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SUMMARY CHAP 28

Chapter 28 discusses the measurement of unemployment, highlighting the distinction between employed, unemployed, and those not in the labor force, as well as the natural and cyclical unemployment rates. It covers the causes of structural unemployment, the impact of minimum wage laws, and the role of unions in bargaining for higher wages, which can lead to unemployment for some workers. Additionally, the theory of efficiency wages is presented, explaining why firms may choose to pay above-equilibrium wages to enhance productivity and reduce turnover.

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24 views4 pages

SUMMARY CHAP 28

Chapter 28 discusses the measurement of unemployment, highlighting the distinction between employed, unemployed, and those not in the labor force, as well as the natural and cyclical unemployment rates. It covers the causes of structural unemployment, the impact of minimum wage laws, and the role of unions in bargaining for higher wages, which can lead to unemployment for some workers. Additionally, the theory of efficiency wages is presented, explaining why firms may choose to pay above-equilibrium wages to enhance productivity and reduce turnover.

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tranhakhanh145
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MACRO SUMMARY

CHAPTER 28: UNEMPLOYMENT

1. Unemployment measuring:
a. Overview:
Measuring Unemployment: Employed, Unemployed, Not in labor force

. Labor force = Total number of workers, including employed and unemployed one
. Unemployment rate:
Number of unemployed
Unemployment rate= × 100
Labor force
. Labor force participation:
Labor force
Participation rate= ×100
Adult population
Notice:
The u-rate is not a perfect indicator of joblessness or the health of the labor market:
+ It excludes discouraged workers.
+ It does not distinguish between full-time and part-time work, or people working part time
because full-time jobs not available.
+ Some people misreport their work status in the BLS survey.
Unemployment Duration:
Most spells of unemployment are short:
+ Typically, 1/3 of the unemployed have been unemployed under 5 weeks, 2/3 have been
unemployed under 14 weeks.
+ Only 20% have been unemployed over 6 months.
Yet, most observed unemployment is long term.
+ The small group of long-term unemployed persons has fairly little turnover, so it accounts
for most of the unemployment observed over time.
Unemployment rate never falls to zero

b. Natural & Cyclical Unemployment:


Natural rate of unemployment: the normal rate of unemployment around which the actual
unemployment rate fluctuates
Cyclical unemployment:
. the deviation of unemployment from its natural rate
. associated with business cycles.

Natural Unemployment = Frictional + Structural


Frictional unemployment Structural unemployment
(thất nghiệp cọ xát) (thất nghiệp cơ cấu)
. occurs when workers spend time . occurs when there are fewer jobs than
searching for the jobs that best suit their workers
skills and tastes . usually, longer-term
. short-term for most workers

c. Job searching:
. 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
+ The economy is always changing
. Public Policy:
+ Reduce time for unemployed to find jobs
o Reduce natural rate of unemployment
+ Government programs - to facilitate job search
o Government-run employment agencies
o Public training program
+ Unemployment insurance: increases frictional unemployment,
UI benefits end when a worker takes a job, so workers have less incentive to search or
take jobs while eligible to receive benefits.

2. Structural Unemployment and Policy:


a. Structural Unemployment:
Structural unemployment occurs
+ when not enough jobs to go around.
+ when wage is kept above equilibrium
b. Minium – wage Laws:
When a minimum wage law forces the wage to remain above the level that balances supply and
demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded
compared to the equilibrium level. There is a surplus of labor. Because there are more workers
willing to work than there are jobs, some workers are unemployed.

c. Union and Collective Bargaining:


Union: a worker association that bargains with employers over wages, benefits, and working
conditions
Collective bargaining: the process by which unions and firms agree on the terms of employment
Union roles:
. Unions exert their market power to negotiate higher wages for workers.
. The typical union worker earns 20% higher wages and gets more benefits than a nonunion
worker for the same type of work.
. When unions raise the wage above equilibrium, quantity of labor demanded falls and
unemployment results.
+ “Insiders” – workers who remain employed, are better off (in unions)
+ “Outsiders” – workers who lose their jobs, are worse off (out of unions)
+ Some outsiders go to non-unionized labor markets, which increases labor supply and
reduces wages in those markets.

Are unions good or bad? Economists disagree.


. Critics:
Unions are cartels. They raise wages above eq’m, which causes unemployment and/or
depresses wages in non-union labor markets.
. Advocates:
Unions counter the market power of large firms, make firms more responsive to workers’
concerns.

d. Theory of efficient wages:


The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to boost worker
productivity.
Different versions of efficiency wage theory suggest different reasons why firms pay high wages.
Four reasons why firms might pay efficiency wages:
1. Worker health
In less developed countries, poor nutrition is a common problem. Paying higher wages
allows workers to eat better, makes them healthier, more productive.
2. Worker turnover
Hiring & training new workers is costly.
Paying high wages gives workers more incentive to stay, reduces turnover.
3. Worker quality
Offering higher wages attracts better job applicants, increases quality of the firm’s
workforce.
4. Worker effort
Workers can work hard or shirk. Shirkers are fired
If market wage is above equilibrium wage, there aren’t enough jobs to go around, so
workers have more incentive to work not shirk.
High wages – make workers more eager to keep their jobs, so workers have more
incentive to work better.

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