Chapter 27 - Unemployment and the demand for labor. In this chapter you will learn: How economists measure employment and unemployment? How minimum wage rates and unionization can cause unemployment? Why there is a natural rate of unemployment? Why there is a cyclical component of unemployment?
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Chapter 27
Unemployment and the Demand for Labor
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• How economists measure employment and
unemployment
• How minimum wage rates and unionization can cause
unemployment
• Why there is a natural rate of unemployment
• Why there is a cyclical component of unemployment
• What factors may stop wages from falling to the
equilibrium level
• What challenges are associated with unemployment
insurance
What will you learn in this chapter?
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• Unemploymentis a situation where someone
wants to work but cannot find a job in the current
market
–People who do not have jobs and are not interested in
obtaining one are not counted as unemployed.
unemployment as people who:
1 Didn’t work at all in the previous week
2 Were available to work if they had been offered a job
3 Were making efforts to look for a job
Defining and Measuring Unemployment
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• The labor forcerefers to the people who are in
the working-age population and are either
employed or unemployed
–The working-age population is the civilian,
noninstitutional population over 16 years old
• The unemployment rateis the number of
employed people divided by the number of
people in the labor force:
Unemployment rate = Number of unemployed
Labor force × 100 where
Labor force = Number of Employed and Unemployed
Measuring unemployment
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1 A student who also works 15 hours per week.
2 A full-time student.
3 A stay-at-home dad that does not work elsewhere.
4 An individual that was laid off a year ago and is
waiting until things get better to look for a job.
5 A 15-year-old working full-time in the summer.
6 A CPA working full-time at a financial firm.
7 A military officer serving overseas.
8 A retired school teacher.
9 A recent law school graduate who is looking for a
job.
Active Learning: Categorizing employment
Categorize each of the following individuals as employed,
unemployed, or not in the labor force
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• Given the categories of employment, employment
statistics can be calculated
• For the United States:
–Unemployment rate in December 2006:
, ,
, , × 100 = 4.4%
–Unemployment rate in December 2011:
, , , , × 100 = 8.5%
Measuring unemployment
Month Working-age population
(non-institutionalized)
Unemployed Employed Labor force
6,762,000 145,970,000 152,732,000 230,108,000
December 2006
13,097,000 140,790,000 153,887,000 240,584,000
December 2011
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The unemployment rate varies by gender and
age
Measuring unemployment
Unemployment rate (%)
Year
0 4 8 10 14 18
2003 2005 2007 2009 2011
Unemployment rate by age
Men Women
Unemployment rate by sex
Unemployment rate (%)
Year
0
4
8
10
14
18
2003 2005 2007 2009 2011
16-24
35-44 55+
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The unemployment rate also varies by race and
education level
Measuring unemployment
Unemployment rate by race
Unemployment rate (%)
Year
0
4
8
10
14
18
2003 2005 2007 2009 2011
Unemployment rate by education level Unemployment rate (%)
Year
0 4 8 10 14 18
2003 2005 2007 2009 2011
White
American African
Asian Latino
Less than high school High school Some college Bachelor’s
or higher
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• The state of the economy is also understood by
looking at the labor-force participation rate
LFPR= Labor force
Working−age population × 100
• The LFPR indicates what fraction of the
population wants to be working, regardless of
whether or not they actually have a job.
–It is common for the LFPR to fall during a recession
Measuring unemployment
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working-age population stopped participating in
the labor force
–It is likely that at least some of these people would
have been unemployedif they had stayed in the labor
force
–Thus, the unemployment rate may understatethe
effect of the recession
Measuring unemployment
Unemployment rate (%) Labor-force participation rate (%)
Month
December 2006
December 2011
Employment in the United States, 2006 and 2011
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Use the following information to calculate the
unemployment and labor-force participation rates
Active Learning: Unemployment and LFPR rates
139.9 million 14.3 million 81.7 million
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• There two main limitations of the
unemployment rate.
• It does not give a good indication of how many
people are:
–Discouraged workers: People who have looked
for work in the past year but have given up
because of labor market conditions
–Underemployed workers: People who are either
working less than they would like or in jobs
below their skill level
Beyond the unemployment rate
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To provide a better picture of the labor market,
the BLS calculates the following six measures of
unemployment.
Beyond the unemployment rate
Rate in December 2006 (%) Category of unemployment Rate in December 2011 (%)
U1: Long-time unemployed
(more than 15 weeks) 1.4 5.0
U2: Job losers + those who
completed temporary work 2.1 4.9
U3: Unemployed 4.4 8.5
U4: Unemployed +
discouraged workers 4.6 9.1
U5: Unemployed, discouraged
attached workers
5.2 10.0 Workers + marginally
U6: Unemployed, discouraged
workers, marginally attached 7.9 15.2
workers + underemployed
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• The main source of information on
unemployment in the U.S is a household
survey called the Current Population Survey
(CPS), conducted by the BLS
• The BLS surveys approximately 60,000 U.S
households per month.
• The CPS asks people if they are working and
how much they are earning, among many
other questions.
Where do the data come from?
