Download Unemployment

Macroeconomic
Objectives:
Unemployment
Chapter 10, 265-273
What is the “natural” rate of unemployment?
How can we measure unemployment? Why can it be
difficult to do so?
What are the types of unemployment? How do we
graph them?
How does unemployment affect the market?
Some materials
within are
Copyright © 2001
Macroeconomic Objectives and the
Economy
 There are three macroeconomic
objectives:
 Full employment of the nation’s
resources: labor, land, capital
 Price level stability—low inflation rate
 Economic growth
 Why does this matter?
Key terms
 Unemployment—idle, or not fully used
resources; people of working age who are
actively seeking employment but who are
not employed
 Unemployment of other resources will be refered
to as such: “unemployment of capital”
 Underemployment—people of working
age with part-time jobs who want full-time
jobs, or with jobs that do not make full use
of their education
 Both terms mean an economy is inefficient
by “wasting” scarce resources by not using
them fully
How is Unemployment
Measured?
The labor force participation
rate is the percentage of the adult
population that is in the labor
force; those who are employed
and unemployed of working-age.
Labor force
Labor force participat ion rate =
100
Adult population
How is Unemployment
Measured?
The unemployment rate is calculated
as the percentage of the labor force
that is unemployed in an entire nation
Number unemployed
Unemployme nt rate =
 100
Labor force
Ex: if unemployment rate is 5%, 5 out of every 100
people in the labor force are unemployed.
Describing Unemployment
Three 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?
Does the Unemployment Rate Measure
What We Want It To?

Official statistics underestimate true
employment due to hidden
unemployment, excluded groups:
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Discouraged workers, “drop-outs” of the labor
force (could not find a job)
Full-time vs part-time (both considered
employed)
No distinction on type of work done
Early retirees, retraining programs, those
working in underground economies
Different population groups within a nation
(region, gender, ethnicity, age, occupation,
education levels)
Consequences of Unemployment


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Loss of real output (real GDP)
Loss of income for unemployed workers
Loss of tax revenue for the government
Costs to the government of unemployed benefits (also
reduces tax revenue, govt-provided services such as public
goods, merit goods)
Cost to government of social problems:

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Unequal distribution of income (some become poorer while
others maintain or increase income)
Long period unemployment can result in a harder time finding
a job (may lose some skills, education, firms relying on fewer
workers)
Personal problems: loss of income could mean
indebtedness, stress, lower levels of health, family tensions,
etc.
Social problems: high rates of unemployment, especially
when unequally distributed, can lead to serious problems
such as unrest, increased crime/violence, drug use, and
homelessness
CHECK IT!
 Define unemployment and explain how it
differs from underemployment.
 How is the unemployment rate measured?
 Why are unemployment figures inaccurate?
 Identify some of the economic and social
consequences of unemployment.
 In an economy with a labor force of 27.3
million people and 3.1 million unemployed
people, 0.5 million discouraged workers,
and 1.5 million part-time workers, what is
the unemployment rate?
Categories of Unemployment


The problem of unemployment is
usually divided into two categories.
The long-run problem and the shortrun problem:


The natural rate of unemployment—all
unemployment other than that caused
by the business cycle (the sum of
structural, frictional, and seasonal
unemployment)
The cyclical rate of unemployment
Natural unemployment:
structural
Why are there always some people unemployed? This question is related to
structural unemployment—unemployment as a result of changes in demand
(mostly DEMAND-SIDE phenomenon) for:
types of labor skills and/or geographical location of industry/jobs
Due to technological innovation, structure of economy (agriculture vs. service), leads to
mismatches between labor skills needed by employers and labor skills provided
by workers
Physical location of industry could result in fall in demand for labor in one region, and
increase in another; firms could move abroad; inability of workers to move to these
structurally expanding regions could result in unemployment
labor market rigidities—factors preventing supply and demand from operating in the
labor market:
Minimum wage legislation (price floors)
labor union activities, wage bargaining (higher equilibrium wages)
Employment protection laws (higher cost to firms)
Generous unemployment benefits (increase attractiveness to remaining unemployed,
reduce incentives to work)
Solutions: improved job-search techniques, outplacement counseling, retraining
programs, tuition grants, low-cost education loans, subsidies or tax credits to businesses
for retraining, relocation subsidies and loans, venture capital funds to help workers start
new business, etc
Structural unemployment
from mismatches between
labor demand and supply are
can be shown by a product
supply and demand graph
(at left).
Demand shifts from D1 to D2
(decrease) and Supply falls
from Q2 to Q1.
Smaller quantity supplied
means that firms will need
less labor; those who lack
skills for another industry or
cannot relocate have
structural unemployment.
Economists argue that market rigidities can cause higher unemployment
rates in countries with strong labor protection systems (like Europe)
compared to countries with weaker labor protection systems (like US).
Natural unemployment: frictional
 Why can’t unemployed people just get a job? This
question is related to frictional unemployment—
when workers are “between jobs” due to being fired, a
failed firm, search for a better job, or waiting to start
a new job (SUPPLY-SIDE)

