Chapter 10 Unemployment
Chapter 10 Unemployment Econ 202 - 01
Popular in Principles Of Macroeconomics
Popular in Economcs
This 11 page Class Notes was uploaded by Roger D. on Tuesday April 12, 2016. The Class Notes belongs to Econ 202 - 01 at University of North Dakota taught by Kwan Yong Lee in Spring 2016. Since its upload, it has received 6 views. For similar materials see Principles Of Macroeconomics in Economcs at University of North Dakota.
Reviews for Chapter 10 Unemployment
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 04/12/16
Chapter 10 ~ Econ 202 ~ Unemployment Introduction: When a country keeps its workers as fully employed as possible, it achieves a higher level of GDP than it would if it left many of its workers idle. The problem of unemployment is divided into the long-run problem and the short-run problem. The natural rate of unemployment ~ refers to the amount of unemployment that the economy normally experiences. o Natural does NOT imply that it is desirable o Natural does NOT imply that it is constant over time or unaffected by government policy o Natural means that it just doesn’t go away on its own even in the “long-run” o It is determined by: Job search, minimum-wage laws, unions and efficiency wages The cyclical rate of unemployment ~ refers to the year-to-year fluctuations and deviations in unemployment around its natural rate, and is closely associated with the “short-run” ups and downs of economic activity and the business cycle. IDENTIFYING UNEMPLOYMENT The Bureau of Labor Statistics (BLS) of the Labor Department surveys 60,000 households monthly which is called the “Current Population Survey.” Employed ~ are those who are paid employees, run a small business or worked unpaid within a family member’s business. Both full-time and part-time are counted. Also includes temporary absence; such as, vacations, illness or bad weather. Unemployed ~ are those NOT employed in the past week, are available to work or tried to find work in the past 4 weeks. It includes people who are waiting to be recalled back to work, recent high school and college graduates and older folks returning to the work force. Not in the labor force ~ These are ones who don’t fit into any of the two above categories; such as, full-time students, retirees, homeworkers and stay-at-home fathers, discouraged workers and people who haven’t been looking for work for a given length of time. Labor force ~ is the total number of workers, including both the employed and the unemployed Labor force = Number of employed + Number of unemployed Unemployment rate ~ is the percentage of the labor force that is unemployed ???????????????????????? ???????? ???????????????????????????????????????? Unemployment rate = ???????????????????? ???????????????????? × 100 Labor-force participation rate ~ is the percentage of the adult population that is in the labor force and is a statistic which shows us the fraction of the population that has chosen to be in the labor- market. The adult population includes teenagers of the age equal to 16 years of age and older. ???????????????????? ???????????????????? (???????????????????????????????? & ????????????????????????????????????????) Labor-force participation rate (LFPR) = ???????????????????? ???????????????????? ???????????????????????????????????????? × 100 Adult Population = Number of employed + Number of unemployed + Number NOT in Labor Force Total Adult Population = Labor Fore + Number NOT in the Labor Force Example: 142.3 million employed, 12.5 million unemployed, 155.0 million labor force, 88.3 million not in the labor force and 243.3 million for the total adult population…. Labor force = 142.3 + 12.5 = 155.0 million 12.5 ???????????????????????????????????????? Unemployment rate = 155 ???????? ????ℎ???? ???????????????????? ????????????????????00 = 8.1% 155.0 ???????????????????????????? ???????? ???????????????????? ???????????????????? LFPR (labor-force participation rate) = × 100 = 63.7 ???????????????????? ???????????????????? ???????????????????????????????????????? To quickly review: The normal rate of unemployment around which the unemployment rate fluctuates is called the natural rate of unemployment and the deviation of unemployment from its natural rate is called cyclical unemployment. The unemployment rate is the percentage of those who would like to work who do not have jobs. The Bureau of Labor Statistics calculates this statistic monthly based upon a survey of 60,000 households called the “Current Population Survey.” Labor-Force Participation of Men and Women in the U.S. Economy More women are in the work-force because of: o Technology ~ washing machines, clothes dryers, refrigerators, freezers and dishwashers o Changes in political and social attitudes (reduced stereo typing) o Birth control o Increased education Less men are in the work-force because of: o Men go to school for longer periods of time now-a-days o Men are living longer because of less job-related life and health hazards o Men are retiring earlier o Women (sugar-mamas!!) have taken on the role of being the bread-winner and men as stay-at-home dads The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search and therefore are not counted as unemployed. When the economy is “booming”, the cyclical unemployment rate is below the natural unemployment rate. When the economy is in a recession, the cyclical unemployment rate is higher than the natural rate. Limitations / Implications of the unemployment rate ~ A falling unemployment rate gives the impression that the labor force market