Principle of economics session XIII unemployment

Exercise XIII-1: Calculate Labor Force Statistics Compute the labor force, unemployment rate, adult population, and labor force participation rate using... Does the unemployment rate g

Session XIII Unemployment

Principles of Economics

Overview

How is unemployment measured?

What are the “three types of unemployment”?

What is the “natural rate of unemployment”?

Why are there always some people unemployed?

How is unemployment affected by unions and minimum wage laws?

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– how unemployment can arise from bargaining

between firms and unions

– how unemployment results when firms choose to

Part I Labor Force Statistics

Unemployment

Labor Force Statistics

Produced by Bureau of Labor Statistics (BLS),

in the U.S Dept of Labor vs in Korea, produced by

Statistics Korea (통계청)

Based on regular survey of 60,000 households vs in

Korea, 32, 000 households

Based on “adult population” : 16 yrs or older vs in

Korea, based on 15~64 yrs

As of Dec 2014: unemployment rate in Korea 3.4%

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Labor Force Statistics

Population will be divided into 3 groups:

– Employed: paid employees regardless of part-time

or full-time, self-employed,

and unpaid workers in a family business

– Unemployed: people not working who have looked for work during previous 4 weeks

– Not in the labor force: everyone else

The labor force is the total # of workers, including

the employed and unemployed

The BLS divides the adult

population into three categories: employed,

unemployed, and not in the labor force

The Breakdown of the Adult

Population in 2009

Labor Force Statistics

labor force participation rate

labor force adult population

= 100 x

 Labor force participation rate

: % of the adult population that is in the labor force

 Unemployment rate (U-rate)

: % of the labor force that is unemployed

labor force

= 100 x

Exercise XIII-1:

Calculate Labor Force Statistics

Compute the labor force, unemployment rate, adult

population, and labor force participation rate using

Exercise XIII-1 Answers:

Calculate Labor Force Statistics

Labor force = employed + unemployed

Exercise XIII-1 Answers:

Calculate Labor Force Statistics

Population = labor force + not in labor force

Exercise XIII-2:

Limitations of the Unemployment Rate

In each of the following, what happens to the u-rate?

Does the unemployment rate give an accurate

impression of what’s happening in the labor market?

closed last year, becomes discouraged and gives up looking for

work

as a research scientist Immediately, he takes a part-time job at

McDonald’s until he can find another job in his field

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Source: Mankiw (2011)

Exercise XIII-2 Answer A:

Limitations of the Unemployment Rate

A Sue lost her job and begins looking for a new one

Unemployment rate rises

A rising unemployment rate gives the impression that the labor market is worsening, and it is

Exercise XIII-2 Answer B:

Limitations of the Unemployment Rate

B Jon has been out of work since last year, becomes

discouraged, stops looking for work

Discouraged workers

– would like to work but have given up looking for jobs

– classified as “not in the labor force” rather than

“unemployed”

Unemployment rate falls because Jon is no longer counted as unemployed

A falling unemployment rate gives the impression that the

labor market is improving, but it is not

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Exercise XIII-2 Answer C:

Limitations of the Unemployment Rate

C Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one

Unemployment rate unchanged because a person is

“employed” whether they work full or part time

Things are worse, but the unemployment rate fails to show it.

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What Does the Unemployment Rate

Really Measure?

The unemployment 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

Despite these issues, the unemployment rate is still a

very useful barometer of the labor market & economy

Youth Unemployment

Youth Unemployment :

– The Economist article

– http://www.economist.com/news/international/21576657-around-world-almost-300m-15-24-year-olds-

are-not-working-what-has-caused

The Duration of Unemployment

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

Knowing these facts helps policymakers design better policies to help the unemployed

Part II Types of Unemployment

Unemployment

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Natural Rate 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

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Three Types of Unemployment

During healthy macroeconomic conditions, both

structural and frictional unemployment are present

During recessions, cyclical unemployment also

Natural unemployment

Explaining the Natural Rate:

Frictional 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

–the process of matching workers and jobs

–short-term for most workers

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Explaining the Natural Rate:

Frictional Unemployment (cont’d)

Frictional unemployment

– often the result of changes in the demand for labor

among different firms

– Sectoral shifts : changes in the composition of demand among industries or regions of the country

Such shifts displace some workers,

who must search for new jobs appropriate

for their skills & tastes

The economy is always changing,

so some frictional unemployment is inevitable

Explaining the Natural Rate:

