reaps Composition of Population in terms of Economic Status or UNEMPLOYMENT [ : =e canis INTRODUCTION TO T MACROECONOMICS (ECN 1215) r l a ee See Flows in the Labour Market DEFINITIONS An individual is either Sir = EMPLOYED Gene eee |e = UNEMPLOYED Kes ~ OR NOT PART OF THE LABOUR FORCE T - T zat a ‘The labour force is defined as the sum of the eer employed and unemployed, and. the [ees al, tinemploymest ste i dofned'aa the percentage sal ae of the labour force that is unemployed. DEFINITIONS Continued +A person 18 conaiderd employed if he or she spent most of the previous week working at paid job. + A person is unemployed if he or she is on temporary layoff, 16 looking for a job, or is ‘waiting for the start date of a new job. + A Person who fits neither of the frst two ‘categories, such asa fulltime student, homemaker, or retitee, is not in the labor force DEFINITIONS Continued The economy always has some uuetupluytnent and that amount changes year to year The normal rate of unemployment around which the unemployment rate fluctuates is called the natural rate of unemployment, and the deviation of unemployment from its natural rate is called cyclical unemploymentee Identifying Unemployment * Categones of Unemployment ~The problem of unemployment i ural Ahvided int tw emtepon ~The longum peblem andthe shor-eun probins 2h Rel of seclopd + Ths eel on of coat Nature Rate of Unemployment ~The natural rate of unemployment is unetnployment that does not go away on its own even in the long run —1tss the amount of unemployment that the economy normally experiences. Natural Rate of Unemployment Contd * Itis the average or long-run rate of Ancmployment sound which the economy fluctuates. * In a recession, the actual unemployment tate rises above the natural rate. + Ina boom, the actual unemployment rate falls below the natural rate. Cyclical Unemployment —Cyclical unemployment refers the year-to-year fluctuations in unemployment around its natural rate. —Itis associated with short-term ups and downs of the business cycle. Unemployment, GDP, and Okun’s Law + What relauonship should we expect to find between unemployment and real GDP? ed workers hap to produce goods sod services and unemployed workers do not, mereases nthe unemployment rate should be ssnocuated with decteases in teal GDP * Ths negative relationship —_berween unemployment and GDP is called Okun’s law, after Arthur Okun, the economist who first sradied it HOW IS UNEMPLOYMENT MEASURED? * The unemployment rate is the statistic that measures the percentage of those People wanting to work who do not have jobsUnemployment Rate ‘Unemployment rate» Number unemployed 5 ator force |... Labor Force Participation Rate Labor force participation rate = Labor force ‘Adult population Labor Force * Labor Force —The /abor force is the total number of workers, including both the employed and the unemployed. ‘THE BREAKDOWN OF THE POPULATION Problems of Unemployment Statistics + In is difficult to distinguish between a person who 1s unemployed and a persoa who is not in the labor force. * Discouraged workers, people who would ike 10 work but have given up looking for jobs after an unsuccessful search, don't show up in unemployment statistics DOES THE UNEMPLOYMENT RATE MEASURE WHAT WEE WANT IT TO? + Measuring the amount of unemployment in the economy might seem straightforward. In fact, it is not. * Whereas it is easy to distinguish between a person with a full-time job and a person who is fot working at all, it is much harder to distinguish “between a person who is unemployed and a person who is not in the labor force.DOES THE UNEMPLOYMENT RATE ME WANT IT TO? SURE WHAT WE * Movements into and out of the labor force are, in fact, very common. More than one-third of the unemployed are recent entrants into the labor force. These entrants include young workers looking for their first jobs, such as recent college graduates. They also include, in Rreater numbers, older workers who had Previously left the labor force but have now returned to look for work. DOES THE UNEMPLOYMENT RATE MEASURE WHAT WE WANT 1-10? * Moreover, not all unemployment ends with the job seeker finding a job. Almost half of all spell of unemployment end when the unemployed person leaves the labor force. Because people ‘move into and out of the labor force so often, statistics on unemployment are difficult to interpret. On the one hand, some of those who report being unemployed may not, in fact, be trying hard to find a job. OPS THE UNEMPLOYMENT RATE MEASURE WHAT WE WANT IT TO? + On the other hand, some of those who report being out of the Libor force may, in faet, want to work, These ‘nabviduals may have tned to find a job but have