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• The existence of any amount of unemployment is a bit
of a puzzle
• Labor is bought and sold in a market, just like other
goods and services
–There is a demandfor labor (from firms wanting to hire
workers)
–There is a supplyof labor (from individuals looking for jobs)
–There is a price(called the wage)
• In most markets, the price is expected to adjust until
the market reaches equilibrium, a point at which the
quantity supplied equals the quantity demanded
• The existence of unemployment suggests that this
simplest of models can’t fully explain what goes on in
the labor market
Equilibrium in the labor market
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A simple labor market model can be used to help
understand a few aspects of unemployment
Equilibrium in the labor market
Wage
Labor demand
Units of labor
Firms and the labor market
• The labor demand curve
shows the relationship between the total quantity
of labor demanded by all firms in the economy and the wage rate
• All things being equal, firms will want to hire morelabor when wages are lower and
lesslabor when wages are higher
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• The supply of labor comes from people who are able to
work and who choose to participate in the labor market
– Not everyone who could potentially work wants to work.
Equilibrium in the labor market
Labor supply
Wage
Units of labor
Workers and the labor market
• The labor supply curveshows the relationship between the total labor supplied in the economy and the wage rate.
• Other things being equal, people will
be willing to supply more labor at higher wage rates, and less labor at lower wage rates.
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• The labor demand and labor supply curves describe the national
labor market.
• The intersection of the curves identifies the market equilibrium.
Equilibrium in the labor market
Wage
Labor supply
Labor demand
W*
L*
The labor market in equilibrium
Labor
• At equilibrium, there is a stable wage (price) and amount of labor bought and sold.
• The equilibrium does not explain unemployment.
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Unemployment occurs when the wage rate is
higher than the equilibrium wage.
The labor market with unemployment
W1
Labor supply
Labor demand
LS
LD
W*
L*
Unemployment
Wage
Labor
The labor market with unemployment
• Workers are willing to provide morelabor than firms are willing to hire
• The labor market has a
surplusof workers
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helpful to separate out two categories of
unemployment
normal level of unemployment that persists in an
economy in the long run
unemployment:
1 Frictional unemployment
2 Structural unemployment
3 Real-wage or classical unemployment
Categories of unemployment
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who are changing location, job, or career.
–It is a natural and healthy part of life in a dynamic
economy
mismatch between the skills workers can offer
and the skills in demand.
from wages being higher than the
market-clearing level.
Categories of unemployment
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• Second, cyclical unemployment is caused by
short-term economic fluctuations.
• Economists use the term business cycles to
describe the pattern of short-term ups and
downs.
• Wages are “sticky” in the real world, meaning
that they are slow to respond to shifts in the
economy
–This results in actual wages that are above the
market-clearing level
Cyclical unemployment
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Cyclical unemployment in the United States is
easily observed.
Cyclical unemployment
Annual unemployment rate
Annual per capita GDP
3 …and when the growth rate of GDP/capita increases…
2 …unemployment soon rises…
4 …unemployment soon decreases.
1 Usually, when the GDP/capita
growth rate slows…
2 2
0
2
4
6
8
10
12
Percent
2 4
Year
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Indicate whether each of the following situations
describes frictional, structural, classical, or cyclical
unemployment
Active Learning: Categorizing the type of
unemployment
1 Mary is temporarily unemployed after she
decides to move to NYC for better job
prospects
2 Montana increases its minimum wage, which
makes it difficult for David to find work
3 Few winter fires leaves many firefighters
unemployed from November to April
4 Advances in computer-aided architecture
technology leaves Ann, a drafter, unemployed
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the overall health of the economy, but
addressing the issue is not always easy.
rate from adjusting
those who experience it
unintentionally cause unemployment by
keeping the market wage higher than the
equilibrium wage.
Public policies and other influences
on unemployment
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• The government might prevent falling wages
through minimum-wage legislation.
–A minimum wage is the lowest wage that a firm is
legally allowed to pay its workers
bargain with their employer(s) over salaries
and work conditions
market rate to increase productivity.
Factors that may stop wage rates from falling
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• Frictional and structural unemployment are part of the
normal working of the economy
–Most economists believe that some government policies
can affect the level of these kinds of unemployment.
• Unemployment insuranceis money paid by the
government to people who are unemployed
–Can affect how quickly people find jobs, which will affect
the natural rate of unemployment
• The effect of unemployment insurance is ambiguous
because:
–People might not look as hard for work if the payment is
generous
–If people don’t have to rush into taking the first job they’re
offered, they are more likely to find the right job for them
Unemployment insurance
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unemployment
–The reasoning is that people have a higher incentive to
find a job, knowing they will keep more of the income
they earn from the job
–The magnitude of the impact taxes have on job-search
efforts, however, is inconclusive
also affect unemployment
–Employers may be reluctant to hire people if they
know that it will be difficult to get rid of them
Other factors: Taxes and worker rights
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meet three conditions:
1 Be part of the working-age, civilian population
2 Not have worked in the previous week
3 Be actively looking for work
rates give an indication of employment and
unemployment conditions in an economy
labor demand and labor supply curves
Summary
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• The labor market reaches an equilibrium wage
where the labor demand and labor supply
curves intersect.
• A market wage above the equilibrium wage
causes unemployment.
–Unemployment is a surplus of labor at the market
wage
• Frictional and structural unemployment cause
economies to have long-run, natural levels of
unemployment.
Summary
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• Unemployment that responds to business
cycles is called cyclical unemployment.
• There are three main reasons why wage rates
might not adjust to the equilibrium:
1 A minimum wage above the equilibrium wage
2 Labor unions
3 Efficiency wages
• Setting proper unemployment insurance rates
is challenging because it changes worker
incentives.
Summary