Topic 6

Chapter 28
Unemployment

1
 Identifying Unemployment, Part 1
• Employed
– Those who worked
• Paid employees
• In their own business
• Unpaid workers in a family member’s
business
–Full-time and part-time workers
–Temporarily absent
• Vacation, illness, bad weather

2
 Identifying Unemployment, Part 2
• Unemployed
– Those who were not employed
• Available for work
• Tried to find employment during the previous
four weeks
– Those waiting to be recalled to a job
• Laid off

3
 Identifying Unemployment, Part 3
• Not in the labor force
– Not employed and not unemployed
– Full-time students
– Homemakers
– Retirees

4
Figure 1 The Breakdown of the Population in January 2019

6
 Identifying Unemployment, Part 4

• Labor force
• Total number of workers, employed and
unemployed
Labor force = No of employed + No of unemployed

• Unemployment rate
– Percentage of labor force that is unemployed
Number of unemployed
Unemployment rate
Labor force

7
 Identifying Unemployment, Part 5
• Labor-force participation rate
– Percentage of the total adult population that
is in the labor force
– Fraction of the population that has chosen
to participate in the labor market
Labor force
Labor force participation rate
Adult population

8
Table 1 The Labor-Market Experiences of Various Demographic Groups

10
 Identifying Unemployment, Part 6
• Labor-market experiences
– Women of prime working age (25 to 54
years old)
• Lower rates of labor-force participation than
men
– Once in the labor force
• Men and women – similar rates of
unemployment

11
 Identifying Unemployment, Part 7
• Labor-market experiences
– Blacks of prime working age
• Similar rates of labor-force participation as
prime-age whites
• Much higher rates of unemployment
– Teenagers
• Lower rates of labor-force participation
• Much higher rates of unemployment than
older workers

12
Figure 2 Unemployment Rate Since 1960

14
 Identifying Unemployment, Part 8
• Natural rate of unemployment
– Normal rate of unemployment around
which the unemployment rate fluctuates
– 4.6% in 2018 (close to the actual
unemployment rate of 3.9%)
• Cyclical unemployment
– Deviation of unemployment from its
natural rate

15
Labor-Force Participation of Men and Women
in the U.S. Economy, Part 1
• Women’s role in American society
– Changed dramatically over the past
century
– New technologies
• Reduced the amount of time required to
complete routine household tasks
– Improved birth control
• Reduced the number of children born to the
typical family
– Changing political and social attitudes
16
Figure 3 Labor-Force Participation Rates for Men and Women Since 1950

18
Labor-Force Participation of Men and Women
in the U.S. Economy, Part 2
Data on labor-force participation
• 1950 – difference between participation
rates
– 33% of women were working or looking
for work
– 87% of men were working or looking for
work

19
Labor-Force Participation of Men and Women
in the U.S. Economy, Part 3
• 2018 – difference between participation
rates
– 57% of women were working or looking
for work
– 69% of men were working or looking for
work

20
Labor-Force Participation of Men and Women
in the U.S. Economy, Part 4
• Fall in men’s labor-force participation
– Young men stay in school longer
– Older men retire earlier and live longer
– With more women employed
• More fathers now stay at home to raise their
children
• Counted as being out of the labor force
– Full-time students, retirees
– Stay-at-home dads
21
 Identifying Unemployment, Part 9
• Official unemployment rate
– Useful
– Imperfect measure of joblessness
• Movements into and out of the labor force
– Common
– More than one-third of unemployed
• Recent entrants into the labor force

22
 Identifying Unemployment, Part 10
• Unemployment
– Not all unemployment ends with the job
seeker finding a job
• Half of all spells of unemployment end when
the unemployed leaves the labor force
• Some of those who report being unemployed
– May not be trying hard to find a job
• Want to qualify for a government help
• Working but paid “under the table”

23
 Identifying Unemployment, Part 11
• Some of those who are out of labor force
– May want to work: discouraged workers
• Discouraged workers
– Individuals who would like to work
– Have given up looking for a job

24
Table 2 Measures of Labor Underutilization

26
 Identifying Unemployment, Part 12
The Bureau of Labor Statistics defines:
• Marginally attached workers: currently are neither
working nor looking for work but indicate that they
want and are available for a job and have looked for
work sometime in the recent past.
• Discouraged workers: marginally attached workers
who have given a job-market related reason for not
currently looking for a job.
• Persons employed part-time for economic reasons:
want and are available for full-time work but have
had to settle for a part-time schedule.
27
 Identifying Unemployment, Part 13
• How long are the unemployed without
work?
– Most spells of unemployment are short
– Most unemployment observed at any
given time is long-term

Assume 52 weeks for work. For a given year, a total unemployed: 55

- 52 unemployed for one week, 3 unemployed for the full year
 52/55 (95%) of unemployment spells end in one week
 75% of the unemployment unemployed for a full year are observed
at any moment.

