Unemployment and Its Natural Rate

1
Chapter 26

• Unemployment and Its Natural Rate

2
Identifying Unemployment

• A job loss means a lower living standard in the
  present, anxiety about the future, and reduced
  self-esteem. (micro issue)
• Unemployment results in a loss of output in an
  economy (macro issue)

3
Categories of Unemployment

• The problem of unemployment is usually divided
  into two categories
• . The Natural Rate of Unemployment
• . The Cyclical Rate of Unemployment

4
Natural Rate of Unemployment

• Joblessness that does not go away on its own
  even in the long run.
• The amount of unemployment that the economy
  normally experiences.

5
Components of the Natural Rate

• Frictional Unemployment represents joblessness
  related to job searching and job switching.
• Structural Unemployment refers to unemployment in
  the in economy resulting from changes (e.g.
  labor saving technology).

6
Cyclical Unemployment

• Refers to the year-to-year fluctuations in
  unemployment around its natural rate. Deals with
  short-term fluctuations associated with the ups
  and downs of the business cycle.

7
Measuring Unemployment

• Monthly Unemployment Rate is calculated by
• The BLS surveying 60,000 randomly selected
  households and categorizing each adult (i.e. gt16
  years old) as
• . Currently employed (have a paying job).
• . Unemployed but actively seeking a job.
• . Not in the labor force (i.e. neither of above).

8
Measuring Unemployment

• A person is employed if he or she has spent any
  time at all as a paid employee during the survey
  week.
• A person is unemployed if he or she is
• on temporary layoff
• is looking for a job
• is waiting for the start of a new job
• A person in neither category is not in the labor
  force.

9
Measuring Unemployment

• The Labor Force is the number of employed persons
  plus the number of unemployed persons.

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Unemployment Rate Formula

• U B/(AB) X 100
• U is the unemployment rate
• A is the number of employed
• B is the number of unemployed
• AB is the labor force

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August 2002 Unemployment Rates (NSA)

• U.S. (8.148 m /143.176 m) X 100 5.7
• GA. (198,028/4,199,436)X 100 4.7

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Unemployment Rates ()
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U.S. Unemployment (Sept. 2002,SA)

• All workers 5.6
• Adult Men 5.2
• Adult Women 4.9
• Teenagers 15.7
• Black 9.6
• Hispanic 7.4

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Measuring Unemployment

• The Labor-Force Participation Rate illustrates
  the fraction of the adult population that has
  chosen to participate in the labor market.
• The Labor-Force Participation Rate is
• PR (AB) / Adult Pop X 100
• Table 26-1 and Figure 26-3

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Shortcomings of the Unemployment Rate?

• It is hard to distinguish between a person who is
  unemployed and a person who is not in the labor
  force.
• The unemployment rate is not a perfect measure of
  unemployment.
• Underemployed
• Discouraged workers

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Underemployed/Discouraged Workers

• Underemployed are those who are working part time
  when they really want full-time work.
• Discouraged Workers are those who have given up
  looking for work and report that they are no
  longer in the labor force.

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Duration of Unemployment

• Most of the economys unemployment problem is
  attributable to the relatively few workers who
  are jobless for long periods of time.
• The average duration of unemployment is very
  short (lt 10 weeks) for the majority of the
  unemployed (75).

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Classical Labor Market

• In an ideal labor market, wages would adjust to
  balance the supply of labor and the demand of
  labor, ensuring full employment.

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Why is there always some unemployment?

• Five reasons
• Minimum-wage laws
• Unions
• Efficiency wages
• Job search (frictional)
• Structural

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1. Minimum-Wage Laws

• Fair Labor Standards Act of 1938
• 1938 (.25/hr.), 1965 (1.25/hr.), 1990
  (3.80/hr.), 1997-Present (5.15/hr.)

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1. Minimum-Wage Laws

• When a minimum-wage law forces the wage to remain
  above the level that balances supply and demand,
  it creates a surplus of labor.

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Minimum-Wage Laws
Price of Labor
Supply
Equilibrium without Minimum Wage
Demand
Quantity of Labor
23
Minimum-Wage Laws
Price of Labor
Supply
PM
Minimum Wage Law Established
Demand
Quantity of Labor
QS
QD
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Minimum-Wage Laws
Price of Labor
Supply
PM
Surplus or Unemployment
Demand
Quantity of Labor
QS
QD
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2. Unions

• A union is a worker association that bargains
  with employers over wages and working conditions.
  
• By acting as a cartel with ability to strike,
  unions usually result in above equilibrium wages
  for their members.

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Impact of Unions on Employment

• At wages set above equilibrium
• a very large number of qualified workers are
  willing to accept the jobs
• job openings tend to be scarcer in unionized
  sectors
• workers tend to hold out accepting other jobs in
  hopes of one day landing the high paying union job

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3. The Theory of Efficiency Wage

• Firms operate more efficiently if wages are above
  the equilibrium level.
• Why?

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The Theory of Efficiency Wage

• Higher than equilibrium wages are set to promote
  the following goals of the firm
• Worker Turnover A higher paid worker is less
  likely to look for another job.
• Worker Effort Higher wages motivate workers to
  put forward their best effort.
• Worker Quality Higher wages attract a better
  pool of workers to apply for jobs.

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4. Job Search Unemployment

• Unemployment that results from the fact that it
  takes time for qualified individuals to be
  matched with available jobs.

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Situations of Job Search Unemployment

• Search unemployment is inevitable because the
  economy is always changing.
• Who is searching?
• New Entrants, Re-entrants, job switchers

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Public Policy and Job Search

• Examples of how the Government impacts the job
  search process
• Minimum Wage Laws
• Government-run employment agencies
• Public training programs
• Unemployment insurance

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Government -Run Employment Agencies (e.g Georgia
Dept. Labor)

• Gives out information about job vacancies in
  order to match workers and jobs more quickly.

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Public Training Programs

• Aim to ease the transition of workers from
  declining to growing industries and to help
  disadvantaged groups escape poverty (e.g
  retraining of apparel workers)

34
Unemployment Insurance

• Offers workers partial income protection against
  job loss.
• Funded by unemployment tax (paid by employers)
• Increases the amount of search unemployment

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Unemployment Insurance

• How to qualify? Minimum earnings over two
  quarters, leave job through no fault of own
• Max. Benefits 40-50 of past wages for 6 months
  (GA max---295 week)
• To maintain benefits---check in with Dept of
  Labor, seek employment

36
Cyclical Unemployment

• Deviation in unemployment from natural rate (see
  Figure 26-2).
• In addition to the four factors discussed
  previously, unemployment may be higher or lower
  due to cyclical factors.

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Conclusion

• Since unemployment can impose unusual hardships
  on individuals, families and communities, it is
  an important concern of policymakers.
• Many factors, including public policies,
  efficiency wages, and cyclical conditions, help
  explain the existence of unemployment.