given up after an unsuccessful search. Such individuals, ealled discouraged workers, do not show up in vunemployment states, even though they are. truly ‘workers without jobs og. 0 most csomates, adding discouraged workers would inerease the measured unemployment rate by about one half of one percentage point HOW LONG ARE THE UNEMPLOYED WITHOUT WORK * In judging how sedous the problem of unemployment is, fone question to consider is whether unemployment te ‘ypicaly a short-term or long-term condition If unemployment is short-term, one might conclude that s¢ isnot a big problem. * Workers may require a few weeks between jobs to find the openings that best suit ther tastes and shill Yet af ‘unemployment i long-term, one might conclade that itis a xenon problem Workers unemployed. tor many months are more Ukely to suffer economic and Prychological hardship WHY ARE THERE ALWAYS SOME PEOPLE UNFMPLOVED? + The first explanation is that it takes time for workers to search for the jobs that are best usted for them + The unemployment that results from the cess of matching workers and jobs is smeumes called frictional unemployment, and it is often thought to explain celatively short spells of unemployment. WHY ARE THERE ALWAYS SOME, PEOPLE UNEMPLOYED? Cont'd + The umber of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. + This occurs when the quantity of labor supplied exceeds the quantity demanded. *+ Unemployment of this sort is sometimes called structural unemployment, and it is often thought to explain longer spells of, ‘unemploymentDisguised Unemployment * Developing countries are generally Actual & Potential GDP 7/21/201 unemployment that results from the time that i takes to match workers with jobs: Ta other words, it takes time for woskers to Search for the jobs that are best suit their tastes and shall * Sirwcural memplyment isthe unemployment iMG ene jobs available in some "labor "markets ray not close to the full employment level or * Here, unemployment does not occur due to periodic demand shortfall, These countries, like Zambia, suffer score from disguised unemployment. snp Why Are There Always Some People Unemployed? Job Search + Frciona! smemplomest telett 10 the + bards ~ the process by which workers search to find appropriate jobs given thec tastes and skills results from the fact that ir takes rime: for (qualified individuals ro be matched with appropmate jobs ‘+ This unemployment is different from the other types of unemployment ~ Hts not caused by a wage rate higher than, insufficient to provide 2 job for everyone pet ten 0 Want one caused by the time spent searching forthe whe ee by ‘spent 1g for the L. Inevitable Frictional Unemployment Public Policy * Search unemployment is inevitable because the economy is alwa changing, * Changes in the composition of demand among industries of regions are called sectoral shifts, * It takes time for workers to search for and find jobs in new sectors. * 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1) Government-run Employment Agencies * Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly. 2) Public ‘Training Program: * Public training programs aim to ease the transition of workers from declining t0 growing industries and to_—_—help disadvantaged groups escape poverty. 3) Unemployment Insurance + Unemployment surance i 4 government progr tat paraly pow ween eck whee at et Sremploye ~ Ofer worker pat protection guint jb ~ Offers paral parment of former wigs fo + rd time to thon who ae la off + Unempinmeat inarine ierenes the amount of seach vecapoyment Wercduee the sch effort of the meplopd 1 may improve the chances of worker being matched wah he ng abe ‘Types of Unemployment 1) Seasonal — Regular seasonal changes in employment / labour demand — Affects certain industries more than others + Carenng an ene + Constructs + Retaing *Tounsm + Agricueare 2) Frictional Frictional "Transitional unemployment due to people moving benween jobs: Includes people experiencing short spells of unemployment = Includes new and rcruming entrants into the labour market = lenperfect information about available job : ‘opportunities can lengthen the peniod of someone’: job search 3) Structural Unemployment Structural Unemployment Anises from the mismatch of skills and job ‘opportunities as che pattern of labour demand inthe economy changes = Occupational immobility of labour ~ Often involves long.term unemployment = Prevalent ia regions where industries go into long:teem decline Good examples include industries such as ning, engineering and textesStructural Unemployment * Structural unemployment occuts wheis the ‘quantity of labor supplied exceeds the quantity demanded. * Structural