Unemployment - Lecture notes 1 PDF

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LECTURE NOTES ON MACROECONOMICS

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Chapter Five Unemployment Outline 1. 2. 3. 4. 5.

Nature of Unemployment Types of Unemployment Measurement of Unemployment Job Search Cost of Unemployment

Introduction Losing a job can be the most distressing economic event in a person’s life. Most people rely on their labor earnings to maintain their standard of living, and many people also get a sense of personal accomplishment from working. A job loss means a lower living standard in the present, anxiety about the future, and reduced selfesteem. It is not surprising, therefore, that politicians campaigning for office often speak about how their proposed policies will help create jobs. In previous chapters, we have seen some of the forces that determine the level and growth of a country’s standard of living. A country that saves and invests a high fraction of its income, for instance, enjoys more rapid growth in its capital stock and GDP than a similar country that saves and invests less. An even more obvious determinant of a country’s standard of living is the amount of unemployment it typically experiences. People who would like to work but cannot find a job are not contributing to the economy’s production of goods and services. This chapter begins our study of unemployment. The problem of unemployment is usefully divided into two categories: the long-run problem and the short-run problem. 1. Natural rate of unemployment refers to the amount of unemployment that the economy normally experiences. 2. Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate, and it is closely associated with the short-run ups and downs of economic activity. Alternatively, we can think about the natural rate of unemployment as the economy’s long-‐run rate of unemployment and cyclical unemployment as the shorter run fluctuations around the natural rate. Types of Unemployment There are three types of unemployment:   

Frictional unemployment Structural unemployment Cyclical unemployment

Frictional Unemployment is when workers move from one job to another job. At any given time some workers are “between jobs.” Some of them will be moving voluntarily from one job to another. Others will have been fired and will be seeking 2

reemployment. Still others will have been laid off temporarily because of seasonal demand. In addition to those between jobs, many young workers will be searching for their first jobs. Frictional unemployment is inevitable and, at least in part, desirable. Many workers who are voluntarily between jobs are moving from low-paying, low-productivity jobs to higher-paying, higher-productivity positions. That means greater income for the workers, a better allocation of labor resources, and a larger real GDP for the economy. Structural Unemployment: Occurs when the qualification of a person is not enough to meet his job responsibilities. Changes over time in consumer demand and in technology alter the “structure” of the total demand for labor, both occupationally and geographically. Occupationally, the demand for certain skills (for example, sewing clothes or working on farms) may decline or even vanish. The demand for other skills (for example, designing software or maintaining computer systems) will intensify. Unemployment results because the composition of the labor force does not respond immediately or completely to the new structure of job opportunities. Workers who find that their skills and experience have become obsolete or unneeded thus find that they have no marketable talents. They are structurally unemployed until they adapt or develop skills that employers want. Geographically, the demand for labor also changes over time. An example: the migration of industry and thus of employment opportunities from the Snowbelt to the Sunbelt over the past few decades. Cyclical Unemployment Occurs when the economy is in needed of lower work force that is caused by a decline in total spending. cyclical unemployment typically begins in the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rise. Cyclical unemployment results from insufficient demand for goods and services. Seasonal Unemployment: occurs when an occupation not in demand at certain season. Causes of Unemployment       

High population growth. Absence of employment opportunities. Seasonal employment. Joint family system. Increasing turnout of students from universities. Slow developing industries. Insufficient rate of economic growth.

Measurement of Unemployment

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Measuring unemployment is the job of the Bureau of Labor Statistics (BLS), which is part of the Department of Labor. The BLS produces data on unemployment and on other aspects of the labor market, including types of employment, length of the average workweek, and the duration of unemployment. Based on the data from the BLS measuring unemployment is divided into one of three categories: 

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

Employed: This category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member’s business. Both full-time and part-time workers are counted. This category also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather. Unemployed: This category includes those who were not employed, were available for work, and had tried to find employment during the previous four weeks. It also includes those waiting to be recalled to a job from which they had been laid off. Not in the labor force: This category includes those who fit neither of the first two categories, such as a full-time student, homemaker, or retiree.

