015 Unemployment

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Government, Business and

Society

Unemployment


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Understanding Unemployment

The economys natural rate of unemployment

refers to the amount of unemployment that the

economy normally experiences.

Cyclical unemployment refers to the year-to-yearfluctuations in unemployment around its natural

rate, and it is closely associated with the short-

run ups and downs of economic activity. Natural merely means that this unemployment

does not go away on its own even in the long run.

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Identifying Unemployment

Employed

People who work as paid employees

Unemployed

Not employed Want to work

Looking for a job

Not in the labor force

Not employed

Not unemployed

Full time students, Home makers, retiree etc.

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Labor force

Total number of workers, employed and

unemployed

= Number of employed + Number of unemployed

Unemployment rate

Percentage of labor force that is unemployed

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100=forceLabor

unemployedofNumberratentUnemployme


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Labor-force participation rate

Percentage of the total adult population that is in the laborforce

Fraction of the population that has chosen to participate in

the labor market

The normal rate of unemployment around which theunemployment rate fluctuates is called the natural rate ofunemployment, and the deviation of unemployment fromits natural rate is called cyclical unemployment

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100=populationAdult

forceLaborrateionparticipatforce-Labor


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Official unemployment rate

Useful

Imperfect measure of joblessness

much harder to distinguish between a person who isunemployed and a person who is not in the labor force

Movements into and out of the labor force is very Common

Recent entrants into the labor force

Reporting themselves unemployed- may not be trying to find a job

Some of those who are out of labor force may want to work -Discouraged workers

Disguised unemployment

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Alternative Measures of Labor Underutilization

The table

shows

various

measures of

joblessness

for the U.S.

economy. The

data are for

April 2010.


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Unemployment Rate since 1960

Employment statistics are produced by three bodies:

NSSO releases its survey-based employment results every five years.

The data covers both organised and unorganised sector employment

and is quite comprehensive.

CSO releases the Economic Census every five years, which alsoprovides survey-based data on employment but only with respect to

establishments in the organised and unorganised sectors.

The Labour Bureau, ministry of labour and employment, releases the

Annual Survey of Industries (ASI), covering employment in theorganised sector as well as the Quarterly Report on Changes in

Employment in Select Sectors.


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How long are the unemployed without work?

Most spells of unemployment are short and Most

unemployment observed at any given time is long-

term

Most people who become unemployed

Will soon find jobs meeting their test and skills

But most of the economys unemployment problem isattributable to the relatively few workers who are

jobless for long periods of time.

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In most markets prices adjust to bring quantitydemanded and quantity demanded into balance.

Why are there always some people unemployed?Unemployment rate Never falls to zero

Fluctuates around the natural rate of unemployment

Frictional unemploymentIt takes time for workers to search for the jobs that

best suit their tastes and skills

Explain relatively short spells of unemployment

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Structural unemployment

Results because the number of jobs available in

some labor markets is insufficient to provide a job

for everyone who wants one

Explains longer spells of unemployment

Results when wages are set above the equilibrium

Minimum-wage laws, unions, and efficiency wages

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1 Job Search

Job search

Process by which workers find appropriate jobs

given their tastes and skills

Workers differ in their tastes and skills

Jobs differ in their attributes Information about job candidates and job vacancies

is disseminated slowly

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Job Search

Some frictional unemployment - inevitable

Changes in demand for labor among different

firms

Changes in composition of demand among

industries or regions (sectoral shifts)The economy is always changing

Jobs created in some firms/ industries/ regions

Jobs destroyed in other firms / industries/ regions

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Public Policy and Job Search

Reduce time for unemployed to find jobs

Reduce natural rate of unemployment

Government programs to facilitate job

search

Government-run employment exchanges

Public training programs

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Public Policy and Job Search

Unemployment insurance

Government programs that partially protects workersincomes when they become unemployed

Increases frictional unemployment Without intending to do so

Qualify only the unemployed who were laid off becausetheir previous employers no longer needed their skills

