Download Chapter 14 Unemployment and Its Natural Rate

Chapter 14 Unemployment and Its Natural
Rate
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Identifying Unemployment
Job Search
Minimum-wage Laws
Unions and Collective Bargaining
The theory of efficiency wages
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• “A job loss means a lower living standard in the present,
anxiety about the future, and reduced self-esteem.”
• The problem of unemployment is usually divided into two
categories:
 The Natural Rate of Unemployment (long-run problem)
: represents persistent joblessness that does not go away
on its own even in the long-run. Refers to the amount of
unemployment that the economy normally experiences.
 The Cyclical Rate of Unemployment (short-run
problem): refers to the year-to-year fluctuations in
unemployment around its natural rate. Deals with shortterm fluctuations associated with the ups and downs of
the business cycle.
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Identifying unemployment
• How is unemployment measured? Measuring
unemployment is the job of Statistics Canada. Monthly
Unemployment Rate is calculated by:
– Statistics Canada surveying 52,000 randomly selected
households and categorizing each adult (i.e. aged 15 and
older) as:
 Currently employed (have a paying job). A person is
employed if he or she has spent most of the previous
week working at a paid job.
 Unemployed but actively seeking a job. 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
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 Not in the labour force (i.e. neither of above). A person
in neither category is not in the labour force.
The Labour Force is the number of employed persons plus
the number of unemployed.
The Unemployment Rate is: U = [B/(A+B)] x 100
• “U” is the unemployment rate
• “B” is the number of unemployed persons
• “A+B” is the labour force
See Figure 14-1 on page 291.
The Labour-Force Participation Rate illustrates the fraction
of the population that has chosen to participate in the labour
market.
The Labour-Force Participation Rate is:
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PR = [(A+B) / Population] x 100
• See Table 14-1 and Figure 14-2 on page 293
• See Figure 14-3 on page 295
• Does the unemployment rate measure what we want it
to?
• Where it is easy to distinguish between a person with a fulltime job and a person who is not working at all, it is hard to
distinguish between a person who is unemployed and a
person who is not in the labour force.
• It is suggested that the “unemployment rate is inaccurately
low” because it doesn’t reflect:
– 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
labour force, when in fact, they would be willing to work
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if offered a suitable, stable job.
• How long are unemployed people without work?
• Most of the economy’s unemployment problem is
attributable to unemployed workers who are jobless for
long periods of time.
• The rate of unemployment is the product of the number of
jobless and their average duration of joblessness.
– The average duration of unemployment (>14 weeks) has
been increasing over time from 35% in 1977 to 47% in
1996.
– In 1996, 28% of unemployed people in Canada were
unemployed for just four weeks or less, while 25% were
unemployed for between 5 to 13 weeks. Most of the
economy’s unemployment problem in that year was
attributable to the 47% unemployed people who were job
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less for 14 weeks or more.
• “ Most spells of unemployment are short, and most
unemployment observed at any given time is long-term.”
• Assume: you meet a total of 55 unemployed people, 52 of
them are unemployed for one week and three are
unemployed for the full year. This means that 52/55 or 95%
of unemployment spells end in one week.Thus, most spells
of unemployment are short.
• Consider the total amount of unemployment. The three
people unemployed for one year( 52 weeks) make up a total
of 156 weeks of unemployment. Together with the 52
people unemployed for one week, this makes 208 weeks of
unemployment. In this example, 156/208 or 75% of
unemployment is attributable to those individuals who are
unemployed for a full year. Thus, most unemployment
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observed at any given time is long-term.
• Why are there always some unemployed people?
• In an ideal labour market, wages would adjust to balance the
supply of labour and the demand of labour, ensuring all
workers full employment.
• Of course, reality does not resemble this ideal. There are
always some workers without jobs, even when the overall
economy is doing well. See Figure 14-4 on page 299.
• Natural Rate of unemployment: the rate of unemployment to
which the economy tends to return in the long run
• Cyclical unemployment: the deviation of unemployment
from its natural rate. Cyclical unemployment arises due to
short-run economic fluctuations.
• There are four ways to explain unemployment is the long
run. The first is that it takes time for workers to search for
the jobs that are best suited for them. The other three ways
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are:
– Minimum-wage laws
– Unions
– Efficiency wages
We will discuss them later.
