Macroeconomics

Lecture 3

1
Unemployment

Chapter 28
 Lecture Objectives
 Describe unemployment, why it is a
problem and types of unemployment.
 Learn how unemployment is measured.
 Explain reasons for natural
unemployment.

3
 Unemployment

A situation where
some people are willing
and able to work, but are
unable to find paid employment

4
Why Unemployment Is a Problem?

Unemployment results in
 Lost incomes and production

 Lost human capital

5
 Types of Unemployment

There’s always some unemployment, though the u-

rate fluctuates from year to year.
 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

6
 U.S. Unemployment, 1960-2007
12

Unemployment rate
10
percentage of labor force

4 Natural rate of
unemployment

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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 Natural Rate of Unemployment
Even when the economy is doing well, there is always
some unemployment, including:
Frictional unemployment
 occurs when workers spend time searching for the
jobs that best suit their skills and tastes
 short-term for most workers
Structural unemployment
 occurs when there are fewer jobs than workers in
some labor market
 usually longer-term 8
9
10
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How is Unemployment Measured?
 BLS regular survey of 60,000 households
 Based on the answers to the survey
questions: working-age population (adults
16 or more in US, 15 in Vietnam) are
placed into one of three categories
 Employed
 Unemployed
 Not in the labor force

12
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How is Unemployment Measured?
 Employed: if the previous week
 In USA: paid employees, self-employed,
and unpaid workers in a family business
 In Vietnam: spent 1 hour working at a paid job
or family business.
 Unemployed: if
 Not working
 looking for a work during past 4 weeks, or
waiting to be called back to laid-off, or start a
new job
 Available for work
 Not in the labor force: every one else 14
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How is Unemployment Measured?
Example: the US labor force
categories in Jun 2012:
Population: 314 million
Working-age population:
243.4 million
Labor force: 155.0 million
Employed: 142.2 million
Unemployed: 12.8 million

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 How is Unemployment Measured?
US labor force in Jan 2015 released on BLS website
‘000
Civilian noninstitutional population 249,723

Civilian labor force 156,050

Participation rate 62.5

Employed 146,552

Employment-population ratio 58.7

Unemployed 9,498

Unemployment rate 6.1

Not in labor force 93,674

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 Labour Market Indicators
 The unemployment rate

U/E rate = Unemployed / Labour force

 The labor-force participation rate (LFPR)

LFPR = Labour force / Adult population

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 US Labor-Force Experiences of
Various Demographic Groups (1998)
Demographic Unemployment Labor-Force
Group Rate Participation
Adults (20+) Rate
White, male 3.2 77.2
White, female 3.4 59.7
Black, male 7.4 72.5
Black, female 7.9 64.8
Teenagers (16-19)
White, male 14.1 56.6
White, female 10.9 55.4
Black, male 30.1 40.7
Black, female 25.3 42.5
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20
Labor Market Statistics by Education Level,
June 2008

Adults (25 yrs & older)

u-rate LF part. rate

less than h.s. 8.7% 45.9%

h.s. diploma 5.1 62.8

some college or
4.2 71.9
assoc degree
bachelor’s
2.3 78.1
degree or more

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Participation Rate (in
US Labor-force Participation
100
Rates Since 1950
Men
Labor-force

80
percent)

60

40 Women

20

0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 ’98
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 Labour Market Indicators
Vietnam labor and employment as of Q2 2014
 Employed = 53.3

 Unemployed = 1.0

 Not in the labour force = 15.4

 Labour Force
 Adult population
 Unemployment rate
 Labour force participation rate
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 Measurement Issues
 The u-rate is not a perfect indicator of
joblessness or the health of the labor market:
 It excludes discouraged workers.
 Some people misreport their work status in
the BLS survey.
 It does not distinguish between full-time and
part-time work, or people working part time
because full-time jobs not available.

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 Measurement Issues
 BLS Alternative measures of labor underutilization:
Not
seasonall
y
Measure adjusted
U-1 Persons unemployed 15 weeks or longer, as a percent of the
2.7
civilian labor force
U-2 Job losers and persons who completed temporary jobs, as a
3.1
percent of the civilian labor force
U-3 Total unemployed, as a percent of the civilian labor force (official
6.1
unemployment rate)
U-4 Total unemployed plus discouraged workers, as a percent of the
6.5
civilian labor force plus discouraged workers
U-5 Total unemployed, plus discouraged workers, plus all other
persons marginally attached to the labor force, as a percent of the
7.4
civilian labor force plus all persons marginally attached to the labor
force
U-6 Total unemployed, plus all persons marginally attached to the
labor force, plus total employed part time for economic reasons, as a
12.0
percent of the civilian labor force plus all persons marginally attached
 GSO: Underemployment rate
to the labor force

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 Measurement issues
In each of the following, what happens to the u-rate?
Does the u-rate give an accurate impression of what’s
happening in the labor market?

