Unemployment defined One is unemployed if one is able to work at prevailing wage rates, and is either seeking employment or has been hired for employment,

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Presentation transcript:

Unemployment defined One is unemployed if one is able to work at prevailing wage rates, and is either seeking employment or has been hired for employment, but is not currently employed.

Frictional unemployment Temporary job search. Likely to find work soon. About 1% of labor force. Information reduces search time. Full employment means, the only unemployment is frictional.

Pseudo or phantom unemployment Those who say they are seeking work, to obtain unemployment payments, but are not really searching. Large unemployment payments reduce the incentive to work. Alternative: public employment program.

Cyclical and Sectoral Cyclical unemployment: the increase in unemployment during a recession. Sectoral unemployment: due to shifts of industry.

Chronic or structural unemployment Long-run unemployment. why?

Chronic unemployment Barriers between labor and resources: Regulations such as the minimum wage. Taxes raise labor costs beyond the minimum wage.

Barriers make it harder to cross.

The natural rate of unemployment The long-run average rate of unemployment. It is not really “natural.” It can change.

The labor force Age 16 and up. Employed plus unemployed. Discouraged workers: gave up searching. Unemployment rate: unemployed / labor force

Labor force participation The labor-force participation rate = labor force / adult population

Unions Split the labor force into a union and non-union sector. Union sector has higher wage. Higher wage: less employment. Workers shift to non-union sector. Which reduces the wage. Net effect: no overall wage increase.

Best policy for labor No taxes on labor or employment. No minimum wage or other restriction on employment. Result: full employment, workers keep their full wage. Self employment competes with employees. Employers have to treat workers well.