business and public works
programmes tend to be very labour intensive, and a fall in the price of labour relative
to other factors of production may encourage a relative increase in the demand for
labour. (pp. 565–567)
10. a
If wages increase by more than the productivity of workers increases, then the costs
of production will increase. If firms pass these higher costs onto consumers in the
form of higher prices, demand will fall and unemployment will increase. (pp. 548–
549)
11. e
If the Phillips curve shifts to the right, then every level of inflation is now associated
with a higher level of unemployment. Factors that cause a leftward shift of the AS
curve (such as an increase in input prices) produce a rightward shift of the Phillips
curve. (p. 569)
12. d
Stagflation refers to rising inflation together with rising unemployment. (p. 569)
13. e
An incomes policy seeks to redress cost-push inflation by reducing costs of
production, including wage costs and profit margins. It is, therefore, a supply-side
response to the problem of inflation. (pp. 570–572)
14. b
The expanded definition of unemployment includes all workers who state that they
would be willing to work but who are not actively looking for work. (pp. 562–563)
15. d
The strict definition includes all those people wanting to work who have actively
taken steps to look for work (during the four weeks before they were interviewed). It
therefore excludes discouraged work-seekers who have not actively been looking for
work. (pp. 562–563)

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