Chapter 14: UNEMPLOYMENT AND ITS NATURAL RATE

Problem of unemployment The long-run unemployment or the natural rate of unemployment is the amount of unemployment that the economy normally experiences The Short-run unemployment or cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate We focus on the natural rate of unemployment

Outline Measurement of unemployment rate Interpretations of unemployment data Explain the determinants of natural rate of unemployment

Measurement of unemployment Source is the Labour Force Survey Each surveyed household is classified as Employed Unemployed Not in the labour force Labour force= # employed+ # unemployed Unemployment rate is the percentage of labour force that is unemployed

Measurement of unemployment Labour-Force Participation Rate (LFPR) is the percentage of adult population that is in the labour force Unemployment rates: Variation by region, by age, and by gender

Measurement of unemployment Participation rate Source: Statistics Canada, CANSIM, table 282-0002

Labour Force Participation Rates by Gender: 1976-2002                                                                     Source: Statistics Canada, CANSIM, table 282-0002

Unemployment rates by gender, 1976-2001

Unemployment rates for age group: 15-24 years and for all 15+

CANADA: AVERAGE WEEKS UNEMPLOYED, BOTH SEXES ( 15 YEARS AND OVER), 2002 Jan 15 Feb 16.3 Mar 17.9 Apr 17.3 May 15.9 Jun Jul 15.6 Aug Sep Oct 16 Nov Dec 15.8

Unemployment Rates by Region      Source: Statistics Canada, CANSIM, table 282-0055

Problems with the measurement of unemployment Movements into and out of labour force are common Behaviour of EI beneficiaries Discouraged workers Duration of unemployment Most spells of unemployment are short, and most unemployment at any given time is long-term Low LFPR

Types of unemployment Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

Types of unemployment Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

Natural and observed rate of unemployment, 1976-2001

Unemployment and causes Frictional unemployment Job search: the process by which workers find appropriate jobs given their tastes and skills Public policy and job search: EI Causes of Structural unemployment: Minimum-wage laws: above equilibrium wage Unions and collective bargaining: type of cartel Efficiency wages are above equilibrium wages paid by firms to increase worker productivity

The theory of efficiency wages Why do firms want to pay higher wages? Worker health Worker turnover Worker effort Worker quality Worker-quality variant of efficiency wage theory illustrates the principles of adverse selection and moral hazard