50% of former wages for twenty-six weeks

Reduces the hardship of unemployment

Increases the amount of unemployment Unemployment benefits stop when a worker takes a new job

Unemployed Devote less effort to job search

More likely to turn down unattractive job offers

Less likely to seek guarantees of job security

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2 Minimum-Wage Laws

Structural unemployment

Number of jobs insufficient

Minimum-wage lawsCan cause unemployment

Forces the wage to remain above the equilibrium

level

Higher quantity of labor supplied

Smaller quantity of labor demanded

Surplus of labor unemployment

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Unemployment from a Wage above the Equilibrium

Level

In this labor market, the wage at which supply and demand balance is WE. At

this equilibrium wage, the quantity of labor supplied and the quantity of labor

demanded both equal LE. By contrast, if the wage is forced to remain above

the equilibrium level, perhaps because of a minimum-wage law, the quantity of

labor supplied rises to LS, and the quantity of labor demanded falls to LD. The

resulting surplus of labor, LS L

D, represents unemployment.

Wage

Quantity of Labor0

Minimum wage

LD LS

Surplus of labor =

Unemployment

Labor

demand

Labor

supply

LE

WE


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Minimum-Wage Laws

Wages may be kept above equilibrium level

Minimum-wage laws

Unions

Efficiency wages

If the wage is kept above the equilibrium level

Result: unemployment

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3 Unions & Collective Bargaining

Union Worker association that bargains with employers over Wages,

benefits, and working conditions

Type of cartel: A group of sellers acting together in the hope ofexerting their joint market power.

Collective bargaining Process by which unions and firms agree on the terms of

employment

Strike Organized withdrawal of labor from a firm by a union

Reduces production, sales, and profit

Union workers Earn 10-20% more

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Unions & Collective Bargaining

Union - raises the wage above the equilibriumlevelHigher quantity of labor supplied

Smaller quantity of labor demanded

UnemploymentBetter off: employed workers (insiders) reap the

benefit

Worse off: unemployed (outsiders) bear the cost

May stay unemployed Take jobs in firms that are not unionized

Supply of labor increase in industries not unionized Lower wage

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Unions & Collective Bargaining

Are unions good or bad for the economy?

Critics Unions - a type of cartel

Allocation of labor

Inefficient - high union wages reduce employment in unionized firmsbelow the efficient level

Inequitable - some workers benefit at the expense of other workers

Advocates Unions - necessary antidote to the market power of the firms that

hire workers In the absence of a union, firms pay lower wages and offer worse workingconditions : hours of work, overtime, leave, other benefits, promotions

Unions - help firms respond efficiently to workers concerns Keep a happy and productive workforce

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4 Theory of Efficiency Wages

Efficiency wages

Above-equilibrium wages paid by firms to increase

worker productivity: firms work more efficiently

Worker health

Worker turnover

Worker quality

Worker effort

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Theory of Efficiency Wages

Worker health Better paid workers

Eat a more nutritious diet

Healthier and more productive

Worker turnover

Firm - can reduce turnover among its workers By paying them a high wage

Worker quality Firm pays a high wage

Attracts a better pool of workers

Increases the quality of its workforce

Worker effort High wages make workers more eager to keep their jobs

Give workers an incentive to put forward their best effort

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$


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Henry Ford and the very generous $5 a-day

wage

Henry Ford - founder of Ford Motor CompanyIntroduced modern techniques of production

Built cars on assembly lines Unskilled workers were taught to perform the same simple

tasks over and over againOutput: Model T Ford

1914, Ford - the $5 workdayTwice the going wage

Long lines of job seekers Number of workers willing to work > number of workers

Ford needed

Fords high-wage policy efficiency wage

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$


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Henry Ford and the very generous $5-a-day

wage

Fords efficiency wageTurnover fell

Absenteeism fell

Productivity rose

Workers so much more efficient Fords production costs were lower despite higher wages

Profitable for the firm

Fords efficiency wage

High worker effort

Closely linked to Fords use of the assembly line Assembly line - highly interdependent workers

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015 Unemployment

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