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Chapter 27Unemployment

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008

PowerPoint presentation by Alex Tackie and Damian Ward

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Some key terms• Unemployment rate:

– the percentage of the labour force without a job but registered as being willing and available for work.

• Labour force– those people holding a job or registered as

being willing and available for work.• Participation rate

– the percentage of the population of working age declaring themselves to be in the labour force.

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Hanehalkı İşgücü İstatistikleri Metodolojisi

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Çalışma Durumuna Göre Nüfus

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Nüfusun İşgücü Durumu

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Unemployment in the UK1950-2007

02468

101214

% p

.a.

Source: Economic Trends Annual Supplement, Labour Market Trends

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Unemployment (%) in selected countries

02468

10121416

%

1972 1982 1992 2001 2004 2006

UK Ireland France EU USA

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Unemployment Rate in Turkey

(1988-2011)

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Unemployment Rate in Turkey

(2007-2011)

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Labor Force in Turkey(2006-2010)

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The Reasons Not To be Included in Labour Force (Thousand) - ( 15 + years old )

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Important Details• Discourages workers are those who want to work but do not

search a job any more. They are not counted as unemployed. In 2009, US had 13.5 million unemployed workers and 2.1 discouraged workers.

• Underemployment: If a worker works in a job far below her capacity. She will be counted as employed.

• Because of these two factors, the unemployment situation is much worse than what the statistics tell us.

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Unemployment seperated by Education (%)- ( 15 + years )

Turkey (2009-2011)

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Labor Participation in Turkey (%) - ( 15 + y )

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Labour market flowsIt is tempting to see the labour market in static terms

Working Unemployed

Non-participants but...

LABOUR FORCE

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Labour market flows

LABOUR FORCE

Working Unemployed

Non-participantsTakinga job

Job-losersLay-offs

Quits

New hiresRecalls

Discouragedworkers

Re-entrantsNew entrants

RetiringTemporarily

leaving

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More on labour market flows

• The size of these flows is surprisingly high.• In 1999 unemployment in the UK began at

1.29 million.• During the year:

– 3.14 million became unemployed– but 3.3 million left the ranks of the

unemployed.

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Types of unemployment• Frictional

– the irreducible minimum level of unemployment in a dynamic society

• people between jobs• the ‘almost unemployable’

• Structural– unemployment arising from a mismatch of skills and

job opportunities when the pattern of demand and production changes

• it takes time for ex-coal miners to retrain as international bankers

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Types of unemployment (2)• Demand-deficient unemployment

– occurs when output is below full capacity– ‘Keynesian’ unemployment occurs in the

transitional period before wages and prices have fully adjusted

• Classical unemployment– created when the wage is deliberately

maintained above the level at which labour supply and labour demand schedules intersect

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A ‘modern’ view of unemployment

• A similar categorisation is retained, but an important distinction is to be noted between:

• Voluntary unemployment– when a worker chooses not to accept a job

at the going wage rate.• Involuntary unemployment

– when a worker would be willing to accept a job at the going wage but cannot get an offer.

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The natural rate of unemployment

• The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium.

• This is entirely voluntary.• It includes:

– frictional unemployment– structural unemployment

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The natural rate of unemployment

Number ofworkers

Rea

l wag

e

LD

LD: labour demand

LFLF: size of labour forceAJAJ: the number of workers prepared to accept jobs

AJ is to the left of LFbecause some members of the labour force are between jobs, others are waiting for better offers.

w*

N* N1

Equilibrium is at w*/ N*.

The distance EF is the natural rate of unemployment.

E F

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Keynesian unemployment

Number of workers

Rea

l wag

e

LD

LFAJ

w*

With sticky wages and pricesin the short-run, the economywill move to equilibrium at A

E F and there will be unemploymentof AF. Of which EF will bevoluntary and AE will beinvoluntary (i.e. Keynesian).

Beginning at E, supposelabour demand falls to LD’.

A

LD’

w2 H

If labour demand remains at LD’,the new equilibrium when wagesand prices have fully adjustedwill be at G.

G

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w2

Suppose that union powersucceeds in maintaining areal wage of w2.

Classical unemployment

Number of workers

Rea

l wag

e

LD

LFAJ

w*

N* N1

and AB is involuntary.

A

N2

Equilibrium is at AB

of which BC is voluntary

Cand unemployment is AC,

To the extent that this unemployment reflects a conscious decision by unions to restrict employment,it is voluntary unemployment.

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Supply-side economics

• entails the use of microeconomic incentives to alter – the level of full employment– the level of potential output– the natural rate of unemployment.

• In the long run the performance of the economy can only be changed by affecting the level of full employment and the corresponding level of potential output.

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w3

w1 > w3 (the take-home net pay of workers).

F

Unemployment is now EF.

Unemployment is BCC

Tax cuts and unemployment

Number of workers

Rea

l wag

e

LD

LFAJ

w1

Firms pay a gross wageof w1

N1

Equilibrium is at N1

EF < BC i.e. unemploymentis reduced.

w2

N2

E

Without tax, equilibrium is at E.

AB is the amount of tax

A

B

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Other supply-side policies• Trade union reform

– reducing the power of trade unions may limit distortions in the labour market

• Other labour supply policies– training and retraining measures– improving the efficiency of the labour market

• such measures may affect frictional and structural unemployment• Investment

– higher investment may increase the demand for labour• may be achieved via tax incentives or low interest rates