is improving, when in fact, things are much worse and the unemployment rate fails to show it. It excludes discouraged workers It doesn’t distinguish between full-time and part-time work, or people working part-time because full-time jobs aren’t available Some people miss-report their work status in the BLS survey Some facts: Knowing these facts helps policymakers design better policies to help the unemployed It is much harder to distinguish between someone who is unemployed from a person who is out of the labor force. More than one-third (1/3) of the unemployed are recent entrants into the labor force which include young workers whom are recent college graduates and returning older workers Typically, 1/3 of the unemployed have been unemployed under 5 weeks and 2/3 have been unemployed under 14 weeks Almost half of all spells of unemployment end when the unemployed person leaves the labor force. Most spells of unemployment are short-term. Although some that are out of the labor force may actually want to work; these individuals are called discouraged workers because they truly want to work but have given up hope of finding a “fitting” job. Only 20% have been unemployed over 6 months; yet, most observed unemployment is long- term. The small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the observed unemployment over time. Alternative measures and descriptions of labor utilization: Marginally attached workers ~ are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers ~ are marginally attached workers who have given a job-market-related reason for not currently looking for a job. Persons employed part-time for economic reasons ~ are those who want and are available for full-time work but have had to settle for a part-time schedule. U-1 ~ Persons unemployed 15 weeks or longer as a percentage of the civilian labor force U-2 ~ Persons losing a job and persons who completed temporary jobs per civilian labor force U-3 ~ Total unemployment per percentage of civilian labor force (official unemployment rate) U-4 ~ Total unemployment and discouraged workers via the % of the civilian labor force U-5 ~ Total unemployment plus marginally attached workers as a % of the civilian labor force U-6 ~ Total unemployment plus all marginally attached workers and total employed part-time for economic reasons as a percentage of the civilian labor force (It is best to view the “official unemployment rate” as a useful but imperfect measure of joblessness). “Most spells of unemployment are short-term, and most unemployment observed at any given time is long-term.” In an unemployment office, you see the same 3 people weekly for one year and one new person weekly. 3 + 52 = 55 people in one year. o 52/55 × 100 = 95% of unemployment spells end in one week and is short-term o 3 of 4 persons unemployed for the whole year means 75% observed unemployment is long-term Another fact: For the very most part, the cyclical unemployment rate never falls to zero; instead, it fluctuates around the natural rate of unemployment. However, it can equal the natural rate of unemployment when it touches or crosses (up or down) on the natural unemployment point or line. When the economy is good & booming, the cyclical unemployment rate is < 0 (the natural rate) When the economy is in recession, the cyclical unemployment is > 0 (the natural inflation rate) When the economy is neither, the cyclical unemployment rate = 0 (equals the natural rate) A quick review: In the U.S. economy, most people who become unemployed find work within a short period of time. Nonetheless, most unemployment observed at any given time is attributable to the few people who are unemployed for long periods of time. Understanding “The Jobs Number(s)” The BLS releases the jobs numbers on the first Friday (fry-day) of each month. This data is collected via a survey called the “Establishment Survey” of 160,000 businesses and over 40 million workers on their payrolls and is more reliable than the “official unemployment report.” The Job Report (Establishment Survey) is closely watched for its data on jobs but says nothing about unemployment. The household unemployment (Current Population) survey is the only source for information on unemployment. A person with 2 jobs would be counted as one employed person via the household survey; whereas, the establishment survey would count-in both jobs as if 2 separate people are employed. A person who would be self-employed would show up as being employed in the household, whereas, he or she would NOT show up in the job’s (establishment survey) report. JOB SEARCH & UNEMPLOYMENT INSURANCE ~ FRICTIONAL UNEMPLOYMENT Frictional unemployment ~ is unemployment that results because it takes time for workers to search (look) for the jobs that best suit their tastes and skills. It is also the result of changes in the demand for labor among different firms and industry sectors which produce different products: A period of time is needed to shift laborers. (1) Job Search ~ is the process by which workers find appropriate jobs given their tastes and skills. The result of frictional unemployment is a short-term period of unemployment Government agencies ~ provide information about job vacancies to speed up the matching of jobs to workers Public training programs ~ aim to equip workers displaced from declining industries with skills needed for new industries Employment can rise or fall in different areas of the country based upon goods that are produced Sectoral Shifts ~ are changes in the composition of demand among industries (sectors) or