PRINCIPLES OF ECONOMICS Chapter 21 Unemployment PowerPoint Image Slideshow

FIGURE 21.1 Borders was one of the many companies unable to recover from the economic recession of

3 of 25 LABOR MARKET Employed: Currently working for pay Unemployed: Out of who work, but actively looking for work Labor Force: Employed + Unemployed Out of Labor Force: Out of who work, but not looking for work

4 of 25 UNEMPLOYMENT An unemployed person is any one who is: Sixteen years old or older Sixteen years old or older Out of who work Out of who work Actively searching for work: he/she has made specific efforts to find work during the previous four weeks Actively searching for work: he/she has made specific efforts to find work during the previous four weeks

MEASURING UNEMPLOYMENT

EMPLOYMENT DATA

PATTERNS OF UNEMPLOYMENT The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of 4% to 6%. Highest rate was about 10% in and recession.

PATTERNS OF UNEMPLOYMENT

TYPES OF UNEMPLOYMENT Frictional unemployment: Unemployment due to searching time for jobs and waiting time between jobs e.g., Jennifer, just graduated from college, is looking for a job that matches her qualifications Structural unemployment: Unemployment due to changes in the structure of the economy that result in a loss of jobs in certain industries e.g., Ken, a farm laborer, lost his job due to mechanization. He is getting trained to be a security officer.

TYPES OF UNEMPLOYMENT Cyclical unemployment: Unemployment due to labor lay-offs in a recession e.g., Nancy, an engineer, is let go as her employer attempts to cut labor cost. Seasonal unemployment: Unemployment due to seasonal changes e.g., Tom, a ski instructor, loses his job when winter Ends.

TYPES OF UNEMPLOYMENT Natural Rate of Unemployment: Unemployment that occurs as a normal functioning of the economy. = Frictional Unemployment + Structural Unemployment Usually 4 to 5 percent of the labor force is searching for jobs, waiting between jobs, or getting trained for new jobs. Unemployment rate above the natural rate is considered to be cyclical, e.g., 7.5% – 5% = 2.5%

THE CLASSICAL VIEW: WAGE FLEXIBILITY The labor market is brought to equilibrium by rising and falling wage rates. There should not be any persistent unemployment above the natural rate.

THE CLASSICAL VIEW: WAGE FLEXIBILITY In a labor market with flexible wages, the equilibrium will occur at wage W e and quantity Q e, where the demand for labor intersect the supply of labor.

THE KEYNESIAN VIEW: WAGE RIGIDITY Wages are “rigid” or “sticky” downward. Sticky Wages refers to the downward rigidity of wages as an explanation for the existence of unemployment.

THE KEYNESIAN VIEW: WAGE RIGIDITY Because the wage rate is stuck at W, above the equilibrium, the number of job seekers (Q s ) is greater than the number of job openings (Q d ). The result is unemployment = Q s – Q d.

ADJUSTMENT TO INCREASED DEMAND a)In a labor market where wages could rise, an increase in the demand for labor leads to an increase in equilibrium wage and employment. b)In a labor market where wages could not fall, a decline in the demand for labor leads to a loss of employment at the original wage. At the fixed wage of W 0, unemployment = Q 0 – Q 2

ADJUSTMENT TO INCREASED DEMAND

ADJUSTMENT TO PRODUCTIVITY INCREASED o Productivity improves, increasing the demand for labor, wage, and employment. o Then productivity stops increasing. Still, wages keep rising. o But, the demand for labor has not increased, so at a market wage, unemployment exists.  There is no improvement in productivity.  There is no wage increase.  Now, productivity improves, increasing the demand for labor and creating more jobs.

ADJUSTMENT TO PRODUCTIVITY INCREASED