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9.5 End-of-Chapter Material

In Conclusion

During election season in the United States, the adverse effects of trade on jobs are often talked about extensively. In the 2008 Michigan presidential primary election, for example, candidates offered different ways in which they claimed they would help the automobile industry and bring more jobs to the Michigan economy. In the South Carolina primary in the same year, job losses in the textile industry received lots of attention. One large textile manufacturer in the region, Swift, had been cutting jobs steadily and was closing up, apparently planning to move production to South America. Individuals who lost their jobs due to this closing reported that they experienced a period of unemployment as they searched for a new job. Some found new jobs, either in an automobile assembly plant or working on optic fibers. Others moved from working in manufacturing to services. This is job creation and destruction in action. It happens all the time, all across the world.

Viewed abstractly, job creation and destruction are healthy processes for an economy. Through the process of job creation and destruction, workers are induced to move from less productive to more productive jobs. Such movement enhances the overall productivity of an economy. From the perspective of individual workers, however, the process looks very different. Job destruction means that people lose their jobs, which are a source of income and perhaps also of pride and dignity. They may have to spend some period of time unemployed, and they may lose important benefits, such as health insurance. They may have to relocate in search of jobs that are being created elsewhere; such relocation can be difficult and costly.

In sum, although the productivity of an economy as a whole may increase, this need not translate into improvements for workers who lose their jobs. Some find higher-paying jobs, but others, particularly those with few skills, see their wages decrease. One of the big challenges faced by governments and policymakers is to encourage the efficient reallocations of workers while minimizing the individual hardships that workers confront.

Key Links


  1. A statistic called “unit labor cost,” which is the cost per unit of output of the labor input, is often calculated. How is this different from marginal cost?
  2. Would you think that a firm’s managers would have a different viewpoint than its workers on whether or not a plant should be shut down?
  3. All else being the same, which firms would you expect to be more capital intensive—those with labor contracts that pay high wages or those with easy access to funds on capital markets?
  4. How is the labor demand curve of a firm influenced by the cost of other inputs, such as energy?
  5. If a firm operates with high fixed costs, should it set a higher price for its output to be able to cover those fixed costs?
  6. Would a firm ever remain in business even though it is earning negative profits in the current year? How does this decision depend on the interest rate?
  7. Besides labor, what other markets can you think of where search is important?
  8. All else being the same, who will have a higher reservation wage—someone who can receive unemployment insurance for 13 weeks or someone who can receive unemployment insurance for 26 weeks?
  9. What do you think is the role of “friends” in helping you find your first job? What about subsequent jobs?
  10. In economic downturns, what happens to the ratio of unemployed workers to vacancies?
  11. Why do people quit jobs? Do you think that the number of job quitters is higher or lower during economic downturns??
  12. In many European countries, it is very difficult for a firm to close one of its plants. What might be the effects of an increase in the cost of closing a plant on job creation, destruction, and reallocation?
  13. Suppose that the establishment of a Walmart in a nearby town led to the creation of 100 jobs in that store and the destruction of 150 retail jobs in the town. Is the net loss of 50 jobs enough reason to oppose the opening of the Walmart? What other benefits might a Walmart bring? What other costs might it impose?
  14. What might be the effects of a reduction in child-care costs on an unemployed worker’s reservation wage?

Spreadsheet Exercise

  1. Revisit Table 9.3 "Monthly Costs of Production" through Table 9.5 "Demand and Profit after Walmart Comes to Town". Suppose your fixed operating costs were $12,000 instead of $14,000. Redo the tables with this change. Should you stay in business after Walmart arrives? Explain.

Economics Detective

  1. The Bureau of Labor Statistics produces data on labor turnover called JOLTS ( Using that information, create a table and a plot of data to illustrate what has happened to job openings and the quit rate since January 2007. How would you explain these findings?