3.5 Unemployment. Unemployment Full Employment Equilibrium on the aggregate labor market.

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Presentation transcript:

3.5 Unemployment

Unemployment Full Employment Equilibrium on the aggregate labor market

What rate is generally considered to be full-employment in America?

Underemployment People cannot find full-time work. Unemployment Rate Formula: Unemployed/Labor Force = %

2006 Figures Around 5% 90 Vietnam Denmark Romania Lithuania Australia United States Austria Burma Luxembourg Brunei United Kingdom Saint Kitts and Nevis Japan Taiwan Ireland Norway ChinaVietnamDenmarkRomaniaLithuania AustraliaUnited StatesAustriaBurma LuxembourgBruneiUnited KingdomSaint Kitts and NevisJapanTaiwanIreland NorwayChina

Colombia Spain Turks and Caicos Islands10.00 Turkey Greenland Egypt France India Brazil Saint Pierre and Miquelon Slovenia EcuadorSpainTurks and Caicos IslandsTurkey GreenlandEgyptFranceIndia BrazilSaint Pierre and MiquelonSlovenia Ecuador

Weaknesses of Unemployment Measures Definitional Problems Accounting Problems Solution: Standardized Measure International Labour Organization (ILO) Used by Organisation of Economic Cooperation and Development (OECD)

Costs of Unemployment Loss of output Lost tax base Increased Transfer Payments Opportunity costs (roads vs. unemployment benefits) Tax Increases Barriers to entry Deskilling of workforce

Social Costs Dignity vs. Dependence Self-image Crime, Drug Abuse, Physical abuse Health Depression Stress Mental Health

Types of Unemployment Structural(mismatch between skills and demand of economy) Regional Industries specific to a region Sectoral Segments suffer temporary or permanent decline Technological Technology replaces workers Frictional Short term/ during job search Seasonal

Natural Rate of Unemployment Some people voluntarily reject the real wage rate (equilibrium) There is always some unemployment Pg. 418

Cyclical/Demand Deficient U Keynesian Unemployment Business Cycle affects Unemployment Involuntary unemployment Pg. 419 ADL shifts left Distance ADL1 to ADL2 Why don’t wages clear? How are AD and ADL correlated? See pg. 420

Downward Sticky Supply Curve Pg. 420 Same effect as minimum wage

Real Wage Unemployment Classical View Disequilibrium Unemployment Unemploy exceeds natural rate Doesn’t clear to real wage (equil) Voluntary + Involuntary Unemployment Diagrams pg. 421 Why doesn’t in clear? Minimum wage legislation Unions Social Benefits (no incentive to accept lower wages).

Measures to Deal With Unemployment Interventionist Increase demand for labor through fiscal and monetary stimulation of AD Demand Management (Keynes) Increase ADL by increasing AD in economy Shift in ADL right = Full employment Diagram 422

Supply Side Intervention Govt. intervention in factor markets to enhance: Attractiveness of labor Availability of labor (ie. Supply of labor) Secondary affect = increased DL How? Training and education incentives Increase Skills Job mobility Decrease search costs for employers and labor

Market Solutions pg Removing market imperfections Decrease union power Lower minimum wage Lower taxes on labor

Decreasing Natural Rate of Unemployment Shift ASL right How? Incentives to work Lower social benefits Lower income taxes Increase labor flexibility Retraining and Eduction Reduce time between jobs

Critics of market policies Social Inequality Marginal Tax decreases don’t affect ASL Voluntary is often involuntary