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Unemployment
What is Say’s Law?
The belief of the
Classical Economists
that the economy was
always tending toward
full employment
2
What does
Say’s Law say?
Supply creates its
own demand
3
Why is Say’s Law a Full
Employment theory?
Generally speaking,
producers produce goods
that consumers want and
consumers have the
money to buy because of
the wages they were paid
4
Under Say’s Law, is
Unemployment possible?
Yes, but it is a short-lived
adjustment period in which
wages and prices decline or
people voluntarily choose
not to work
5
What changed people’s
mind about Say’s Law?
The Great Depression and
the publication of The
General Theory of
Employment, Interest, and
Money published in 1936
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6.6%
5.6%
3.2%
12.1%
12%
9.5%
8.8%
Japan U.S. Germany England Canada Italy France
7
More than a Century of Unemployment
Source: U.S. Department of Labor, Bureau of Labor Statistics
Figure 7-1
8
Unemployment Rate Since 1960
Percent
of
Labor
Force
Unemployment rate
10
8
6
4
Natural rate of
unemployment
2
0
1960
1965
1970
1975
1980
1985
1990
1995
9
2000
Employed & unemployed
Noninstitutionalpopulation
seeksemployment
(inlaborforce)
acceptsemployment
(employed)
doesn't seeksemployment
(notinlaborforce)
doesn'tacceptsemployment
(unemployed)
10
Unemployment
• Stocks
– The quantity of something (unemployed)
measured at a point in time
• Flow
– A quantity measured over time
(job leavers, job finders)
12
Visualizing Stocks and Flows
Figure 7-4
13
Types & causes of unemployment
• Frictional unemployment
• Structural unemployment
• Deficient-demand (cyclical)
unemployment
• Seasonal unemployment
15
What is Frictional
Unemployment?
Unemployment caused by
the normal search time
required by workers with
marketable skills who are
changing jobs, entering, or
re-entering the labor force
16
What is Frictional
Unemployment?
Joblessness experienced by
people who are between
jobs or who are just
entering or reentering the
labor market
17
Frictional Unemployment
– Arises from normal labor turnover
— people entering and leaving the
labor force
– Influenced by unemployment
benefits
18
What is Structural
Unemployment?
Unemployment caused by a
mismatch of the skills
/locations of workers out of
work and the skills/locations
required for existing job
opportunities
19
Structural Unemployment
– Arises when changes in technology
or international competition change
the skills needed to perform jobs or
change the locations of jobs
• Structural unemployment is often thought to
explain longer spells of unemployment.
– Typically lasts longer than frictional
20
What is Cyclical
Unemployment?
Unemployment caused by
the lack of jobs during a
recession
Joblessness arising from changes in
production over the business cycle
21
Percentage deviation from trend
©1999 South-Western College Publishing
Countercyclical VariablesPanel B
40
20
0
20
40
1900
Figure 1.5B
1920
1940
1960
1980
Time
GDP
Unemployment
77
22
Cyclical Unemployment
–Arises from the fluctuations of
the business cycle
–Increases during a recession and
decreases during expansion
–The natural rate of
unemployment excludes cyclical
unemployment
23
What causes Cyclical
Unemployment?
When total spending falls,
businesses will find it
profitable to produce a
lower volume of goods and
avoid unsold inventory
24
Cyclical Unemployment
•
•
Cyclical unemployment refers to the yearto-year fluctuations in unemployment
around its natural rate of unemployment.
It is associated with short-term ups and
downs of the business cycle.
25
What is Seasonal
Unemployment?
Unemployment caused by
recurring changes in
hiring due to changes in
weather conditions
26
What is Seasonal
Unemployment?
Joblessness related to
changes in weather,
tourist patterns, or
other seasonal factors
27
Total Population
Not in labour
Force
Labour Force =
working population
Employed
Unemployed
( Include those
underemployed )
Frictional
Unemployment
= Voluntory
Unemployment
Structural
Unemployment
= Voluntory
Unemployment?
Seasonal
Unemployment
Cyclical
Unemployment
Involuntory
Unemployment
28
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
The cyclical rate of unemployment
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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 normally experiences.
30
Natural rate of unemployment
Unemployment rate = 0?
31
NO!!
32
Unemployment
• Natural Rate of Unemployment
– The unemployment rate that is estimated
to prevail in the long run when all
workers and employers have fully
adjusted to any changes in the economy
– When seasonally adjusted the natural
rate of unemployment should only take
into account frictional and structural
unemployment
33
What is
Full Employment?
The situation in which an
economy operates at an
unemployment rate equal
to the sum of the frictional
and structural
unemployment rates
34
Full employment
= natural rate of unemployment (NRU)
= frictional unemployment + structural unemployment
Actual unemployment
= NRU + deficient-demand unemployment
35
Unemployment and Full Employment
Full employment exists when the
unemployment rate equals the natural
rate of unemployment.