unemployment is often thought to explain longer spells of unemployment. * Why ts there Stuctutal Uneaployinieut? — Minimum-wage laws = Unions fficiency wages Minimum Wage Law * When the minimum wage is ser above the level that balance supply and demand, it create unemployment Union * A union is a worker association that bargains with employers over wages aud working conditions. * A.union is a type of cartel attempting to exert its market power. * The process by which unions and fiems agree on the terms of employment ts called collective bargaining. Strike + A ske will be organized if the union and the firm cannot reach an agreement. * A stnike 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 come of the costs Union Worker's Wage ting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members.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 — ages are above equilibrium wages paid by firms sn order to increase worker productivity. *'The theory of efficiency wages states thal fitrns 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: cher Health Better paid workers eat a better dit and thus age more productive Worker Turnover: higher paid worker is less IMkely to look for another job 3 Worker Fore Highee wages monvate workers to jor forwad thie Best effort 4 Worker Quality Higher wages aat a beter pool of workers 10 apply forjobs 4) Cyclical unemployment ~ Caused by» alla sept deand lating ts eof rest anal tpt and employment ~ Keyes ape that am economy can become ch ww me of AD and an econony oper precy bly ax pena Real Wage Unemployment + Real Wage Unemployment Created when real wages are maintained above their market clearing level leading to an excess supply of labour at the prevailing wage rate Some economists believe that unemployment can be created if the ‘ational minimum wage is set too high EFFECTS OF UNEMPLOYMENT: Economic and Social Costs of Unemployment = Fat el ag sds ~ Maree hh oe + Nat gy et ~ Loasof manetable sie Quman cpa ed meinen cmployment the urrfoyd heme ew roe ‘EFFECTS OF UNEMPL(C JYMENT; Economic and Social Costs of Unemployment + Economic Comequences for Busneses ~ Negauve consequences * oll demand fr gots and sees + Fallin demand for busmesses farther dow th sippy chan, * Conse the negate msg fics from the sre of « mar employer in a wen or ty = Some ponave consequences + Wgger pool of supa bourw alible~ but sila problem ‘ere plenty of smucwed unemploymen * Les pressure to pay ger wage + Less oak of nda / ste action — ea of reduced made unm power ob tes edn to FECTS OF UNEMPLOYMENT. £ and Social Costs of Unernployment + Consequences for the Government (Peal ! = Increased spending, on unemployment ber other income ~related state welfare paymwenr = Fall in revenue from inconne tax and taxe consumer spending = Fallin profits ~ reduction in revenue fre. corporation tax = May lead to ive in government borerny (ve a budget deficit EFFECTS OF UNEMPLOYMENT: Economic and Social Costs of Unemployment + Consequences forthe economy as a whole = Loxt output (eal GDP) feom people being out of work ~ the economy wil be operating wel within it production fivatiee = Unemployment scen a: an inefficient way of allocating sexoueces = labour market failure? ~~ Some of the long-term unemployed may leave che labour {once pesmanently~ filin poteotal GDP Increase ithe inequality nse in eelative pers Policies to reduce or Cure unemployment Dean and supply side approaches Demand side Policies to Reduce Unemployment + het any Meret boost aber demand ence yc tia at as Gd ada w sper pie) 5 Karena agli in map pa peo Ey epee be coup Nous org ement ou espcmne Supply-side polices to reduce Unemployment Seppe poles Those are measures to prove bow sappy (dice cmon and sractratunemp men ~ lactase spending om eduction & mang inclading an cmphant on "hetne ean”) = limped flows of fem on ob vacances 7 Changes 10 as and benef wo prove ncenmes ~ Measures desgned to make the bor mart ove Nee 9 that workers ave the sil and educa that pes them improved employment aptonsT/21/W Consequences of falling unemployment +The cera nd the mp = Incomes ova it Bohol wl gow = Fasting urcnphyment ad demand and eens # ponene rng fect on mezmes, domain aed caput = When incomes and spending ae growing. hte a erate ‘he dead for ports: Unless thw the by se ‘yo es the rade ance goods ad service wll rae Consequences of falling unemployment + Goreme cee = Wath more people work paying come ta alae ad ta the government can expt» Lge ne eevee ‘eduction m socal scutes + anna fers ~ Fall unemployment cana create are faery resin parcuely whem the cosy mine cet perting Fl apy However ths no ely nek wh he ono cman of recemon, esse spy Hh be gy ce becuse ofa ngh eve pe pac