Chapter Unemployment 15

Identifying Unemployment How is unemployment measured? – Usual BLS calculation considers only those who are “active” in the current labor force 1.Currently Employed 2.Unemployed – recently laid off (last 2 years) – applying for or currently collecting benefits – mean to capture those “actively looking” Not counted in the labor force – Not employed and not actively looking – Not unemployed 2

Figure The breakdown of the population in The Bureau of Labor Statistics divides the adult population into three categories: employed, unemployed, and not in the labor force.

Identifying Unemployment How is unemployment measured? Labor force (participation rate of adults) – Total number of adult workers in the labor force who are either: Employed Unemployed – but actively looking Labor force = Number of employed + Number of unemployed – Doesn’t count those not actively looking 4

Identifying Unemployment How is unemployment measured? Unemployment rate – Percentage of labor force that is unemployed Labor-force participation rate – Percentage of adult population that is in the labor force 5

Table The labor-market experiences of various demographic groups 1 6 Demographic GroupUnemployment RateLabor-force Participation Rate Adults (ages 20 and older) White, male White, female Black, male Black, female Teenagers (ages 16–19) White, male White, female Black, male Black, female 3.7% % This table shows the unemployment rate and the labor-force participation rate of various groups in the U.S. population for 2007

Table Labor Force Participation Rates – dropping recently 7 YearJanFebMarAprMayJunJulAugSepOctNovDec Ann ual

Table Labor Force Participation Rates - Graphically 8 Unemployment rate dropped early during recession But due to decrease in labor force participation rate Rather than an increase in employment

Unemployment THE EMPLOYMENT SITUATION -- JANUARY 2015 NOTE: – Total nonfarm payroll employment rose by 257,000 in January, – unemployment rate was little changed at 5.7 percent, the U.S. Bureau of Labor Statistics reported today. – Job gains occurred in retail trade, construction, health care, financial activities, and manufacturing. 9

10 YearJanFebMarAprMayJunJulAugSepOctNovDec

Figure Actual Unemployment rates since This graph uses annual data on the U.S. unemployment rate to show the percentage of the labor force without a job. The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates

Identifying Unemployment Natural rate of unemployment – Normal rate of unemployment – Around which the unemployment rate fluctuates Cyclical unemployment – Deviation of unemployment from its natural rate 12

Figure Labor-force participation rates for men and women since This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

Identifying Unemployment Does the unemployment rate measure what we want it to? Official unemployment rate – Useful – Imperfect measure of joblessness Movements into and out of the labor force – Common – More than one-third of unemployed Recent entrants into the labor force 14

Identifying Unemployment Does the unemployment rate…? Some of those who are out of labor force – May want to work Discouraged workers – Individuals who would like to work – Have given up looking for a job Particularly in longer recessions 15

Table Alternative measures of labor underutilization 2 16 Measure and DescriptionRate U-1 U-2 U-3 U-4 U-5 U-6 Persons unemployed 15 weeks or longer, as a percentage of the civilian labor force (includes only very long-term unemployed) Job losers and persons who have completed temporary jobs, as a percentage of the civilian labor force (excludes job leavers) Total unemployed, as a percentage of the civilian labor force (official unemployment rate) Total unemployed, plus discouraged workers, as a percentage of the civilian labor force plus discouraged workers Total unemployed plus all marginally attached workers, as a percentage of the civilian labor force plus all marginally attached workers Total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian labor force plus all marginally attached workers 1.6% The table shows various measures of joblessness for the U.S. economy. The data are for February Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers are marginally attached workers who have given a job-market-related reason for not currently looking for a job. Persons employed part-time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Identifying Unemployment Unemployment rate – Never falls to zero – Fluctuates around the “natural” (long-term trend) rate of unemployment – ~5% historically Could shift with structural changes in the economy (changes in what the economy produces) and demographics (“ageing of the population) 17

Identifying Unemployment Why are there always some people unemployed? Frictional unemployment Results from the process of matching workers and jobs Structural unemployment – Results because of changes in the number of jobs available in some labor markets 18

Job Search and Frictional Unemployment Job search Process by which workers find appropriate jobs given their tastes and skills Frictional unemployment Results from the process of matching workers and jobs – “job search” it takes time Why some frictional unemployment is inevitable Changes in demand for labor among different firms Changes in composition of demand among industries or regions (sectoral shifts) 19