Structural Unemployment

Even when the economy is doing well, there is

always some unemployment, including:

Structural unemployment

–occurs when there are fewer jobs than workers

–quantity of labor supplied exceeds the quantity

demanded

–usually longer-term

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Public Policy and Job Search

Gov’t employment agencies

: provide information about job vacancies to speed up the matching of workers with jobs

Public training programs

: aim to equip workers displaced from declining

industries with the skills needed in growing industries

Job search : the process of matching workers

with appropriate jobs

Unemployment Insurance

Unemployment insurance (UI)

: a gov’t program that partially protects workers’

incomes when they become unemployed

UI increases frictional unemployment

To see why, recall one of the

Ten Principles of Economics:

People respond to incentives.

UI benefits end when a worker takes a job,

so workers have less incentive to search or

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Unemployment Insurance

Benefits of UI:

– Reduces uncertainty over incomes

– Gives the unemployed more time to search,

– resulting in better job matches and thus higher

productivity

Explaining Structural Unemployment

Structural unemployment

occurs when not enough

jobs to go around

kept above equilibrium

W 1

loyment

unemp-29

1 Minimum-Wage Laws

The min wage may exceed the equilibrium wage

for the least skilled or experienced workers, causing

structural unemployment

But this group is a small part of the labor force, so the minimum wage can’t explain most unemployment

2 Unions I

Union: a worker association that bargains with

employers over wages, benefits, and working

conditions

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

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2 Unions II

When unions raise the wage above equilibrium,

quantity of labor demanded falls and unemployment

results

“Insiders” – workers who remain employed,

they are better off

“Outsiders” – workers who lose their jobs,

they are worse off

Some outsiders go to non-unionized labor markets,

which increases labor supply and reduces wages in

those markets

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3 Efficiency 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

– Worker health, worker turnover, worker quality, and

worker effort

Exercise XIII-3:

Applying the Concepts

Which of the following would be most likely to

reduce frictional unemployment?

A The government eliminates the minimum wage

B The government increases unemployment insurance

benefits

C A new law bans labor unions

D More workers post their resumes at Monster.com, and

more employers use Monster.com to find suitable

Exercise XIII-3 Answer:

Applying the Concepts

Which of the following would be most likely to

reduce frictional unemployment?

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A The gov’t eliminates the minimum wage

C A new law bans labor unions

These are likely to reduce structural unemployment, not frictional unemployment

Exercise XIII-3 Answer:

Applying the Concepts

Which of the following would be most likely to

reduce frictional unemployment?

B The gov’t increases unemployment insurance benefits

E Sectoral shifts become more frequent

These are likely to increase frictional unemployment, not reduce it

Exercise XIII-3 Answer:

Applying the Concepts

Which of the following would be most likely to

reduce frictional unemployment?

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D More workers post their resumes at Monster.com, and

more employers use Monster.com to find suitable

Quiz: True or False?

1. Every adult who was not employed during the

previous 4 weeks is included in the Bureau of Labor Statistics’ “unemployed” category

2. When a minimum-wage law forces the wage to

remain above the level that balances supply and

demand, the result is a surplus of labor

Quiz Answer: True or False?

1. Every adult who was not employed during the

previous 4 weeks is included in the Bureau of Labor Statistics’ “unemployed” category

 False, The BLS’ “unemployed” category includes

those who were not employed, were available for

work, and had tried to find employment during the previous 4 weeks

Quiz Answer: True or False? (cont’d)

2. When a minimum-wage law forces the wage to

remain above the level that balances supply and demand, the result is a surplus of labor

 True, it is obvious from the graph in p.29

Summary I

The unemployment rate is the percentage of those who

Unemployment and labor force participation vary

widely across demographic groups

The natural rate of unemployment is the normal rate of

Cyclical unemployment is the deviation of

short-term economic fluctuations

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Summary II

The natural rate includes frictional unemployment and

Frictional unemployment occurs when workers take

Structural unemployment occurs when above-

Three reasons for above-equilibrium wages include

Evaluation of the Session

Choose the most appropriate words below to fill in the blanks

– ( ) is above-equilibrium wages paid by firms

voluntarily to increase worker productivity

– ( ) results because of the process of matching

workers and jobs

– ( ) results because jobs are not sufficient

natural rate of unemployment, frictional unemployment,

efficiency wage, union, structural unemployment

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