Unemployment and Its Natural Rate

(1)

28

(2)

IDENTIFYING UNEMPLOYMENT

• _{Categories of Unemployment}

• _{The problem of unemployment is usually divided}

into two categories.

• _{The long-run problem and the short-run problem:}

(3)

IDENTIFYING UNEMPLOYMENT

• _{Natural Rate of Unemployment}

• _{The natural rate of unemployment} _is _unemployment

that does not go away on its own even in the long run.

• _{It is the amount of unemployment that the economy}

(4)

IDENTIFYING UNEMPLOYMENT

• _{Cyclical Unemployment}

• _{Cyclical unemployment} _{refers to the year-to-year}

fluctuations in unemployment around its natural rate.

• _{It is associated with with short-term ups and downs}

(5)

IDENTIFYING UNEMPLOYMENT

• _{Describing Unemployment}

• _{Three Basic Questions:}

• _{How does government measure the economy’s rate of}

unemployment?

• _{What problems arise in interpreting the unemployment}

data?

(6)

• _{Unemployment is measured by the Bureau of}

Labor Statistics (BLS).

• _{It surveys 60,000 randomly selected households}

every month.

(7)

• _{Based on the answers to the survey questions,}

the BLS places each adult into one of three categories:

• _Employed

• _Unemployed

(8)

• _{The BLS considers a person an adult if he or}

(9)

• _{A person is considered employed if he or she}

(10)

• _{A person is unemployed if he or she is on}

(11)

• _{A person who fits neither of these categories,}

(12)

• _{Labor Force}

• _The_{labor force}_{is the total number of workers,}

including both the employed and the unemployed.

• _{The BLS defines the labor force as the sum of the}

(13)

Figure 1 The Breakdown of the Population in 2001

Adult

Not in labor force (70.1 million)

(14)

• _The_{unemployment rate}_{is calculated as the}

percentage of the labor force that is unemployed.

U n e m p l o y m e n t r a t e = N u m b e r u n e m p l o y e d

(15)

• _The_{labor-force participation rate}_{is the}

percentage of the adult population that is in the labor force.

How Is Unemployment Measured?

L a b o r f o r c e p a r t i c i p a t i o n r a t e

L a b o r f o r c e

A d u l t p o p u l a t i o n

(16)

Table 1 The Labor-Market Experiences of Various Demographic Groups

(17)

Figure 2 Unemployment Rate Since 1960

10

1960 1965 1980 1985 1990 2005

Percent of Labor Force

1995 2000 Natural rate of

unemployment

(18)

Figure 3 Labor Force Participation Rates for Men and Women Since 1950

100

1950 1955 1960 1965 1970 1975 1980 1985 1990 2000

Labor-Force Participation Rate (in percent)

Women Men

(19)

• _{It is difficult to distinguish between a person}

who is unemployed and a person who is not in the labor force.

• _{Discouraged workers}_{, people who would like}

to work but have given up looking for jobs after an unsuccessful search, don’t show up in

unemployment statistics.

• _{Other people may claim to be unemployed in}

(20)

Work?

• _{Most spells of unemployment are short.}

• _{Most unemployment observed at any given}

time is long-term.

• _{Most of the economy’s unemployment problem}

(21)

Unemployed?

• _{In an ideal labor market, wages would adjust to}

(22)

Unemployed?

• _{Frictional unemployment}_{refers to the}

unemployment that results from the time that it takes to match workers with jobs. In other

(23)

Unemployed?

• _{Structural unemployment}_{is the unemployment}

that results because the number of jobs

(24)

JOB SEARCH

• _{Job search}

• _{the process by which workers find appropriate jobs}

given their tastes and skills.

• _{results from the fact that it takes time for qualified}

(25)

JOB SEARCH

• _{This unemployment is different from the other}

types of unemployment.

• _{It is not caused by a wage rate higher than}

equilibrium.

• _{It is caused by the time spent searching for the}

(26)

Inevitable

• _{Search unemployment is inevitable because the}

economy is always changing.

• _{Changes in the composition of demand among}

industries or regions are called sectoral shifts. • _{It takes time for workers to search for and find}

(27)

• _{Government programs can affect the time it}

takes unemployed workers to find new jobs.