regions due to changes in demand for particular a product they produce and when there is a decline in a given industry’s product. Some workers get displaced because of these shifts, and then must search for appropriate new jobs that match their skills and tastes. Example of sector shifts: The price of oil decreases and thusly production slows down too. Oil fields in western North Dakota decrease production to save costs and have less demand for laborers. Because of lower oil prices, more cars are being sold. Detroit responds to this by increasing auto production. This in turn creates an increased demand for laborers in the production of automobiles. “Churning of the labor force” occurs when someone leaves a company for a better paying job or finds a better suited job for his/her skills and likes. Churning is normal in a robust economy. The internet, for instance, may help facilitate job search and reduce frictional unemployment. (2) Unemployment insurance ~ is a government program that partially protects worker’s incomes when they become unemployed. Unemployment insurance benefits end when a worker takes a job, so workers have less “incentive” to search or take jobs while eligible to receive benefits. It reduces the job search effort of the unemployed It increases the amount of frictional unemployment without intending to do so It reduces the hardship of unemployment It reduces uncertainty over incomes Job seekers are able to search for jobs better suited for their tastes, likes and skills To quickly review: One reason for unemployment is the time it takes workers to search for jobs that best suit their tastes and skills. This frictional unemployment is increased as a result of unemployment insurance, a government policy designed to protect workers’ incomes. Government Policies and Our Declining Employment Food stamps Social Security disability payments Pell grants Extended unemployment benefits MINIMUM-WAGE LAWS, UNIONS & EQUILIBRIUM WAGES ~ STRUCTURAL UNEMPLOYMENT Structural unemployment ~ is unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. In these cases, the supply of workers is greater than the demand for workers and there’s a “surplus of workers.” Structural unemployment usually lasts for longer periods of time vs frictional unemployment Structural unemployment occurs when wages are greater than the equilibrium wages o It’s associated with (1) minimum wage laws, (2) unions and (3) efficiency wages. (1) Minimum Wage Laws The minimum wage may exceed the equilibrium wage for the least skilled or experienced workers causing structural unemployment and a surplus of workers. But this group is a small part of the labor force, and minimum wage can’t explain the reason(s) behind most unemployment. A (binding) minimum-wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded as compared to the equilibrium level. Thusly, there is a persistent surplus of labor and unemployment due a binding minimum-wage law. Minimum-wage laws matter most for the least skilled and least experienced members of the labor force; such as, teenagers. (If the wage is kept above the equilibrium level for any reason, the result is unemployment). The difference between frictional unemployment and structural unemployment is the fact that in the former case (frictional unemployment) a person is looking (searching) for a “suitable” job and there is NO imbalance of the equilibrium level of jobs demanded and supplied; whereas, in the latter case (structural unemployment), the unemployed person is waiting for a job to open up or become available because the equilibrium quantity of labor supplied exceeds the quantity of labor demanded because of minimum wage laws, restrictions and requirements cause a surplus in labor. Facts about Earning Minimum Wages and Less than Minimum Wage 4% of men & 6% of women reported wages at or below the prevailing federal minimum Minimum wage workers tend to be young Minimum wage workers tend to be less educated Minimum wage workers are more likely to be working part-time Leisure and hospitality services provide the lowest of any industry’s wage level The proportion of workers earning minimum wages has fluctuated over time To quickly review: A second reason our economy always has some unemployment is the minimum wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labor supplied and reduce the quantity of labor demanded. The resulting surplus of labor represents unemployment. (2) UNIONS AND COLLECTIVE BARGAINING A Union ~ is a collective worker association that bargains with employers over wages, benefits and working conditions. A union is a type of “cartel” which is a group of sellers acting together in the hope of exerting their joint market power to negotiate higher wages for workers. Union workers generally earn 10% and up to 20% more than similar workers doing comparable work. Collective Bargaining ~ is the process by which unions and firms agree on the terms of employment. A Strike ~ is the organized withdrawal of labor from a firm by a union. When a union raises the wage above the equilibrium level, it raises the quantity of labor supplied and reduces the quantity of labor demanded, resulting in a surplus of laborers and unemployment. Unions tend to create friction between insiders whom benefit from increased wages and outsiders whom are non-union workers who lose jobs. Some outsiders go to non-unionized labor markets which increases labor supply and reduces wages in those workers. When unions raise wages in one part of the economy, the supply of labor increases in other parts