Unemployment
Identifying Unemployment
Categories of Unemployment
oThe problem of unemployment is usually divided into
two categories.
oThe long-run problem and the short-run problem:
Long term - The natural rate of unemployment
Short term - The cyclical rate of unemployment
Nature Rate of Unemployment
Natural Rate of Unemployment
oThe natural rate of unemployment is unemployment that
does not go away on its own even in the long run.
oIt is the amount of unemployment that the economy
normally experiences.
Cyclical Unemployment
Cyclical Unemployment
oCyclical unemployment refers to the year-to-year
fluctuations in unemployment around its natural rate.
oIt is associated with short-term ups and downs of the
business cycle.
Basic Questions
Describing Unemployment
oThree Basic Questions:
How does government measure the economy’s rate of
unemployment?
What problems arise in interpreting the unemployment data?
How long are the unemployed typically without work?
How Is Unemployment Measured?
• Each adult is categorized into one of three categories:
• Employed
• Unemployed
• Not in the labor force
How Is Unemployment Measured?
A person is considered as an adult if he or she is over 16 years old.
A person is considered employed if he or she has spent most of the
previous week working at a paid job.
A person is unemployed if he or she is on temporary layoff, is looking
for a job, or is waiting for the start date of a new job.
A person who fits neither of these categories, such as a full-time
student, homemaker, or retiree, is not in the labor force.
Labor Force
• Labor Force
• The labor force is the total number of workers, including
both the employed and the unemployed.
• The labor force is the sum of the employed and the
unemployed.
THE BREAKDOWN OF THE POPULATION
Employed Labor Force
Adult
Population
Unemployed
Not in labor force
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Unemployment Rate
Number unemployed
Unemployment rate = 100
Labor force
Labor Force Participation Rate
Labor force participation rate
Labor force
100
Adult population
Defining and
Measuring Unemployment
labor force = employed + unemployed
population = labor force + not in labor force
unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population
Problems of Unemployment Statistics
• It is difficult to distinguish between a person who is unemployed
and a person who is not in the labor force.
• Discouraged workers, people who would like to work but have
given up looking for jobs after an unsuccessful search, don’t
show up in unemployment statistics.
• Other people may claim to be unemployed in order to receive
financial assistance, even though they aren’t looking for work.
Ideal Labor Market
• In an ideal labor market, wages would adjust to balance
the supply and demand for labor, ensuring that all
workers would be fully employed.
Why Are There Always Some People Unemployed?
• Frictional unemployment refers to the unemployment that
results from the time that it takes to match workers with jobs. In
other words, it takes time for workers to search for the jobs that
are best suit their tastes and skills.
• Structural unemployment is the unemployment that results
because the number of jobs available in some labor markets is
insufficient to provide a job for everyone who wants one.
Seasonal Unemployment
• Seasonal unemployment is caused by seasonal shifts in labor supply
and demand
• Examples: construction, agriculture,
Job Search/Frictional unemployment
• Job search - the process by which workers find appropriate
jobs given their tastes and skills.
• results from the fact that it takes time for qualified
individuals to be matched with appropriate jobs.
• This unemployment is different from the other types of
unemployment.
• It is not caused by a wage rate higher than equilibrium.
• It is caused by the time spent searching for the “right” job.
Inevitable Frictional Unemployment
• Search unemployment is inevitable because the economy is
always changing.
• Changes in the composition of demand among industries or
regions are called sectoral shifts.
• Sectoral shift changes the required skill set.
• It takes time for workers to search for and find jobs in new
sectors.
Effects of Public Policy on frictional unemployment
• Government programs can affect the time it takes
unemployed workers to find new jobs.
• These programs include the following:
• Government-run employment agencies
• Public training programs
• Unemployment insurance
Government-run Employment Agencies
• Government-run employment agencies give out information
about job vacancies in order to match workers and jobs
more quickly.
Public Training Programs
• Public training programs aim to ease the transition of
workers from declining to growing industries and to help
disadvantaged groups escape poverty.
Unemployment Insurance
• Unemployment insurance is a government program that partially protects
workers’ incomes when they become unemployed.
• Offers workers partial protection against job losses.
• Offers partial payment of former wages for a limited time to
those who are laid off.
• Unemployment Insurance:
• increases the amount of search unemployment.
• reduces the search efforts of the unemployed.
• It may improve the chances of workers being matched with the right jobs.
Structural Unemployment
• Structural unemployment occurs when the quantity of
labor supplied exceeds the quantity demanded.
• Structural unemployment is often thought to explain
longer spells of unemployment.
• Why is there Structural Unemployment?
• Minimum-wage laws
• Unions
• Efficiency wages
Minimum Wage Law
• When the minimum wage is set above the level that
balances supply and demand, it creates unemployment.
Wage D
Labor
Surplus of labor =
supply
Unemployment
Minimum
wage
WE
Involuntary Voluntary
Labor
demand
0 LD LE LS Quantity of
Labor
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Union
• A union is a worker association that bargains with
employers over wages and working conditions.
• A union is a type of cartel attempting to exert its market
power.
• The process by which unions and firms agree on the
terms of employment is called collective bargaining.
Strike
• A strike will be organized if the union and the firm cannot
reach an agreement.
• A strike refers to when the union organizes a withdrawal
of labor from the firm.
• A strike makes some workers better off and other workers
worse off.
• Workers in unions (insiders) reap the benefits of collective
bargaining, while workers not in the union (outsiders) bear
some of the costs.
Union Worker’s Wage
• By acting as a cartel with ability to strike or otherwise
impose high costs on employers, unions usually achieve
above-equilibrium wages for their members.
• Union workers earn 10 to 20 percent more than nonunion
workers.
Union: Good or Bad?
• Critics argue that unions cause the allocation of labor to
be inefficient and inequitable.
• Wages above the competitive level reduce the quantity
of labor demanded and cause unemployment.
• Some workers benefit at the expense of other workers.
Theory of Efficiency Wages
• Efficiency wages are above-equilibrium wages paid by
firms in order to increase worker productivity.
• The theory of efficiency wages states that firms operate
more efficiently if wages are above the equilibrium level.
Theory of Efficiency Wages
A firm may prefer higher than equilibrium wages for the following reasons:
• Worker Health: Better paid workers eat a better diet and thus are more productive.
• Worker Turnover: A higher paid worker is less likely to look for
another job.
• Worker Effort: Higher wages motivate workers to put forward their
best effort.
• Worker Quality: Higher wages attract a better pool of workers to
apply for jobs.
Inflation and Unemployment: The Phillips
Curve
A Phillips curve is a curve that shows the
relationship between the inflation rate and the
unemployment rate.
The Short-Run Phillips Curve
• The short-run Phillips curve shows the relationship
between inflation and unemployment holding constant
the expected inflation rate and natural unemployment
rate.
Phillips curve
Phillips curve
Phillips curve
• A Phillips curve illustrates a trade-off between the unemployment rate
and the inflation rate; if one is higher, the other must be lower.
• For example, point A illustrates an inflation rate of 5% and an
unemployment rate of 4%. If the government attempts to reduce
inflation to 2%, then it will experience a rise in unemployment to 7%, as
shown at point B.
Phillips curve
• Figure shows that the negative relationship between the
inflation rate and unemployment rate is explained by the
AS-AD model.
• An unexpectedly large increase in aggregate demand
raises the inflation rate and increases real GDP, which
lowers the unemployment rate.
• So higher inflation is associated with lower
unemployment, as shown by a movement along a short-
run Phillips curve.
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