LABOR MARKET Essays based on: N. Goodwin, J. Nelson, J. Harris ‘Macroeconomics in context’, 2009 N. Mankiw, ‘Principles of Economics’, 2003 TYPES OF UNEMPLOYMENT ALTERNATIVE ECONOMIC INDICATORS Prepared by Agnieszka Włosek Economics, December 2011

LABOR MARKET Agnieszka Włosek, December 2011 Considerations of labor market places each adult (aged sixteen and older) into one of three categories: - Employed - Unemployed (on temporary layoff, is looking for a job, or is waiting for the start date of a new job ) - Not in the labor force (full-time student, homemaker, or retiree) Potential labour force - (age-eligible population) is considered to be entire population less (1) young people under 16 years of age, (2) people who are institutionalized. Labour force - consists of people who are either employed or unemployed but actively seeking a job. We do not take into consideration people who don’t want to work. Labour force participation rate - is determined by comparing the actual labour force with the potential labour force (economic activity).

LABOR MARKET Agnieszka Włosek, December 2011 Marginally attached workers - people who do not have jobs, are available for a job, and have looked for it recently but not right now (for example that person is busy with taking care of a child at the moment and doesn’t look for a job). Discouraged workers - people who do not have jobs, but they are not looking for them, because they think there is no job for them. It is about long-term unemployed people. Underemployment - working fewer hours than desired, and/or at a job that does not utilize one’s skills. A type of people who are treated as employed, but they are not employed in a term that satisfied them (for example medical doctor who is working in a hospital as a cooker)

LABOR MARKET Agnieszka Włosek, December 2011 A STOCK-FLOW MODEL OF THE LABOR MARKET A stock-flow model of the labor market – this is the situation in which we have certain numbers, stocks: stock of employed (number of people who are employed), stock of unemployed (number of people who are unemployed), stock of not in a labor force (number of people who are not in a labor force).

LABOR MARKET Agnieszka Włosek, December 2011 What may change? people who went from employment to the ‘not in the labor force’ (e.g. parent who decide to stay at home and take care of children) people who went from not in the labor force to employed (students graduated from university and start working) people who are employed and decide to leave the labor force (retired workers) people who are not in the labor force and become unemployed (when people finish school and try to find job, but they can’t find it) people who are unemployed becomes employed (people who find a job)

LABOR MARKET Agnieszka Włosek, December 2011 UNEMPLOYMENT RATE – the percentage of the labor force made up of people who do not have paid jobs, but who are immediately available and actively looking for paid jobs. The unemployment rate represents the fraction of the officially defined labor force which is made up of people not currently working at paid jobs, but who are currently looking for and available for paid work. UNEMPLOYMENT RATE = NUMBER OF UNEMPLOYED / LABOUR FORCE

TYPES OF UNEMPLOYMENT Agnieszka Włosek, December 2011 Why are people unemployed? Sometimes it takes time for workers to search for the jobs that are best suited for them. We have three main types of unemployment: Frictional - (search unemployment) – unemployment of people who are in transition between jobs. It is linked to dynamic markets and imperfect information flows. The unemployment that happens when people are looking for a job. It is short term unemployment. This unemployment happens because of two reasons: Dynamic of the labor market – people are changing their places of work, the labor market is dynamic therefore. Imperfect information - we don’t have enough information and it is sometimes the main reason why we are unemployed, because when we don’t have information who exactly is willing to give us the job (information is not valuable, we have to look for a job).

TYPES OF UNEMPLOYMENT Agnieszka Włosek, December 2011 Structural - arises because people’s skills, experience, education, and/or location does not match the employers needs. It is linked to long-lasting imbalances in demand and supply. it is long lasting unemployment. Those imbalances can have two bases: education imbalance – about education, experience, skills, geographic imbalance – people have qualifications that are enough, but in certain country, not in another one. The government tries to find a way, a middle option, to improve that situation, for example by provisioning subsidies for firms or companies that trains unemployed people so that they obtain qualifications that are needed, Provisioning of information about, Help in relocation in order to work in another region of country,

TYPES OF UNEMPLOYMENT Agnieszka Włosek, December 2011 Cyclical – (demand-deficient) associated with fluctuations in business activity. It occurs when a decline in aggregate demand in the output market causes the drop in aggregate demand for labor in the face of downward inflexibility in real wages. When we talk about labor, labor demand is indirect (we have a direct demand for products and services and labor depends on production – more production, more workers etc.). Cyclical unemployment happens when we have inflexibility in wages.

