Harcourt Brace & Company Chapter 26 Unemployment and Its Natural Rate.

Harcourt Brace & Company

Chapter 26

Unemployment and Its Natural Rate


Identifying Unemployment

• “A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem.” (micro issue)

• Unemployment results in a loss of output in an economy (macro issue)


Categories of Unemployment

• The problem of unemployment is usually divided into two categories:

1 . The Natural Rate of Unemployment 2 . The Cyclical Rate of Unemployment


Natural Rate of Unemployment• Joblessness that does not go away on its

own even in the long run.• The amount of unemployment that the

economy normally experiences.


Components of the Natural Rate • Frictional Unemployment represents

joblessness related to job searching and job switching.

• Structural Unemployment refers to unemployment in the in economy resulting from changes (e.g. labor saving technology).


Cyclical Unemployment• Refers to the year-to-year fluctuations in

unemployment around its natural rate. Deals with short-term fluctuations associated with the ups and downs of the business cycle.


Measuring Unemployment

• Monthly Unemployment Rate is calculated by:– The BLS surveying 60,000 randomly

selected households and categorizing each adult (i.e. >16 years old) as:

1 . Currently employed (have a paying job).

2 . Unemployed but actively seeking a job.

3 . Not in the labor force (i.e. neither of above).


Measuring Unemployment• A person is employed if he or she has

spent any time at all as a paid employee during the survey week.

• A person is unemployed if he or she is:– on temporary layoff – is looking for a job– is waiting for the start of a new job

• A person in neither category is not in the labor force.



• The Labor Force is the number of employed persons plus the number of unemployed persons.


Unemployment Rate Formula U = B/(A+B) X 100

• “U” is the unemployment rate• “A” is the number of employed• “B” is the number of unemployed• “A+B” is the labor force


August 2002 Unemployment Rates (NSA)

U.S. (8.148 m /143.176 m) X 100 = 5.7 %

GA. (198,028/4,199,436)X 100 = 4.7 %


Unemployment Rates (%)

Year U.S. Georgia

1990 5.6 5.4

1995 5.6 4.9

2000 4.0 3.7

2001 4.8 4.0


U.S. Unemployment (Sept. 2002,SA)

• All workers 5.6 %• Adult Men 5.2 %• Adult Women 4.9 %• Teenagers 15.7 %• Black 9.6 %• Hispanic 7.4 %



• The Labor-Force Participation Rate illustrates the fraction of the adult population that has chosen to participate in the labor market.

• The Labor-Force Participation Rate is:

PR = (A+B) / Adult Pop X 100– Table 26-1 and Figure 26-3


Shortcomings of the Unemployment Rate?

• It is hard to distinguish between a person who is unemployed and a person who is not in the labor force.

• The unemployment rate is not a perfect measure of unemployment.– Underemployed

– Discouraged workers


• Underemployed are those who are working part time when they really want full-time work.

• Discouraged Workers are those who have given up looking for work and report that they are no longer in the labor force.

Underemployed/Discouraged Workers


Duration of Unemployment• Most of the economy’s unemployment

problem is attributable to the relatively few workers who are jobless for long periods of time.

• The average duration of unemployment is very short (< 10 weeks) for the majority of the unemployed (75%).


“Classical Labor Market”

• In an ideal labor market, wages would adjust to balance the supply of labor and the demand of labor, ensuring full employment.


Why is there always some unemployment?

Five reasons:– Minimum-wage laws

– Unions

– Efficiency wages

– Job search (frictional)

– Structural


1. Minimum-Wage Laws

• Fair Labor Standards Act of 1938

• 1938 ($.25/hr.), 1965 ($1.25/hr.), 1990 ($3.80/hr.), 1997-Present ($5.15/hr.)


1. Minimum-Wage Laws

• When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it creates a surplus of labor.


Minimum-Wage LawsPrice of Labor

Quantity ofLabor

Demand

Equilibriumwithout

Minimum Wage

Supply



Quantity ofLabor

Supply

Demand

PM

QSQD

Minimum WageLaw Established



Quantity ofLabor

Demand

PM

QSQD

Surplus orUnemployment

Supply


2. Unions

• A union is a worker association that bargains with employers over wages and working conditions.

• By acting as a “cartel” with ability to strike, unions usually result in above equilibrium wages for their members.


Impact of Unions on Employment

• At wages set above equilibrium:– a very large number of qualified workers

are willing to accept the jobs

– job openings tend to be scarcer in unionized sectors

– workers tend to hold out accepting other jobs in hopes of one day landing the high paying union job


3. The Theory of Efficiency Wage

• Firms operate more efficiently if wages are above the equilibrium level.

• Why?


The Theory of Efficiency Wage

• Higher than equilibrium wages are set to promote the following goals of the firm:– Worker Turnover: A higher paid worker is

less likely to look for another job.

– Worker Effort: Higher wages motivate workers to put forward their best effort.

– Worker Quality: Higher wages attract a better pool of workers to apply for jobs.


4. Job Search Unemployment

• Unemployment that results from the fact that it takes time for qualified individuals to be matched with available jobs.


Situations of Job Search Unemployment

• Search unemployment is inevitable because the economy is always changing.

• Who is searching?– New Entrants, Re-entrants, job

switchers


Public Policy and Job Search

• Examples of how the Government impacts the job search process:

– Minimum Wage Laws

– Government-run employment agencies

– Public training programs

– Unemployment insurance


• Gives out information about job vacancies in order to match workers and jobs more quickly.

Government -Run Employment Agencies (e.g Georgia Dept. Labor)


Public Training Programs

• Aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty (e.g retraining of apparel workers)


–Offers workers partial income protection against job loss.

–Funded by unemployment tax (paid by employers)

–Increases the amount of search unemployment

Unemployment Insurance


• How to qualify? Minimum earnings over two quarters, leave job through no fault of own

• Max. Benefits ~40-50% of past wages for 6 months (GA max---$295 week)

• To maintain benefits---check in with Dept of Labor, seek employment

Unemployment Insurance


Cyclical Unemployment

• Deviation in unemployment from natural rate (see Figure 26-2).

• In addition to the four factors discussed previously, unemployment may be higher or lower due to cyclical factors.


Conclusion

• Since unemployment can impose unusual hardships on individuals, families and communities, it is an important concern of policymakers.

• Many factors, including public policies, efficiency wages, and cyclical conditions, help explain the existence of unemployment.

Harcourt Brace & Company Chapter 26 Unemployment and Its Natural Rate.

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