© The McGraw-Hill Companies, 2005 Chapter 27 Unemployment David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill, 2005 PowerPoint presentation by Alex Tackie and Damian Ward

© The McGraw-Hill Companies, 2005 Some key terms Unemployment rate: –the percentage of the labour force without a job but registered as being willing and available for work. Labour force –those people holding a job or registered as being willing and available for work. Participation rate –the percentage of the population of working age declaring themselves to be in the labour force.

© The McGraw-Hill Companies, 2005 TOTAL POPULATION Age ≥ 15 (Adult Population)Age < 15 Non-Institutional (Civilian) PopulationInstitutional Population: 1. Army 2. Prisoners 3. Health Institutions * Not in Labor Force Labor Force Students  Retired  Homemakers  Rentier income earners  Disabled or sick  Miscellaneous other EmployedUnemployed  Wage and salary earners1. is not currently employed  Business owners2. actively seeking a job  Self-employed workers3. ready to start work if offered Unpaid family workers employment Labour Force = Employed + Unemployed Unemployment Rate U = Unemployed = Unemployed Labor Force Employed + Unemployed Labor Force Participation Rate = Labour Force Total Civilian Population

© The McGraw-Hill Companies, 2005 Disguised Unemployment Discouraged Workers: Workers who stopped looking for a job because they have no hope of finding one. Underemployment: Workers who have a job but looking for an additional or other job, because worker is dissatisfied with pay/conditions.

© The McGraw-Hill Companies, 2005 Slide #5 The Labor Market in Turkey Total Population million Minus Armed forces and Incarcerated- (?) million Civilian Non-institutional Pop million Minus Pop. under million Civilian Non-institutional Adult Pop million Minus not in the Labor Force million Civilian Labor Force million Employed million Unemployed million

© The McGraw-Hill Companies, 2005 Slide #6 The Labor Market in Turkey The Labor Force Participation Rate= From 52% in 2001; What has caused the participation rate to decrease over time?

© The McGraw-Hill Companies, 2005 Slide #7 The Labor Market in Turkey Differences Across Workers 2009 Labor Force Participation Rates Turkey47.9% Males 70.5% Females26.0% Urban Females22.3% Rural Females32.7%

© The McGraw-Hill Companies, 2005 Slide #8 The Labor Market in Turkey The unemployment rate =

© The McGraw-Hill Companies, 2005 Slide #9 Unemployment Data: Turkey Urban Unemployment

© The McGraw-Hill Companies, 2005 Slide #10 Unemployment Data: Turkey Urban Unemployment

© The McGraw-Hill Companies, 2005 Slide #11 Unemployment Data: Turkey Rural Unemployment

© The McGraw-Hill Companies, 2005 Slide #12 Unemployment Data: USA

© The McGraw-Hill Companies, 2005 Unemployment in the UK Source: Economic Trends Annual Supplement, Labour Market Trends

© The McGraw-Hill Companies, 2005 Unemployment (%) in selected countries

© The McGraw-Hill Companies, 2005 Labour market flows It is tempting to see the labour market in static terms WorkingUnemployed Non-participants but... LABOUR FORCE

© The McGraw-Hill Companies, 2005 Labour market flows LABOUR FORCE Working Unemployed Non-participants Taking a job Job-losers Lay-offs Quits New hires Recalls Discouraged workers Re-entrants New entrants Retiring Temporarily leaving

© The McGraw-Hill Companies, 2005 Types of unemployment Seasonal arises due to cyclical nature of economic activity in some sectors such as agriculture, tourism, construction. Frictional –the irreducible minimum level of unemployment in a dynamic society people between jobs the ‘almost unemployable’ Structural –unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes it takes time for ex-coal miners to retrain as international bankers

© The McGraw-Hill Companies, 2005 Types of unemployment (2) Different Schools of Thought in Economics offer different accounts of why Unemployment arises Keynesian View: Demand-deficient unemployment –occurs when output is below full capacity –‘Keynesian’ unemployment occurs in the transitional period before wages and prices have fully adjusted Neoclassical View: Classical unemployment –created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect

© The McGraw-Hill Companies, 2005 Keynesian unemployment Number of workers Real wage LD LF AJ w* With sticky wages and prices in the short-run, the economy will move to equilibrium at A E F and there will be unemployment of AF. Of which EF will be voluntary and AE will be involuntary (ie Keynesian). Beginning at E, suppose labour demand falls to LD’. A LD’ w2w2 H If labour demand remains at LD’, the new equilibrium when wages and prices have fully adjusted will be at G. G

© The McGraw-Hill Companies, 2005 A ‘modern’ view of unemployment A similar categorisation is retained, but an important distinction is to be noted between: Voluntary unemployment –when a worker chooses not to accept a job at the going wage rate. Involuntary unemployment –when a worker would be willing to accept a job at the going wage but cannot get an offer.

© The McGraw-Hill Companies, 2005 The natural rate of unemployment A neoclassical concept The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. This is entirely voluntary. It includes: –frictional unemployment –structural unemployment Yet one needs to question if unemployment can ever be called natural? Voluntary?

© The McGraw-Hill Companies, 2005 Unemployment Policies: Different Schools of Thought in Economics offer different policies to solve the Unemployment Problem Neoclassical Economics → reduce wages to solve “classical unemployment”. How? Trade union reform: reducing the power of trade unions may limit distortions in the labour market Legal reforms: such as eliminating minimum wages Tax reductions Keynesian Economics → boost effective demand in the product market to increase labor demand and solve “demand-deficient unemployment” Investment –higher investment may increase the demand for labour may be achieved via tax incentives or low interest rates Solution to structural U: training and retraining measures Solution to frictional U: improving the efficiency of the job search and worker placement mechanisms

© The McGraw-Hill Companies, 2005 Hysteresis The idea that a (short-run) fall in aggregate demand can lead to a persistence of unemployment even when the fall in aggregate demand has been reversed. This could help to explain high and persistent unemployment in Europe in the 1980s.

© The McGraw-Hill Companies, 2005 Hysteresis (continued) Four channels: –Insider-outsider distinction only those in work take part in wage bargaining & they protect their own positions –Discouraged workers people stop looking for jobs –Search and mismatch firms and workers get used to low search –capital stock low levels of investment in recession lead to permanently low capital stock levels

© The McGraw-Hill Companies, 2005 Summary Unemployment is a dynamic phenomenon. It impacts upon different groups differently. Different Schools of Thought in Economics offer different accounts of why the problem of unemployment arises and how to solve it. Modern view emphasises difference between voluntary and involuntary unemployment. Hysteresis may help to explain unemployment persistence.