of the economy. Unions are exempt from anti-trust laws. The Wagner Act of 1935 prevents employers from interfering when workers try to organize unions. The NLRB, National Labor Relations Board, is the government’s agency that enforces workers’ right to unionize. Right-to-work laws ~ are laws which give workers in a unionized firm the right to choose whether to join the union or not. Market power and “company towns” are situations where a business is the largest demander of labor in a town and sets the price of wages which leads to a surplus of laborers. Minimum-wage laws and unions prevent firms from lowering wages in the presence of a surplus of laborers and workers. The benefit of unions is the fact that unions can counter the market power of large firms and makes those firms more responsive to workers’ concerns. To quickly review: A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor. (3) THE THEORY OF EFFICIENCY WAGES Efficiency wages ~ are above-equilibrium wages paid by firms to increase worker productivity. According to this theory, firms operate more efficiently if wages are above the equilibrium level. Firms “voluntarily” pay above equilibrium (efficiency) wages to boost worker productivity. The advantages of efficiency wages are: Worker health ~ better paid workers eat better, are healthier, and are thusly more productive Worker turn-over ~ less workers leave for other job positions thusly reducing training costs Worker quality ~ a better pool of workers are attracted to the business Worker effort ~ workers are more eager to keep their jobs and have a financial incentive o Workers can work “hard” or shirk: If market wages are above the equilibrium wage, then there aren’t enough jobs to go around, so workers have more incentive to work hard and not shirk and risk being fired. Applying these concepts: Which of the following would be most likely to reduce “frictional unemployment?” Clue ~ determine first which ones are frictional and structural unemployment. A. The government eliminates the minimum wage (Structural) B. The government increases unemployment insurance (Frictional) C. A new law bans labor unions (Structural) D. More workers post their resumes at Monster.Com, and more employers use Monster.Com to find suitable workers to hire (Frictional) E. Sectoral shifts become more frequent (Frictional) “D” is correct because it’s associated with frictional unemployment and reducing job search time… Note: Henry Ford’s theory of efficiency wages lead to less turn-over, less absenteeism and greater productivity. The cravat of assembly-line work is that an inefficient (weak-link-in-a-chain) worker slows down the rest of the team. To quickly review: A fourth reason for unemployment is suggested by the theory of efficiency wages. According to this theory, firms find it profitable to pay wages above the equilibrium level. High wages can improve worker health, lower worker turn-over, raise worker quality and increase worker effort. CHAPTER 10 REVIEW & SUMMARY OF QUICK NOTES The 5 determinates and reasons for unemployment and their associated characteristics Job Search with a possible sector change of employment which requires a period of time to find ~ Frictional Unemployment (usually short-term) Unemployment insurance ~ Frictional Unemployment (usually short-term) Minimum wage laws ~ Structural Unemployment (longer-termed) Market power of unions ~ Structural Unemployment (longer-termed) Efficiency wages ~ Structural Unemployment (longer-termed) The natural rate of unemployment consists of: Frictional unemployment which is short-run and it takes time to search for the right job. o It occurs even if there are enough jobs to go around for everyone o Its components are: Job search and unemployment insurance o Sometimes an industry sector change occurs in order to be employed Structural unemployment which is longer-run and occurs when wages are above equilibrium levels and there are NOT enough jobs to go around for everyone o Its components are: Minimum wages, unions and efficiency wages The BLS considers a person to be unemployed if he or she is in the adult population, did not work for pay in the previous week, and has actively looked for work during the preceding 4 weeks. By this definition, the BLS classifies Alyssa and Hilary as unemployed. Anyone in the adult population who worked for pay in the last week, even if unsatisfied with his or her job, is considered employed. By this definition, the BLS classifies Tim and Edison as employed. Because Brian is not actively seeking employment, he is not considered part of the labor force. Note that not being in the labor force is different from being unemployed. Once people leave the labor force, they are not counted when calculating the unemployment rate. Because Crystal is under the age of 16, she is not considered part of the adult population. Any jobless person who has not looked for work in the past 4 weeks is not in the labor force according to the Bureau of Labor Statistics (BLS). Some of these jobless people who are not in the labor force indicate that they'd like to have a job and are available for work. The BLS classifies such people as marginally attached workers. Discouraged workers are marginally attached workers who give a job- market-related reason for giving up on their job search. Typically, discouraged workers give up on their search because they feel that there are no current opportunities for them in the labor market. Structural unemployment arises from a mismatch between the jobs available in some labor markets and