A . Huong just graduated and start looking for a job.

B. Lan, a tailor who has been out of work since her
company closed last year, becomes discouraged
and gives up looking for work.
C. Nam, the sole earner in his family of 5, just lost
his $80,000 job as a research scientist.
Immediately, he takes a part-time job at
restaurant until he can find another job in his
field.
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 Why is There Unemployment
 Natural U/E = Frictional U/E + Structural U/E
 Cause of Frictional U/E: Job search
 Cause of Structural U/E: Above-Equilibrium
Wage

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Why is There Unemployment
 Frictional unemployment:
unemployment that results from the time
that it takes to match workers with jobs or
for workers to search for the jobs best
suited for them.
 Job Search Unemployment

 Job search

 Job search unemployment

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 True meanings of…

 Flexible hours: ?
 Negotiable salary:?

 Provide training opportunities:?

 Dynamic working environment:?

 Transparent promotion path:?

 …hmm can someone translate these into

Vietnamese please?
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 Job Search Unemployment

 Different
from the other types of
unemployment.
 not caused by a wage rate higher than
equilibrium.
 caused by the time spent searching for the
“right” job.

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 The Inevitability of
Job Search Unemployment
 The economy is always changing.
 Sectoral shifts: changes in the composition of
demand among industries or regions
 It takes time for workers to search for
and find jobs in new sectors.

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 Public Policy and Job Search
 Government programs to reduce
searching time:
 Government-run employment agencies
 Public training programs
 Unemployment insurance

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 Public Policy and Job Search
 Government-run employment agencies:
provide information about job
vacancies in order to match workers and
jobs more quickly.
 Public training programs: ease the

transition of workers from declining to

growing industries and to help
disadvantaged groups escape poverty.

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 Public Policy and Job Search
 Unemployment insurance: partially
protect workers’ incomes when they
become unemployed.
 Offer workers partial protection against job
losses.
 Offer partial payment of former wages for a
limited time to those who are laid off.

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 Public Policy and Job Search
 Effects of Unemployment insurance:
 Increase the amount of search
unemployment.
 Reduce the search efforts of the unemployed.
 Improve the chances of workers being
matched with the right jobs.

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Why is There Unemployment
 Structural unemployment occurs when
the quantity of labor supplied exceeds
the quantity demanded.
 Cause of Structural Unemployment:
Above-Equilibrium Wage due to:
 Minimum-wage laws
 Unions
 Efficiency wages

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 Minimum-Wage Laws

When the minimum

wage is set above the
level that balances supply and
demand, it creates unemployment.

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 Unemployment from a Wage
Above the Equilibrium Level
Wage
Surplus of labor = Labor
Unemployment supply
Minimu
m wage
WE

Labor
demand

0 LD LE LS Quantity
of Labor
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Unions and Collective Bargaining
 A union: a worker association that bargains
with employers over wages and working
conditions.
 Collective bargaining: process by which

unions and firms agree on the terms of

employment
 A strike: withdrawal of labor from the

firm, organized if the union and the firm

cannot reach an agreement.
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Unions and Collective Bargaining
 Collective bargaining  above
equilibrium wages for their members.
 Unionized workers: reap the benefits - in
Australia: earn up to 10 percent more than
nonunion workers
 Non-unionized workers: bear costs -
unemployed at higher wages.

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Unions and Collective Bargaining
 Are Unions Good or Bad for the Economy?
 Critics’ ideas: causing inefficient and
inequitable allocation of labor
 Advocates’ ideas: a necessary antidote/
remedy to the market power of firms that hire
workers.

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 Theory of Efficiency Wages
 Efficiency wages

 Theory of efficiency wages

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 Theory of Efficiency Wages
 Reasons for using efficiency wages
 Worker Health

 Worker Turnover:

 Worker Effort

 Worker Quality

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 Why is There Unemployment
 Natural U/E = Frictional U/E + Structural U/E
 Cause of Frictional U/E:
 Job search
 Cause of Structural U/E: Above-Equilibrium
Wage due to:
 Minimum-wage laws
 Unions
 Efficiency wages

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Lecture Review

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