• _{These programs include the following:}

• _{Government-run employment agencies}

• _{Public training programs}

(28)

• _{Government-run employment agencies give out}

(29)

• _{Public training programs aim to ease the}

transition of workers from declining to growing industries and to help disadvantaged groups

(30)

• _{Unemployment insurance is a government}

program that partially protects workers’ incomes when they become unemployed.

• _{Offers workers partial protection against job losses.} • _{Offers partial payment of former wages for a}

(31)

• _{Unemployment insurance}_{increases the amount}

of search unemployment.

• _{It reduces the search efforts of the unemployed.} • _{It may improve the chances of workers being}

(32)

• _{Structural unemployment occurs when the}

quantity of labor supplied exceeds the quantity demanded.

• _{Structural unemployment is often thought to}

(33)

• _{Why is there Structural Unemployment?}

• _{Minimum-wage laws}

• _Unions

(34)

MINIMUM-WAGE LAWS

• _{When the minimum wage is set above the level}

(35)

Figure 4 Unemployment from a Wage Above the Equilibrium Level

Quantity of Labor

0

(36)

UNIONS AND COLLECTIVE

BARGAINING

• _A_union_{is a worker association that bargains}

with employers over wages and working conditions.

• _{In the 1940s and 1950s, when unions were at}

their peak, about a third of the U.S. labor force was unionized.

• _{A union is a type of cartel attempting to exert}

(37)

UNIONS AND COLLECTIVE

BARGAINING

• _{The process by which unions and firms agree}

(38)

UNIONS AND COLLECTIVE

BARGAINING

• _A_strike_{will be organized if the union and the}

firm cannot reach an agreement.

• _{A strike refers to when the union organizes a}

(39)

UNIONS AND COLLECTIVE

BARGAINING

• _{A strike makes some workers better off and}

other workers worse off.

• _{Workers in unions (insiders) reap the benefits}

(40)

UNIONS AND COLLECTIVE

BARGAINING

• _{By acting as a cartel with ability to strike or}

otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members.

• _{Union workers earn 10 to 20 percent more than}

(41)

• _{Critics argue that unions cause the allocation of}

labor to be inefficient and inequitable.

• _{Wages above the competitive level reduce the}

quantity of labor demanded and cause unemployment.

• _{Some workers benefit at the expense of other}

(42)

• _{Advocates of unions contend that unions are a}

necessary antidote to the market power of firms that hire workers.

• _{They claim that unions are important for}

(43)

THE THEORY OF EFFICIENCY

WAGES

• _{Efficiency wages}_{are above-equilibrium wages}

paid by firms in order to increase worker productivity.

• _{The theory of efficiency wages states that firms}

(44)

THE THEORY OF EFFICIENCY

WAGES

• _{A firm may prefer higher than equilibrium}

wages for the following reasons:

• _{Worker Health: Better paid workers eat a better diet}

and thus are more productive.

• _{Worker Turnover: A higher paid worker is less}

(45)

THE THEORY OF EFFICIENCY

WAGES

• _{A firm may prefer higher than equilibrium}

wages for the following reasons:

• _{Worker Effort: Higher wages motivate workers to}

put forward their best effort.

• _{Worker Quality: Higher wages attract a better pool}

(46)

Summary

• _{The unemployment rate is the percentage of}

those who would like to work but don’t have jobs.

• _{The Bureau of Labor Statistics calculates this}

statistic monthly.

• _{The unemployment rate is an imperfect}

(47)

Summary

• _{In the U.S. economy, most people who become}

unemployed find work within a short period of time.

• _{Most unemployment observed at any given}

(48)

Summary

• _{One reason for unemployment is the time it}

takes for workers to search for jobs that best suit their tastes and skills.

• _{A second reason why our economy always has}

some unemployment is minimum-wage laws.

• _{Minimum-wage laws raise the quantity of labor}

(49)

Summary

• _{A third reason for unemployment is the market}

power of unions.

• _{A fourth reason for unemployment is suggested}

by the theory of efficiency wages.

• _{High wages can improve worker health, lower}