Chap_19 Unemployment and its natural rate

nullUnemployment and Its Natural RateUnemployment and Its Natural RateChapter 26Copyright © 2001 by Harcourt, Inc. All rights reserved.   Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Categories of UnemploymentCategories of UnemploymentThe problem of unemployment is usually divided into two categories. The long-run problem and the short-run problem: The natural rate of unemployment The cyclical rate of unemploymentNatural Rate of UnemploymentNatural Rate of UnemploymentThe 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 normally experiences.Cyclical UnemploymentCyclical UnemploymentCyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. It is associated with with short-term ups and downs of the business cycle.Describing UnemploymentDescribing UnemploymentThree Basic Questions: How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work?How is Unemployment Measured?How is Unemployment Measured?Unemployment is measured by the Bureau of Labor Statistics (BLS). It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey. How is Unemployment Measured?How is Unemployment Measured?Based on the answers to the survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labor force How is Unemployment Measured?How is Unemployment Measured?The BLS considers a person an adult if he or she is over 16 years old.How is Unemployment Measured?How is Unemployment Measured?A person is considered employed if he or she has spent most of the previous week working at a paid job.How is Unemployment Measured?How is Unemployment Measured?A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job.How is Unemployment Measured?How is Unemployment Measured?A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force. How is Unemployment Measured?How is Unemployment Measured?The BLS defines the labor force as the sum of the employed and the unemployed.The Breakdown of the Population in 1998The Breakdown of the Population in 1998Unemployed (6.2 million) Not in labor force (67.5 million)Employed (131.5 million)How is Unemployment Measured?How is Unemployment Measured?The unemployment rate is calculated as the percentage of the labor force that is unemployed.How is Unemployment Measured?How is Unemployment Measured?The labor-force participation rate is the percentage of the adult population that is in the labor force.Labor-Force Experiences of Various Demographic Groups (1998)Labor-Force Experiences of Various Demographic Groups (1998)Unemployment Rate Since 1960Unemployment Rate Since 1960108642197019751980198519901995Percent of Labor Force19651960 2000 0null1008060402001950195519601965197019751980198519901995 ’98Labor-force Participation Rate (in percent)Labor-force Participation Rates for Men and Women Since 1950Does the Unemployment Rate Measure What We Want It To??Does the Unemployment Rate Measure What We Want It To??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 order to receive financial assistance, even though they aren’t looking for work. How Long Are the Unemployed without Work?How Long Are the Unemployed without Work?Most spells of unemployment are short. Most unemployment observed at any given time is long-term. Most of the economy’s unemployment problem is attributable to relatively few workers who are jobless for long periods of time.Why Are There Always Some People Unemployed?Why Are There Always Some People Unemployed?In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed.Why Are There Always Some People Unemployed?Why Are There Always Some People Unemployed?Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suited for them.Job Search UnemploymentJob Search UnemploymentJob search is the process by which workers find appropriate jobs given their tastes and skills. Job search unemployment results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.Job Search UnemploymentJob Search UnemploymentThis 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 “right” job.The Inevitability of Job Search UnemploymentThe Inevitability of Job Search UnemploymentSearch 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 jobs in new sectors. Public Policy and Job SearchPublic Policy and Job SearchGovernment 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 Unemployment insurancePublic Policy and Job SearchPublic Policy and Job SearchGovernment-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly.Public Policy and Job SearchPublic Policy and Job SearchPublic training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.Public Policy and Job SearchPublic Policy and Job SearchUnemployment 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 limited time to those who are laid off.Public Policy and Job SearchPublic Policy and Job SearchUnemployment insurance increases the amount of search unemployment. It reduces the search efforts of the unemployed. It may improve the chances of workers being matched with the right jobs.Why Are There Always Some People Unemployed?Why Are There Always Some People Unemployed?Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to explain longer spells of unemployment.Three Possible Reasons for an Above-Equilibrium WageThree Possible Reasons for an Above-Equilibrium WageMinimum-wage laws Unions Efficiency wagesMinimum-Wage LawsMinimum-Wage LawsWhen the minimum wage is set above the level that balances supply and demand, it creates unemployment.Unemployment from a Wage Above the Equilibrium Level...Unemployment from a Wage Above the Equilibrium Level...WEQuantity of LaborLE0WageUnions and Collective BargainingUnions and Collective BargainingA 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 its market power.Unions and Collective BargainingUnions and Collective BargainingThe process by which unions and firms agree on the terms of employment is called collective bargaining.Unions and Collective BargainingUnions and Collective BargainingA strike will be organized if the union and the firm cannot reach an agreement. A strike refers to when the union organizes a withdrawal of labor from the firm.Unions and Collective BargainingUnions and Collective BargainingA strike makes some workers better off and other workers worse off. Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.Unions and Collective BargainingUnions and Collective BargainingBy 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 nonunion workers.Are Unions Good or Bad for the Economy?Are Unions Good or Bad for the Economy?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 workers.Are Unions Good or Bad for the Economy?Are Unions Good or Bad for the Economy?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 helping firms respond efficiently to workers’ concerns.Theory of Efficiency WagesTheory of Efficiency WagesEfficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level.Theory of Efficiency WagesTheory of Efficiency WagesA 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 likely to look for another job.Theory of Efficiency WagesTheory of Efficiency WagesA 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 of workers to apply for jobs.SummarySummaryThe 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 measure of joblessness.SummarySummaryIn the U.S. economy, most people who become unemployed find work within a short period of time. Most unemployment observed at any given time is attributable to a few people who are unemployed for long periods of time.SummarySummaryOne 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 supplied and reduce the quantity demanded. SummarySummaryA 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 worker turnover, increase worker effort, and raise worker quality. nullThe Breakdown of the Population in 1998The Breakdown of the Population in 1998Unemployment Rate Since 1960Unemployment Rate Since 1960nullLabor-force Participation Rates for Men and Women Since 1950Unemployment from a Wage Above the Equilibrium Level...Unemployment from a Wage Above the Equilibrium Level...