– It fluctuates periodically
– Economists disagree about the size of the
natural rate and the extent to which it
fluctuates
– A situation in which there is no
cyclical unemployment
36
What percent unemployment
is considered Full
Employment?
The natural rate of
unemployment changes
over time, but today it is
considered to be about 5%
in the US.
37
Unemployment
• Question
–Does full employment mean that
everybody has a job?
38
Why can’t the unemployment
rate be zero?
Because there will always
be some people seeking
employment
39
Job Search Unemployment
•
•
Job 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.
41
Job Search Unemployment
•
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
“right” job.
42
The Inevitability of Job Search
Unemployment
•
•
•
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 jobs in new sectors.
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Frequencies/Probability
50%
5000
50%
7000
9000
Wages
Figure 9.1 Wage dispersion (normal distribution) Q.9.3?
44
$
MC
MB
0
Figure 9.2
Optimal amount
of search
Amount
of search
Optimal amount of search for a job
45
Public Policy and Job Search
•
•
Government programs can affect the time
it takes unemployed workers to find new
jobs (search duration).
These programs include the following:
Government-run
employment agencies
Public training programs
Unemployment insurance
46
Public Policy and Job Search
Government-run employment
agencies give out information
about job vacancies in order to
match workers and jobs more
quickly.
47
Public Policy and Job Search
Public training programs aim to
ease the transition of workers
from declining to growing
industries and to help
disadvantaged groups escape
poverty.
48
Public Policy and Job Search
•
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 limited time to those who are laid off.
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Public Policy and Job Search
•
•
•
Unemployment 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.
50
Frequencies/Probability
5000
7000
9000
Wages
Figure for Wage dispersion (normal distribution)
7.8.3.4.b
51
Search Theory of
Unemployment
Advanced
Advanced Level
Level
Macroeconomics
Microeconomics
Dr.
Dr. Lam
Lam Pun
Pun Lee
Lee
$
MC
MC’
MB
0
Figure for
Q9.4(a)
Amount
of search
The effect of higher unemployment benefit on the
amount of search & unemployment rate (UR)
Frequencies
Wages
Figure for
Q9.4(b)
Better information will reduce chances
of finding a higher-pay (& lower-pay) job
53
$
MC
MB’
0
Figure for
Q9.4(b)
MB
Amount
of search
The effect of better information on the amount of
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search & unemployment rate (UR)
Other causes of unemloyment
Possible Reasons for an Above-Equilibrium
Wage
Minimum-wage laws
• Unions
•
55
Minimum-Wage Laws
When the minimum wage
is set above the level that
balances supply and
demand, it creates
unemployment.
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Unemployment from a Wage Above the
Equilibrium Level...
Wage
Surplus of labor =
Unemployment
Labor
supply
Minimum
wage
WE
Labor
demand
0
LD
LE
LS
Quantity
of Labor
57
Advanced
Advanced Level
Level
Macroeconomics
Microeconomics
Unemployment
Real wage rate (w)
Dr.
Dr. Lam
Lam Pun
Pun Lee
Lee
S
Unemployment
D
0
Labour
Figure 5 Unemployment caused by minimum
wages laws
Unemployment
•Question
–What are the costs of
unemployment?
66
Unemployment
• Answer
– Lost real output (= GDP gap)
• Early 1990s unemployment rate was
7% in the USA
• Factory output was 80% of potential
• Lost output was 4% of total production
or $275 billion of goods and services
that could have been produced
– Personal psychological impact
67
Costs of Unemployment
•
•
•
•
Loss of skill and experience
Financial burden to society
Family and social problems
Living standard of the unemployed and
their families becomes worse off.
68
Percentage deviation of
GDP from trend
Okun’s Law
40
30
20
10
0
10
20
30 0
Box 7.1
According to Okun’s
law, a 1% rise in
unemployment
causes GDP to fall
3% below trend.
10
15
20
25
30
5
Percentage of unemployment
69
©1999 South-Western College Publishing
Unemployment
• Question
–How would you show the cost
of unemployment on a
production possibilities
curve?
70
Capital Goods
Production Possibilities
K1
C1
Consumer Goods
34
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Measures to reduce unemployment
• Frictional unemployment
– provide more job-market information & better
employment services
– cut unemployment benefits
– reduce personal income tax
• Structural unemployment
– provide job training and retraining programs
– reduce unemployment benefits
– decrease personal income tax
72
Measures to reduce unemployment
• Deficient-demand unemployment
– practise fiscal and monetary policies
to increase aggregate demand to
eliminate recessionary gap
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Problems in using
unemployment statistics
74
Understate unemployment
• Unemployment statistics are not
comprehensive.
• Disguised workers
75
Overstate unemployment
• Registered unemployed
• Inactive unemployed
76
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.
Other people may claim to be
unemployed in order to receive financial
assistance, even though they aren’t
looking for work.
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