Frictional unemployment is usually short-term; does not
involved lack of skills in demand (less serious than
structural)
 Certain amount inevitable in any growing/changing
economy
Main cause: incomplete information between employers
and workers about job vacancies and required
qualifications
 How to fix? Measures to reduce time workers spend
between jobs and improving information flows (i.e.,
websites, advertisements, employment agencies)
Seasonal unemployment—when demand for labor in
certain industries changes on a seasonal basis because of
different needs
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Structural unemployment is a demand-side
phenomenon. It changes as individuals' tastes and
preferences change and buyers switch from one
product to another, the demand for labor to
produce some goods increases, while the demand
for labor to produce other goods falls. Second, as
technology changes, and capital becomes
relatively more productive and less expensive,
businesses tend to substitute capital for labor.
This "automation" of the production process
reduces the demand for certain types of labor.
Finally, in a large country like the United States,
regional wage differentials may make skills
obsolete in some areas, while the demand is high
in other areas.
Frictional unemployment is a supply-side
phenomenon. It changes as workers enter and reenter
the labor force and/or quit one job to look for another.
The number of new entrants and reentrants depends
principally upon demographics, changing attitudes
toward work, government draft policies, and military
preparedness.
Given that new entrants and re-entrants continually
flow into the labor market and given that some
workers are always switching jobs, an element of
frictional unemployment is always evident in the
unemployment statistics.
Cyclical unemployment
 Cyclical rate of unemployment is caused
by a downturn in the business cycle, when
the economy is in a recessionary gap
(mostly a Keynesian concept)
 Due to declining or low aggregate demand (AD);
also known as demand-deficient
unemployment
 As real GDP falls due to fall in AD,
unemployment increases as firms lay off
workers
 When the economy produces real GDP at the
level of potential output, cyclical unemployment
ends
Cyclical unemployment
 A decrease in aggregate demand results in an overall
decline in the level of spending in the economy and
reduces the overall demand for labor.
 Decreased spending is due to an excess of saving
over investment, taxation over government spending,
or imports over exports.
 Cyclical unemployment is generally short-term,
depending on the nature of the downturn.
 Some downturns or recessions are long, but not
severe
 Others are more protracted, but short-lived.
 Only the depressions are both long and severe
Economy initially producing potential output Yp, no cyclical
unemployment. Fall in aggregate demand (AD) causes AD1 to shift
to AD2, creating a recessionary gap as real GDP falls to Yrec.
At Yrec, new unemployment is cyclical. Policies to increase AD and
eliminate recessionary gap (i.e., fiscal and monetary policies) can
attempt to solve this type of unemployment.
So, what is full employment?
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Full employment exists when everybody who is willing and able
to work at the going wage (the labor force) is fully and gainfully
employed and no involuntary unemployment exists (“natural
unemployment”).
However, some involuntary unemployment always exists. At
minimum, this "permanent" amount of unemployment will be
partly frictional and partly structural.
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Frictional unemployment can be reduced with a better flow of job
information, increased job satisfaction, and improved placement of job
applicants in job vacancies.
Structural unemployment, by its very nature, can only be reduced with
increased programs for retraining and relocating displaced workers.
Frictional and structural unemployment can be reduced only at an
increased cost.
NOTE: Employment can be increased even further, if the labor force
itself is enlarged by minimizing voluntary unemployment. Voluntary
unemployment can be reduced by increasing the going wage rate and
improving the quality of jobs. Induced unemployment can be reduced
by changing the quantity and timing of unemployment benefits. Note
further that any attempt to increase the labor force also involves
increased costs.
Unemployment on AD-AS model
(new classical model)
Combined version on p. 272 of your book