28
 Identifying Unemployment, Part 14
• How long are the unemployed without
work?
– Most people who become unemployed
• Will soon find jobs
– Most of the economy’s unemployment
problem
• Attributable to the relatively few workers who
are jobless for long periods of time

29
 Identifying Unemployment, Part 15
• Unemployment rate
– Never falls to zero
– Fluctuates around the natural rate of
unemployment
• Frictional unemployment
– It takes time for workers to search for the
jobs that best suit their tastes and skills
– Explain relatively short spells of
unemployment
30
 Identifying Unemployment, Part 16
• Structural unemployment
– Results because the number of jobs
available in some labor markets
• Is insufficient to provide a job for everyone
who wants one
– Explains longer spells of unemployment
– Results when wages are set above the
equilibrium
• Minimum-wage laws, unions, and efficiency
wages
31
 Job Search, Part 1
• Job search
– Process by which workers find appropriate
jobs given their tastes and skills
• Workers differ in their tastes and skills
• Jobs differ in their attributes
• Information about job candidates and job
vacancies is disseminated slowly

32
 Job Search, Part 2
• Some frictional unemployment is
inevitable
– Changes in demand for labor among
different firms
– Changes in composition of demand
among industries or regions (sectoral
shifts)
– Changing patterns of international trade
• Workers need to move among industries

33
 Job Search, Part 3
• Some frictional unemployment is
inevitable
– The economy is always changing
– From 2004 to 2014, employment
• Fell by 838,000 in construction and 2.1 million
in manufacturing
• Rose by 321,000 in mining, 629,000 in
computer systems design, 1.9 million in food
services, and 2.6 million in health care

34
 Public Policy and Job Search, Part 1
• Reduce time for unemployed to find jobs
– Reduce natural rate of unemployment
• Government programs – to facilitate job
search
– Government-run employment agencies
– Public training programs

35
 Public Policy and Job Search, Part 2
• Unemployment insurance
– Government program
– Partially protects workers’ incomes
• When they become unemployed
– Increases frictional unemployment
• Without intending to do so
– Qualify – only the unemployed who were
laid off because their previous employers
no longer needed their skills
36
 Public Policy and Job Search, Part 3
• Unemployment insurance
– 50% of former wages for 26 weeks
– Reduces the hardship of unemployment
– Increases the amount of unemployment
• Unemployment benefits stop when a worker
takes a new job
• Unemployed
– Devote less effort to job search
– More likely to turn down unattractive job offers
– Less likely to seek guarantees of job security
37
 Minimum-Wage Laws, Part 1
• Structural unemployment
– Number of jobs – insufficient
• Minimum-wage laws
– Can cause unemployment
– Forces the wage to remain above the
equilibrium level
• Higher quantity of labor supplied
• Smaller quantity of labor demanded
• Surplus of labor = unemployment

38
Figure 4 Unemployment from a Wage above the Equilibrium Level

40
 Minimum-Wage Laws, Part 2
• Wages may be kept above equilibrium
level
– Minimum-wage laws
– Unions
– Efficiency wages
• If the wage is kept above the equilibrium
level
– Result: unemployment

41
 Who Earns the Minimum Wage?, Part 1
• 2017, minimum wage = $7.25 per hour
• 80 million workers – paid at hourly rates
– About half of the labor force
– About 2.3% reported wages at or below
the prevailing federal minimum
• Thus, the minimum wage directly affects
about 1% of all workers

42
 Who Earns the Minimum Wage?, Part 2
• Minimum-wage workers
– Tend to be young
– Tend to be less educated
– Are more likely to be working part-time
– Over half of all workers paid at or below
the minimum wage were employed in
leisure and hospitality (earn tips)

43
 Who Earns the Minimum Wage?, Part 3
• The proportion of hourly paid workers
earning the prevailing federal minimum
wage or less
– Trended downward from 13.4% in 1979
to 2.3% in 2017
• Minimum wage increased from $5.15 per
hour in 2006 to $7.25 per hour in 2014

44
 Unions & Collective Bargaining, Part 1

• Union
– Worker association
– Bargains with employers over
• Wages, benefits, and working conditions
– Less than 11% of U.S. workers today
• About 33% in the 1940s and 1950s
– Type of cartel

