Chapter 28

Unemployment and its Natural Rate

A Roadmap for Chapter 28

1. Background

2. Long Run vs. Short Run Unemployment

3. Unemployment - Generally Speaking

4. Determinants of Long-Run Unemployment

Why Unemployment is Important?

• People who are unemployed not contributing to economy’s production.

• A country that keeps its workers as fully employed as possible achieve a higher level of GDP than the one who leaves many of them idle

Why Unemployment is Important?

• Adult population (15-64 years) covers the economically active age group in the population

• Long-run vs. Short-run problem.

Labour Force

• The total number of workers, including both the employed and the unemployed

• Labour force = Number of employed + number of unemployed

Unemployment Rate

• The percentage of the labour force that is unemployed

• Unemployment rate 100ForceLabor

d UnemployeofNumber

Labour force participation

• The percentage of the adult population that is in the labour force

The labour force participation rate:

100PopulationAdult

ForceLabour

Labour Force Participation Rate

0

Men

100

80

60

40

20

1950 1955 1960 1965 1970 1975 1980 1985 1990 2000

labour-ForceParticipation

Rate (in percent)

1995

Women

Figure 1 US Population and Unemployment, 2009

AdultPopulation

(235.9 million)

labour Force(154.2 million)

Employed(139.9million)

Not in labour force(70.1 million)

Unemployed (14.3 million)

Unemployment in the Long-Run

• Natural Rate of Unemployment: is the rate of unemployment that the economy experiences even during normal times, that is, even when the economy is not in a recession

• It is also called economy’s long-run rate of unemployment

Unemployment in the Short-Run

• Cyclical Unemployment: year to year fluctuations in unemployment around its natural rate.

• Occurs during recessions.

UnemploymentLong Run vs Short Run?

The Natural Rate of Unemployment– the long-run rate of unemployment– the rate of unemployment when the economy is at

“full employment”– According to your book, about 5.5% (see next slide)

Unemployment Rate since 1960

What is Unemployment?

Compiled by a random monthly survey of 60,000 households

To be counted as part of the labour force, you must either:– have a job– not have a job, but is able to work and willing to work

(actively searching)

Who is Unemployed?

Demographic Group

Unemployment Rate

labour-Force Participation Rate

Adults (20 or over)

White, male 3.7% 76.8%

White, female 3.6% 50.2%

Black, male 8.0% 72.1%

Black, female 7.0% 65.4%

Teenagers (15-19)

White, male 13.8% 54.1%

White, female 11.4% 52.8%

Black, male 30.5% 38.0%

Black, female 27.5% 37.4%

Problems With Our Measure of Unemployment?

def: Discouraged workers– people who would like to work but have given up

looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.

Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.

Some people work (homemakers) but aren’t paid in a formal labour market, and so aren’t counted as being part of the labour force

Is 0% Unemployment ever possible?

Types of Unemployment

- Frictional Unemployment

- Structural Unemployment

- Disguised Unemployment

- Cyclical Unemployment

Frictional unemployment

Definition: unemployment that results because for workers to search for the jobs that are best suit their tastes and skills.

• Companies and sectors grow, shrink, go bankrupt every day in every economy

• People migrate to other cities or regions for personal as well as economic reasons

• People change jobs for many, even irrational reasons

• At any moment in time, there are many people temporarily unemployed in the economy

Structural unemployment

Definition: is the unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one.

• The 15-64 years age group members (adults) who can not find employment simply because there are not enough factories, offices, fields,

• Macroeconomic policies have no impact on structural unemployment in the short run: unemployment persists even during rapid growth

Disguised unemployment (gizli işsizlik)

• Many people, especially in agriculture and urban services seem to be working

• But they have very low productivity, creating very little value added and therefore earn low levels of income

• This is due to the lack of jobs with high productivity in the economy, itself due to the capital constraint

Cyclical unemployment

• Cyclical unemployment happens when economic activity slows down as result of a recession or a an economic crisis

• As demand for goods and services fall, people who were producing them loose their jobs

• Many people became unemployed in Turkey during 2001 and 2008 because of the economic crisis

L*

SL

DL

Why do above market wages cause unemployment?

If the wage is kept above the equilibrium (w*), then the quantity of labour supplied (LS) will exceed the quantity of labour demanded (LD) and some workers will be unable to find work

This is structural unemployment, and can be caused by:– Minimum wages– Unions– Efficiency wages

L

w

W*

Wmin

LSLD

Unemployment

What determines the natural rate of unemployment?

1. Minimum wages Minimum wages cause

some unemployment As minimum wage rises

above equilibrium, the natural rate rises

2. Labour Unions As unions seek to raise

wages above equilibrium, they’ll produce a similar effect on the natural rate as minimum wages

3. Efficiency Wages When employers pay

above market wages to reduce turnover and increase worker productivity, they increase the natural rate

4. Job Search In general, it’s not

possible to move from one job to another without some lost time – workers are therefore temporarily unemployed during the interim

Conclusion• Unemployment is a major economic as well as political and social issue in all economies

•Labour force consists of the employed and the unemployed

• The unemployment rate is the percentage of people who would like to work but don’t have jobs

•There are four different kinds of unemployment: structural, disguised, cyclical and frictional

• Most unemployment in Turkey is structural Wage and salary earners constitute only 49 percent of the labour force in Turkey