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 The first idea of measuring production was born on the first half of XX century. Each country developed their own national way of calculating production. So everybody calculated it in a different way. Later United Nations decided that we have to do something in order to make it more comparable and they developed GDP. Gross Domestic Product – a total market value of all final goods and services produced during a particular time period in a given economy. Three ways of calculating GDP (in theory they all should be equal): Value of production = value of spending = value of income

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 GDP is not perfect. It measures only market transactions, so monetary flows. If we want to include something to GDP it has to be sold. In economic activity we only take into consideration households, enterprises, government, but we are not taking into consideration everything connected with them, but only their monetary transaction that is very limited. We do much more than it is presented at market exchange. Accounting for the environment Measuring the household production Measuring human well-being

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 Accounting for the environment. There are three functions of environment: Resource functions – the natural environment provides natural resources that are inputs into human production process. We receive input from environment (wood, coal, metals) for production process, but we do not calculate them when we calculate GDP. Environmental service functions – the natural environment provides the basic habitat of clear air, drinkable water, and suitable climate that directly support all forms of life on the planet. Sink functions – the natural environment serves as a „sink” which absorbs the pollution and wastes generated by economic activity. Without that ability we would severe much more than we do now.

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 How to measure all those things? There are exist some special indicators: UN environmentally adjusted net domestic product eaNDP = GDP – depreciation of manufactured capital – depreciation of natural capital Genuine Savings (World Bank) Genuine savings = Gross savings – depreciation of manufactured capital – depreciation of natural capital Valuating the environment depreciation Damage cost approach Maintenance cost approach

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 Measuring household production The household production means everything that is produced for only our use, to consume and not for selling. Household production is not included in GDP, because: 1. Households are non – productive. What is more, productive work is that it can be sold, but dinner cooked for family is not sold. 2. It is hard to distinguish between production and consumption ; 3. Including household production would make huge changes in GDP (like 50% of GDP growth). 4. The household production is behaving in the contrary of business cycle. So, if we include it to the GDP, it will not show us the cycle.

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 There are examples of measuring household production. Time use surveys - the way of determining how much time people spend in unpaid productive activities Methods of valuing household production: Replacement cost method – valuing hours at the amount it would be necessary to pay someone to do the work Opportunity cost method – valuing hours at the amount the unpaid worker could have earned at a paid job

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 Example: Time use in Poland

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 What is invisible in traditional national accounts? Well-being-reducing products –products that are produced in economy and make GDP higher, but they have certain negative influence on people (production of cigarettes, alcohol; cigarettes – cause lounge cancer, a person is treated by hospital. So it is included in GDP, but actually doesn’t make our well being better. Defensive expenditures – if there is something wrong going on in society we are spending money in order to overcome this problem (there is a crime, government gives more money to the Police, so GDP is rising, for example by salaries of policemen, but it doesn’t mean that our well being get better; also war causes GDP growth by expenditures for weapon, gun, but it is not good for citizens)

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 What is invisible in traditional national accounts? Loss of leisure – we enjoy leisure, when we don’t have leisure time, we just work and sleep. GDP is rising with high rate, but our well being is going down Loss of human and social capital – social capital is the capital that we have because we are connected with other people. If we don’t have human and social capital, we just work, GDP rises, but well-being is damaged. Well-being-reducing production methods – certain production methods are reducing our well – being. If we have factory that pollutes a lot, but it produces much, the GDP is growing, but also well – being of neighborhood decreases because of the pollution problem. GDP does not include all those issues, but there are indicators that do include them and help us in measuring well – being.

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 What is invisible in traditional national accounts? Well-being-reducing products –products that are produced in economy and make GDP higher, but they have certain negative influence on people (production of cigarettes, alcohol; cigarettes – cause lounge cancer, a person is treated by hospital. So it is included in GDP, but actually doesn’t make our well being better. Defensive expenditures – if there is something wrong going on in society we are spending money in order to overcome this problem (there is a crime, government gives more money to the Police, so GDP is rising, for example by salaries of policemen, but it doesn’t mean that our well being get better; also war causes GDP growth by expenditures for weapon, gun, but it is not good for citizens)

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 Human Development Index (HDI) The HDI has been used since 1990 by the United Nations Development Programme. The author of this indicator is Pakistan economist Mahbub ul Haq. An index of well-being made by combining measures of health, education, and income. The HDI aggregates three indicators of human well-being: - Life expectancy at birth - An index reflecting a combination of the adult literacy rate and statistics on enrollments in education - GDP per capita The biggest HDI: Norway, Australia, New Zealand.

ALTERNATIVE ECONOMIC INDICATORS Agnieszka Włosek, December 2011 GNH value is proposed to be an index function of the total average per capita of the following measures: Economic Wellness - Indicated via direct survey and statistical measurement of economic metrics such as consumer debt, average income to consumer price index ratio and income distribution Environmental Wellness - pollution, noise and traffic Physical Wellness Mental Wellness - usage of antidepressants and rise or decline of psychotherapy patients Workplace Wellness - job change, workplace complaints and lawsuits Social Wellness - discrimination, safety, divorce rates, complaints of domestic conflicts Political Wellness - quality of local democracy, individual freedom, and foreign conflicts. Gross National Happiness Index