Unemployment and its Natural Rate Chapter 28 Unemployment and its Natural Rate

A Roadmap for Chapter 28 Background Long Run vs. Short Run Unemployment Unemployment - Generally Speaking Determinants of Long-Run Unemployment

Why Unemployment is Important? People who are unemployed not contributing to economy’s production. A country that keeps its workers as fully employed as possible achieve a higher level of GDP than the one who leaves many of them idle

Why Unemployment is Important? Adult population (15-64 years) covers the economically active age group in the population Long-run vs. Short-run problem.

Labour Force The total number of workers, including both the employed and the unemployed Labour force = Number of employed + number of unemployed

Unemployment Rate The percentage of the labour force that is unemployed Unemployment rate

Labour force participation The percentage of the adult population that is in the labour force The labour force participation rate:

Labour Force Participation Rate Men 100 80 60 40 20 1950 1955 1960 1965 1970 1975 1980 1985 1990 2000 labour-Force Participation Rate (in percent) 1995 Women

Figure 1 US Population and Unemployment, 2009 Adult Population (235.9 million) Employed (139.9million) labour Force (154.2 million) Unemployed (14.3 million) Not in labour force (70.1 million)

Unemployment in the Long-Run Natural Rate of Unemployment: is the rate of unemployment that the economy experiences even during normal times, that is, even when the economy is not in a recession It is also called economy’s long-run rate of unemployment

Unemployment in the Short-Run Cyclical Unemployment: year to year fluctuations in unemployment around its natural rate. Occurs during recessions.

Unemployment Long Run vs Short Run? The Natural Rate of Unemployment the long-run rate of unemployment the rate of unemployment when the economy is at “full employment” According to your book, about 5.5% (see next slide)

Unemployment Rate since 1960

What is Unemployment? Compiled by a random monthly survey of 60,000 households To be counted as part of the labour force, you must either: have a job not have a job, but is able to work and willing to work (actively searching) Based on the answers to the survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labour force The BLS considers a person an adult if he or she is over 16 years old. A person is considered employed if he or she has spent most of the previous week working at a paid job. A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labour force.

labour-Force Participation Rate Who is Unemployed? Demographic Group Unemployment Rate labour-Force Participation Rate Adults (20 or over) White, male 3.7% 76.8% White, female 3.6% 50.2% Black, male 8.0% 72.1% Black, female 7.0% 65.4% Teenagers (15-19) 13.8% 54.1% 11.4% 52.8% 30.5% 38.0% 27.5% 37.4%

Problems With Our Measure of Unemployment? def: Discouraged workers people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics. Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. Some people work (homemakers) but aren’t paid in a formal labour market, and so aren’t counted as being part of the labour force It is difficult to distinguish between a person who is unemployed and a person who is not in the labour force. Most spells of unemployment are short. Most unemployment observed at any given time is long-term.

Is 0% Unemployment ever possible? Types of Unemployment - Frictional Unemployment - Structural Unemployment - Disguised Unemployment - Cyclical Unemployment

Frictional unemployment Definition: unemployment that results because for workers to search for the jobs that are best suit their tastes and skills. Companies and sectors grow, shrink, go bankrupt every day in every economy People migrate to other cities or regions for personal as well as economic reasons People change jobs for many, even irrational reasons At any moment in time, there are many people temporarily unemployed in the economy

Structural unemployment Definition: is the unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one. The 15-64 years age group members (adults) who can not find employment simply because there are not enough factories, offices, fields, Macroeconomic policies have no impact on structural unemployment in the short run: unemployment persists even during rapid growth

Disguised unemployment (gizli işsizlik) Many people, especially in agriculture and urban services seem to be working But they have very low productivity, creating very little value added and therefore earn low levels of income This is due to the lack of jobs with high productivity in the economy, itself due to the capital constraint

Cyclical unemployment Cyclical unemployment happens when economic activity slows down as result of a recession or a an economic crisis As demand for goods and services fall, people who were producing them loose their jobs Many people became unemployed in Turkey during 2001 and 2008 because of the economic crisis

Why do above market wages cause unemployment? If the wage is kept above the equilibrium (w*), then the quantity of labour supplied (LS) will exceed the quantity of labour demanded (LD) and some workers will be unable to find work This is structural unemployment, and can be caused by: Minimum wages Unions Efficiency wages L w SL DL LS LD Unemployment Wmin W* L*

What determines the natural rate of unemployment? Minimum wages Minimum wages cause some unemployment As minimum wage rises above equilibrium, the natural rate rises Labour Unions As unions seek to raise wages above equilibrium, they’ll produce a similar effect on the natural rate as minimum wages Efficiency Wages When employers pay above market wages to reduce turnover and increase worker productivity, they increase the natural rate Job Search In general, it’s not possible to move from one job to another without some lost time – workers are therefore temporarily unemployed during the interim The first 3 are all economic phenomena that keep the wage above equilibrium - therefore causing structural unemployment The fourth (job search) explains why there is always some frictional unemployment Government programs can affect the time it takes unemployed workers to find new jobs, including the following: Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly. Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. Offers workers partial protection against job losses. Offers partial payment of former wages for a limited time to those who are laid off. Unemployment insurance increases the amount of search unemployment. It reduces the search efforts of the unemployed. It may improve the chances of workers being matched with the right jobs.

Conclusion • Unemployment is a major economic as well as political and social issue in all economies Labour force consists of the employed and the unemployed The unemployment rate is the percentage of people who would like to work but don’t have jobs There are four different kinds of unemployment: structural, disguised, cyclical and frictional Most unemployment in Turkey is structural Wage and salary earners constitute only 49 percent of the labour force in Turkey