Structural Unemployment Structural unemployment – Results because of changes in the number of jobs available in some labor markets Reasons for structural unemployment – Obsolescence of a single technology will make specific expertise useless. – Increase of the efficiency in an economic sector reduces the number of required workers. Unskilled laborers are the first to go unemployed, and the most likely to stay so. – Reduced relative competitiveness of an industry in a country can also lead to structural unemployment. Basic manufacturing in the West has been hit by this. Lower wages in less developed countries have attracted manufacturing away from the West. – Market inefficiencies can also cause structural unemployment. Long term – need to retrain workers 20

Job Search Public policy and job search Reduce time for unemployed to find jobs – Reduce Natural rate of unemployment Government programs – Government-run employment agencies – Public training programs 21

Job Search Unemployment insurance – Government program – Partially protects workers’ incomes When they become unemployed – Increases frictional unemployment Without intending to do so 22

Minimum-Wage Laws Structural unemployment – Results when the number of jobs is insufficient for the number of workers Minimum-wage laws – Can cause unemployment – Forces the wage to remain above the equilibrium level Higher quantity of labor supplied Smaller quantity of labor demanded Surplus of labor – unemployment 23

Figure Unemployment from a wage above equilibrium level 4 24 In this labor market, the wage at which supply and demand balance is W E. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal L E. By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum-wage law, the quantity of labor supplied rises to L S, and the quantity of labor demanded falls to L D. The resulting surplus of labor, L S – L D, represents unemployment. Wage Quantity of Labor 0 Minimum wage LDLD LSLS Surplus of labor = Unemployment Labor demand Labor supply LELE WEWE

Minimum-Wage Laws Wages may be kept above equilibrium level – Minimum-wage laws – Unions – Efficiency wages If the wage - kept above the equilibrium level – Result: unemployment 25

Unions and Collective Bargaining Union – Worker association – Bargains with employers over Wages, benefits, and working conditions The economics of unions – Collective bargaining Process: unions and firms agree on the terms of employment – Strike Organized withdrawal of labor from a firm by a union 26

Unions and Collective Bargaining The economics of unions Union - raises the wage above the equilibrium level – Higher quantity of labor supplied – Smaller quantity of labor demanded – Unemployment – Better off: employed workers (insiders) – Worse off: unemployed (outsiders) May stay unemployed Take jobs in firms that are not unionized 27

Unions and Collective Bargaining The economics of unions Union - raises the wage above equilibrium – Supply of labor – increase in industries not unionized Lower wage Workers in unions – Reap the benefit of collective bargaining Workers not in unions – Bear some of the cost 28

Unions and Collective Bargaining Are unions good or bad for the economy? Critics – Unions - a type of cartel – Allocation of labor Inefficient – High union wages reduce employment in unionized firms below the efficient level Inequitable – Some workers benefit at the expense of other workers 29

Unions and Collective Bargaining Are unions good or bad for the economy? Advocates – Unions - necessary antidote to the market power of the firms that hire workers In the absence of a union – Firm - pay lower wages and offer worse working conditions – Unions - help firms respond efficiently to workers’ concerns Keep a happy and productive workforce 30

The Theory of Efficiency Wages Efficiency wages – Above-equilibrium wages paid by firms to increase worker productivity Worker health – Better paid workers Eat a more nutritious diet – Healthier and more productive Worker turnover – Firm - can reduce turnover among its workers By paying them a high wage 31

The Theory of Efficiency Wages Worker quality – Firm – pays a high wage Attracts a better pool of workers Increases the quality of its workforce Worker effort – High wages – make workers more eager to keep their jobs Give workers an incentive to put forward their best effort 32

Henry Ford - founder of Ford Motor Company – Introduced modern techniques of production – Built cars on assembly lines Unskilled workers were taught to perform the same simple tasks over and over again – Output: Model T Ford 1914, Ford - the $5 workday – Twice the going wage – Long lines of job seekers Number of workers willing to work > number of workers Ford needed Henry Ford and the very generous $5-a-day wage 33

Ford’s high-wage policy – efficiency wage – Turnover fell – Absenteeism fell – Productivity rose – Workers – so much more efficient Ford’s production costs were lower despite higher wages – Profitable for the firm – Closely linked to Ford’s use of the assembly line Assembly line - highly interdependent workers Henry Ford and the very generous $5-a-day wage 34