Download Unit 3 Identifying Unemployment The United States economy is

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Unit 3 Identifying Unemployment
● The United States economy is measured by the Bureau of Labor Statistics (BLS), and it
surveys 60,000 households for data
● The BLS separates each adult (16 and older) into 3 categories:
○ Employed- If the person has spent most of the previous week working at a paid
job
○ Unemployed- A person who is on temporary layoff, is looking for a job, or is
waiting for the start of a new job
○ Not in the Labor Force- A person who is a full-time student, homemaker, or
retiree
● ***Labor Force = Number Employed + Number Unemployed***
● ***Unemployment Rate = (Number Unemployed) / (Labor Force) * 100***
○ Represents percentage of the labor force that is unemployed
● ***Labor-Force Participation Rate = (Labor Force) / (Adult Population) * 100***
○ Represents percentage of the total adult population that is in the labor force
● Natural Rate of Unemployment- The normal rate of employment, also known as cyclical
unemployment: usually around 5%
● Discouraged Workers​- People who have tried to find a job and have failed, thus giving
up and are now “discouraged”
○ Adding discouraged workers would raise unemployment rate by 0.5%
● ***Most spells of unemployment are short, and most unemployment observed at
any given time is long-term***
○ Let’s say that you meet 100 unemployed people. Of them, 80 are unemployed for
week, and 20 are unemployed for the whole year. Thus, most unemployment
spells are short because 80% are unemployed for only one week.
○ Consider the total amount of unemployment. Those 20 people unemployed for the
whole year makes up a total of 1040 weeks of unemployment. Combined with 80
weeks, this equals 1120 weeks unemployed for the 100 people as a whole.
1040/1120 = .93, or 93%, which means most unemployed observed at any given
time is long term
● Unemployment rate will never reach zero, because of a multitude of reasons
○ Frictional Unemployment​- Unemployment that results because it takes time for
workers to search for the jobs that best suit their tastes and skills
■ Frictional Unemployment is thought to explain short spells of
unemployment
○ Structural Unemployment- ​Unemployment that results because the number of
jobs available in some labor markets is insufficient to provide a job for everyone
who wants one
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■ Structural Unemployment is thought to explain long spells of
unemployment
○ Job Search- ​The process by which workers find appropriate jobs given their
tastes and skills
■ If all workers and jobs were the same, so that all workers were equally
suited for their jobs, job search wouldn’t be an issue. However, workers
differ in taste and skills, and jobs differ in attributes, so finding a job for a
laid-off worker is much more difficult
● Why frictional unemployment is inevitable
○ Frictional Unemployment results in the changes of the demand for labor for
different firms
■ If demand for company A surpasses the demand for company B, then
company A will increase employment while company B decreases
employment
● Company A must decide which new workers to hire for the
growing amount of job, while company B’s laid off workers must
search for new jobs. The result of this is transition is a period of
frictional unemployment
○ Different regions of a nation produces different goods, so at times employment in
one region can increase while the employment in another region decreases
■ Changes in the composition of demand among industries or regions are
called ​sectoral shifts.
○ The economy is always changing
■ Since the economy is dynamic, workers in a declining industry find
themselves looking for work
● Public Policy and Job Search
○ Governments try to facilitate job search in a few ways
■ Government-run employment Agencies-give out information on job
vacancies
■ Public Training programs-aim to ease transition of workers in a declining
sector
○ Most of the job search in our nation is conducted without government intervention
(i.e. newspaper ads, job newsletters, headhunters, etc.)
○ Most education for a job is done privately through schools or on-the-job training
● Unemployment Insurance- A government program that partially protects workers’
incomes when they become unemployed
○ People who quit their jobs, fired or just entered the labor force are not eligible
○ Even though unemployment insurance the financial stress of the unemployed, it
also increases the amount of unemployed
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■ People respond to incentives. Because unemployment benefits stop when a
worker takes a new job, the unemployed defers. Along with this, since
unemployment insurance makes unemployment less strenuous, workers
are less likely to seek guarantees of job security.
Minimum Wage Laws
● Although minimum wage laws are not the most predominant reason for unemployment,
they are for certain groups with particularly high unemployment rates.
○ When a minimum wage law forces a wage to be higher than the wage that
balances supply and demand, it raises the quantity of labor supplied and reduces
the quantity of labor demanded compared to the equilibrium value.
○ IF THE WAGE IS KEPT ABOVE EQUILIBRIUM FOR ANY REASON,
THE RESULT IS UNEMPLOYMENT
Unions and Collective Bargaining
● Unions​ are worker associations that bargain with employers over wages and working
conditions
○ A union is like a cartel in that a union is a group of sellers acting together in hope
of exerting joint market power
○ When a union raises the wage above the equilibrium level, it raises the quantity of
labor supplied and reduces the quantity of labor demanded which results in
unemployment.
■ Insiders benefit from from high union wages
■ Outsiders do not get union jobs
● Outsiders respond to their status in two ways:
○ Remain unemployed and wait for unionized jobs
○ Take a job at a firm that is not unionized
● Collective Bargaining ​is the process by which unions and firms agree on the terms of
employment
○ Strikes are the organized withdrawal of labor from a firm by a union
● Are unions good or bad for the economy?
○ Critics argue that when unions raise wages above equilibrium , they cause the
unemployment we see in the nation and reduce wages for the rest of the country.
The resulting allocation is argued to be both inefficient and inequitable
○ Advocates for unions argue that unions are a necessary antidote to the market
power of firms that hire workers. Advocates also claim that unions are important
for helping firms respond efficiently to workers’ concerns.
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Theory of Efficiency Wages
● Efficiency Wages are above-equilibrium wages paid by firms in order to increase worker
productivity
○ According to this theory, firms operate more efficiently if wages are above the
equilibrium level. Therefore, it may be profitable for firms to keep wages high
even in the presence of a surplus of labor.
○ States that such a constraint on firms is unnecessary in many cases because firms
may be better off keeping wages above the equilibrium level.
● There are several types of efficiency-wage theory:
○ Worker Health- The first link emphasizes the connection between wages and
worker health. Better paid workers eat a more nutritious diet, and workers that are
healthier are more productive. This theory is more applicable in nations that are
less developed where inadequate nutrition is a common issue.
○ Worker Turnover- A second link emphasizes the connection between wages and
worker turnover. Workers quit jobs for many reasons, the frequency with which
they quit depends on the entire set of incentives they face, including the benefits
of leaving and the benefits of staying. The more a firm pays its workers, the less
incentivized they are to leave.
○ Worker Effort- The third link emphasizes the connection between wages and
worker efforts. Higher wages make workers more eager to keep their jobs,
therefore increasing productivity because workers are now putting their best effort
to keep their jobs.
○ Workers Quality- The fourth link emphasizes the connection between wages and
worker quality. When a firm hires new workers, it cannot perfectly gauge the
quality of the applicants. By paying a higher wage, the firm attracts a better pool
of workers to apply for its jobs.