• Frictional unemployment: unemployment that results
because it takes time for workers to search for the jobs that
best suit their tastes and skills. (relatively short spells of
unemployment)
• Structural unemployment: unemployment that results
because the number of jobs available in some labour
markets is insufficient to provide a job for everyone who
wants one. (longer spell of unemployment)
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Job Search
• Search unemployment results from the fact that it takes time
for qualified individuals to be matched with available jobs.
• This unemployment is different from the previous three
types. ( page 8) It is not caused by a wage rate higher than
equilibrium. It is caused by the time spent in searching or
waiting for the “right” job.
• Why some frictional unemployment is inevitable
• Frictional unemployment is inevitable simply because the
economy is always changing. Situations that cause this type
of unemployment include:
– New entrants into the job market
– Re-entrants into the labour force
– Relocations
– Job quitters
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• For example, car manufacturing, petroleum and aircraft
manufacturing industries were very minor sources of
employment in Canada 90 years ago. Today, these are three
of the largest employers in the Canadian economy.
• At the same time, agriculture has fallen from being the
largest single source of employment in Canada in 1911 to
only a minor source of employment today.
• Recent estimates for Canada indicate that the mismatch
between available jobs and people seeking employment
explains why roughly one out of every eight unemployed
workers is unemployed.
• Public Policy and Job Search
• Even if some frictional unemployment is inevitable, the
precise amount is not. The faster information spreads about
job openings and worker availability, the more rapidly the
economy can match workers and firms.
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• If policy can reduce the time it takes unemployed workers
to find new jobs, it can reduce the economy’s natural rate of
unemployment.
• Government programs try to facilitate the job search process
in the following ways:
– Government-run employment agencies: Gives out
information about job vacancies in order to match
workers and jobs more quickly.
– Government-run training programs: Aim to ease the
transition of workers from declining to growing
industries and to help disadvantaged groups escape
poverty.
• These programs can either increase or decrease the time it
takes the unemployed to find new jobs, depending on
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whether the programs are privately-or government-run.
• Employment Insurance ( EI) programs:
– Increases the amount of search unemployment without
intending to
– Offers workers partial protection against job loss.
– Partial payment of former wages for a limited time
period.
• Because EI benefits stop when a worker takes a new job, we
might expect that the unemployed would devote less effort
to job search and be more likely to turn down unattractive
job offers.
• On the other hand, the design of the EI provides an
incentive for people to enter the labour force when they
might not otherwise have done so. Because EI increases the
total income people receive by working: They not only earn
a wage while working, but also become eligible to collect EI
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benefits should they leave the job.
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 labour.
• See Figure 14-5 on page 305
• If the wage is kept above the equilibrium level for any
reason, the result is unemployment.
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Unions and Collective Bargaining
• A union is a worker association that bargains with
employers over wages and working conditions.
– A union is a type of cartel.
• The process by which unions and firms agree on the terms
of employment is called collective bargaining.
• A strike will be organized if the union and the firm cannot
reach an agreement.
– A strike makes some workers better off and other
workers worse off: (1) Striking workers worse off in the
short-run. (2) Rehired workers better off in the long-run.
• By acting as a cartel with ability to strike or otherwise
impose high costs on employers, unions usually result in
above equilibrium wages for their members.
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• Are Unions good or bad for the economy
• Advocates of unions contend that unions are an necessary
antidote to the market power of the firms that hire workers.
( “company town” case) In this case, a union may balance
the firm’s market power and protect the workers from being
at the mercy of the firm owners.
• Advocates of unions also claim that unions are important for
helping firms respond efficiently to workers’ concerns. Even
if unions have the adverse effect of pushing wages above
the equilibrium level and causing unemployment, they have
the benefit of helping firms keep a happy and productive
work force.
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The Theory of Efficiency Wages
• Efficiency wages: above-equilibrium wages paid by firms in
order to increase worker productivity.
• Firms operate more efficiently if wages are above the
equilibrium level.
• Even in the presence of an excess of labour, firms may be
more profitable by keeping wages higher than equilibrium.
• Unemployment caused by this theory is similar to that
caused by the minimum-wage laws and unions.
• Higher than equilibrium wages are set to promote the
following goals of the firm:
– Worker Health: Better paid workers eat better and thus
are more productive.
– Worker Turnover: A higher paid worker is less likely to
look for another job.
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– 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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