Labor Force: is the total number of workers, including both the employed and the unemployed. The BLS defines the labor force as the sum of the employed and the unemployed. “Labor force = Number of employed + Number of unemployed.”

The unemployment rate is calculated as the percentage of the labor force that is unemployed.

Unemployment rare=

Number of Employed X 100 Labor Force

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The labor-force participation rate measures the percentage of the total adult population that is in the labor force: The labor-force participation rate is the percentage of the adult population that is in the labor force.

Labor Force participaption=

Labor Force X 100 Adult population

This statistic tells us the fraction of the population that has chosen to participate in the labor market. The labor-force participation rate, like the unemployment rate, is computed for both the entire adult population and more specific groups. To see how these data are computed, consider the figures. 139.9 million people were employed, and 14.3 million people were unemployed. The labor force was Labor force = 139.9 + 14.3 = 154.2 million. The unemployment rate was Unemployment rate = (14.3 / 154.2) × 100 = 9.3 percent. Because the adult population was 235.9 million, the labor-force participation rate was Labor-force participation rate = (154.2 / 235.9) × 100 = 65.4 percent. Almost two-thirds of the adult population were participating in the labor market, and 9.3 percent of those labor-market participants were without work. Does the Unemployment Rate Measure What We Want It To? 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.

Job search Job Search: is 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.

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Public Policy and Job Search 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 give out information about job vacancies in order to match workers and jobs more quickly. Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. 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. It reduces the search efforts of the unemployed. It may improve the chances of workers being matched with the right jobs. Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Why is there Structural Unemployment?   

Minimum-wage laws Unions Efficiency wages

Minimum-wage laws: When the minimum wage is set above the level that balances supply and demand, it creates unemployment. Labor Unions A labor union is an association of workers that bargains with employers over wages, benefits, and working conditions through a process of collective bargaining. The process by which unions and firms agree on the terms of employment is called collective bargaining. If the two sides can’t agree, the union can organize a strike, the organized withdrawal of labor from the firm. 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. In the 1940s and 1950s, about one third of US workers were unionized. Now, that number is only about 12 percent. Studies show that through collective bargaining, unions can increase the wages that their members receive by 10 to 20 percent. 6

The overall effects of unions on wages and unemployment therefore resemble the effects of minimum wage laws: Insiders, or union members, benefit from the higher wages. But outsiders are hurt because at higher wages, fewer workers are hired. 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. Like minimum wage laws and union collective bargaining, the theory of efficiency wages explains structural unemployment by appealing to wages that are above the level that equates supply and demand. 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.

Cost of Unemployment Individual: unemployed individuals are unable to be earn money to meet financial needs. Failure to pay instalment or to pay rent may lead to homeless. Unemployment increases chances of malnutrition, illness, mental stress and loss of self-esteem, leading to depression. Society: an economy with high unemployment is not using all of the resources, i.e. labor force available to it. This country tends to be less developed.

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Occupation Workers in lower-skilled occupations (for example, laborers) have higher unemployment rates than workers in higher-skilled occupations (for example, professionals). Lower-skilled workers have more and longer spells of structural unemployment than higher skilled workers. They also are less likely to be selfemployed than are higher-skilled workers. Age Teenagers have much higher unemployment rates than adults. Teenagers have lower skill levels, quit their jobs more frequently, are more frequently fired, and have less geographic mobility than adults. Race and ethnicity The unemployment rates for Minority groups are higher than that for Majority. The causes of the higher rates include lower rates of educational attainment, greater concentration in lower-skilled occupations, and discrimination in the labor market. Education Less-educated workers, on average, have higher unemployment rates than workers with more education. Less education is usually associated with lowerskilled, less-permanent jobs; more time between jobs; and jobs that are more vulnerable to cyclical layoff.

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