45
 Unions & Collective Bargaining, Part 2

• Collective bargaining
– Process by which unions and firms agree on
the terms of employment
• Strike
– Organized withdrawal of labor from a firm by
a union
– Reduces production, sales, and profit
• Union workers
– Earn 10-20% more than similar workers who
do not belong to unions
46
 Unions & Collective Bargaining, Part 3

• Union – raises the wage above the

equilibrium level
– Higher quantity of labor supplied
– Smaller quantity of labor demanded
– Unemployment
– Better off: employed workers (insiders)
– Worse off: unemployed (outsiders)
• May stay unemployed
• Take jobs in firms that are not unionized
47
 Unions & Collective Bargaining, Part 4

• Union – raises wage above equilibrium

– Supply of labor in industries not unionized
will increase, lower wages
• Workers in unions
– Reap the benefit of collective bargaining
• Workers not in unions
– Bear some of the cost

48
 Unions & Collective Bargaining, Part 5

• Are unions good or bad for the economy?

– Critics
• Unions – a type of cartel
• Allocation of labor
–Inefficient – high union wages reduce
employment in unionized firms below
the efficient level
–Inequitable – some workers benefit at
the expense of other workers

49
 Unions & Collective Bargaining, Part 6

• Are unions good or bad for the economy?

– Advocates
• Unions – necessary antidote to the market
power of the firms that hire workers
–In the absence of a union, firms pay
lower wages and offer worse working
conditions
• Unions – help firms respond efficiently to
workers’ concerns
–Keep a happy and productive workforce
50
 Theory of Efficiency Wages, Part 1
• Efficiency wages
– Above-equilibrium wages paid by firms to
increase worker productivity
• Worker health; Worker turnover
• Worker quality; Worker effort

51
 Theory of Efficiency Wages, Part 2
• Worker health
– Better paid workers
• Eat a more nutritious diet
• Healthier and more productive
• Worker turnover
– Firm – can reduce turnover among its
workers
• By paying them a high wage

52
 Theory of Efficiency Wages, Part 3
• Worker quality
– Firm – pays a high wage
• Attracts a better pool of workers
• Increases the quality of its workforce
• Worker effort
– High wages – make workers more eager
to keep their jobs
• Give workers an incentive to put forward their
best effort

53
 Henry Ford and the Very Generous
$5-a-day Wage, Part 1
• Henry Ford, founder of Ford Motor
Company
– Introduced modern techniques of
production
– Built cars on assembly lines
• Unskilled workers were taught to perform the
same simple tasks over and over again
– Output: Model T Ford

54
 Henry Ford and the Very Generous
$5-a-day Wage, Part 2

• 1914, Ford: the $5 workday

– Twice the going wage
– Long lines of job seekers
• Number of workers willing to work > number
of workers Ford needed
• Ford’s high-wage policy: efficiency wage

55
 Henry Ford and the Very Generous
$5-a-day Wage, Part 3
• Ford’s efficiency wage
– Turnover fell
– Absenteeism fell
– Productivity rose
– Workers – so much more efficient
• Ford’s production costs were lower despite
higher wages
– Profitable for the firm

56
 Henry Ford and the Very Generous
$5-a-day Wage, Part 4

• Ford’s efficiency wage

– High worker effort
– Closely linked to Ford’s use of the
assembly line
• Assembly line – highly interdependent
workers

57
 Frictional and Structural Unemployment
• Different textbook authors define frictional and structural
unemployment differently.
• structural unemployment:
 Frank and Bernanke; Parkin
– the job shortage caused by structural changes in the
economy (e.g., technological change or international
competition) or change the locations of jobs.
 Mankiw; Krugman and Wells
– unemployment due to job rationing or shortage when the
wage rate becomes stuck above the equilibrium wage i.e.,
wage rigidity.
– three cases where the wage rate remains above its
equilibrium: 1) minimum wage; 2) union wage; and 3)
efficiency wage.
58
 Frictional and Structural Unemployment
• Frictional unemployment:
♦ In almost all textbooks, is defined as unemployment due to
job searches that are caused by the process of matching
employers and job seekers.
• However, the job shortage caused by sectoral changes due
to structural changes in the economy is considered
differently:
♦ structural unemployment (Frank and Bernanke; Parkin)
♦ frictional unemployment (Mankiw; Krugman and Wells)
• Even if there is temporary mismatch between workers’
skills and job requirements due to structural changes in the
nation’s economy, wages will quickly adjust to eliminate the
temporary job shortage. (see diagram in the next page)

59