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UNEMPLOYMENT
Society in general and Economists in particular
are interested in the problem of unemployment
because of its economic and non-economic
effects on people and the society
Why Should We be Concerned
about Unemployment?

Economic Effects:
– The opportunity cost of Unemployment is
measured in terms of lost GDP; and
– Lower standards of living of the unemployed

Non-Economic Effects:
– The human suffering and misery that are
associated with unemployment; and
– The increase in social problems such as crime
The Okun’s Law
“Increases in the unemployment rate
should be associated with decreases in
real GDP”
Arthur Okun
Types of Unemployment

Frictional Unemployment:
– associated to normal turnover in the labor market
and the mismatch between workers skills and the
available jobs; and

Real-Wage Rigidity and Wait Unemployment:
– the failure of wages to adjust to clear the labor
market.
Causes of Real-Wage Rigidity

Minimum-Wage Laws:
– the government prevents wages from falling to
the equilibrium level;

Unions and Collective Bargaining:
– the monopoly power of labor unions holds wages
above the equilibrium level; and

Efficiency Wages:
– high wages make workers more productive.
Public Policy and
Unemployment
Any policy aimed at lowering the natural rate
of unemployment must either reduce the rate
of job separation (s) or increase the rate of job
finding (f). Similarly, any policy that affects
the rate of job separation or job finding also
changes the natural rate of unemployment
Unemployment Rate (U / L) = s / (s + f)