the skills of workers. One cause of structural unemployment is institutional factors such as union negotiation, which holds wages above the marginal productivity of less skilled workers, limiting their employment opportunities. Frictional unemployment occurs because job seekers and employers need time to find one another. Therefore, Becky is considered to be frictionally unemployed. This kind of unemployment is usually brief. Cyclical unemployment is the form of unemployment associated with business cycles. This kind of unemployment rises during recessions and falls during expansions. Because Eileen lost her job due to the recession, she would generally be considered to be cyclically unemployed. Total unemployment is the sum of frictional, structural, and cyclical unemployment. If there is no cyclical unemployment, the economy is at its natural rate of unemployment, equal to the sum of frictional and structural unemployment. In this case, because cyclical unemployment is 0.0%, the economy is at its natural rate of unemployment. Frictional unemployment often results from changes in the demand for labor among firms. When the world price of steel falls, steel-producing firms will find it less profitable to produce steel. As steel- producing firms decrease production, the demand for labor with which to produce steel decreases. Job opportunities in Pennsylvania contract. For automobile-producing firms, the decrease in the world price of steel decreases production costs. As automobile-producing firms increase production, the demand for labor in Michigan increases. Job opportunities in Michigan expand. Workers laid off in one sector will take time to find new positions in an expanding sector. These types of sectoral shifts occur continuously in a dynamic economy, so there will always be some level of frictional unemployment. Unemployment benefits tend to reduce the job-search efforts of the unemployed. Workers receiving unemployment insurance generally take longer to find new work, contributing to frictional unemployment in the interim. Extending or increasing unemployment benefits will contribute to additional frictional unemployment. Note that unemployment insurance is not necessarily bad. Preventing some hardship associated with unemployment may be well worth the cost of some additional frictional unemployment. Reducing the average amount of time spent searching for a job would lower an economy's frictional unemployment and, by extension, its natural rate of unemployment. Job-search websites can connect unemployed workers to firms with job vacancies. A site that matches workers to vacancies more effectively would reduce the amount of time that workers spend looking for jobs and allow employers to fill vacancies more quickly. Government-run employment agencies connect unemployed workers to firms in need of additional labor. Employment bonuses given to unemployed workers who are receiving unemployment insurance benefits would give workers an incentive to find work more quickly. This would reduce frictional unemployment by decreasing the time the unemployed take to find work. A binding minimum wage will contribute to a persistent surplus of labor in this market, generating structural unemployment. Structural unemployment is unemployment that arises from a mismatch between the skills of the existing labor force and those required to perform available jobs. One source of structural unemployment is minimum wage legislation, which holds wages above the productivity levels of less skilled workers, who are thus ill-suited to existing jobs. In the above scenario, the quantity of labor supplied will continue to exceed the quantity of labor demanded as long as the minimum wage remains above the market equilibrium wage. The resulting surplus of labor creates a pool of unemployed workers—people who would like to work at the prevailing minimum wage, but who cannot find a job. Paying above-market wages may be profitable if the higher wages increase the efficiency of the firm's workers (hence the term efficiency wages). Higher wages can enhance worker productivity in several different ways. The wage at which labor supply equals labor demand may be consistent with a malnourished diet in less-developed countries. In such economies, above-market wages may allow the firm's workers to remain healthy and productive. Paying higher wages can also reduce worker turnover. Fewer workers will choose to explore other labor opportunities when a firm pays wages in excess of the prevailing market rate. Since new workers must be trained, the reduction in worker turnover can reduce the firm's training costs. By encouraging workers to stick around, the higher wages cause the experience level of the firm's workforce to rise. More-experienced workers tend to be more productive. Higher wages also attract a more qualified pool of job applicants. If the firm were to pay prevailing market wages, more qualified workers might choose to steer clear of the firm in favor of other companies offering higher-paying positions for which they are qualified. Finally, higher wages may induce greater worker effort. In some firms, the costs of monitoring worker performance are quite high. To deter shirking, a firm may decide to pay wages above the market equilibrium. The higher wage will give workers an incentive to keep their jobs. A worker receiving a relatively high wage will be reluctant to lose his or her job, which would mean being forced to settle for less-lucrative employment elsewhere.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'