2. Unemployment

3. 22 What is Say’s Law? The belief of the Classical Economists that the economy was always tending toward full employment

4. 33 What does Say’s Law say? Supply creates its own demand

5. 44 Why is Say’s Law a Full Employment theory? Generally speaking, producers produce goods that consumers want and consumers have the money to buy because of the wages they were paid

6. 55 Under Say’s Law, is Unemployment possible? Yes, but it is a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work

7. 66 What changed people’s mind about Say’s Law? The Great Depression and the publication of The General Theory of Employment, Interest, and Money published in 1936

8. 77 3.2% 5.6% 6.6% 8.8% 9.5% 12% 12.1% JapanU.S.GermanyEnglandCanadaItalyFrance

9. 8 Source: U.S. Department of Labor, Bureau of Labor Statistics Figure 7-1 More than a Century of Unemployment

10. 9 Unemployment Rate Since 1960 10 8 6 4 2 197019751980198519901995 Percent of Labor Force Natural rate of unemployment 19651960 2000 0 Unemployment rate

11. 10 Employed & unemployed

12. 11 The Logic of the Unemployment Rate Figure 7-3

13. 12 Stocks –The quantity of something (unemployed) measured at a point in time Flow –A quantity measured over time (job leavers, job finders) Unemployment

14. 13 Visualizing Stocks and Flows Figure 7-4

15. 14 Who is a Discouraged Worker? A person who wants to work, but who has given up searching for work. He or she believes there will be no job offers

16. 15 Types & causes of unemployment Frictional unemployment Structural unemployment Deficient-demand (cyclical) unemployment Seasonal unemployment

17. 16 What is Frictional Unemployment? Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force

18. 17 What is Frictional Unemployment? Joblessness experienced by people who are between jobs or who are just entering or reentering the labor market

19. 18 Frictional Unemployment –Arises from normal labor turnover — people entering and leaving the labor force –Influenced by unemployment benefits

20. 19 What is Structural Unemployment? Unemployment caused by a mismatch of the skills /locations of workers out of work and the skills/locations required for existing job opportunities

21. 20 Structural Unemployment –Arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs Structural unemployment is often thought to explain longer spells of unemployment. –Typically lasts longer than frictional

22. 21 What is Cyclical Unemployment? Unemployment caused by the lack of jobs during a recession Joblessness arising from changes in production over the business cycle

23. 2277 GDP Unemployment Time 1940 Percentage deviation from trend 1960198019201900 - 40 - 20 0 20 40 Countercyclical Variables Panel B Figure 1.5B ©1999 South-Western College Publishing

24. 23 Cyclical Unemployment –Arises from the fluctuations of the business cycle –Increases during a recession and decreases during expansion –The natural rate of unemployment excludes cyclical unemployment

25. 24 What causes Cyclical Unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

26. 25 Cyclical Unemployment Cyclical unemployment refers to the year- to-year fluctuations in unemployment around its natural rate of unemployment. It is associated with short-term ups and downs of the business cycle.

27. 26 What is Seasonal Unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions

28. 27 What is Seasonal Unemployment? Joblessness related to changes in weather, tourist patterns, or other seasonal factors

29. 28 Total Population Not in labour Force Labour Force = working population Employed ( Include those underemployed ) Unemployed Frictional Unemployment Structural Unemployment Seasonal Unemployment Cyclical Unemployment Involuntory Unemployment = Voluntory Unemployment = Voluntory Unemployment?

30. 29 Categories of Unemployment The problem of unemployment is usually divided into two categories. The long-run problem and the short- run problem: u The natural rate of unemployment u The cyclical rate of unemployment

31. 30 Natural Rate of Unemployment The natural rate of unemployment is unemployment that does not go away on its own even in the long run. It is the amount of unemployment that the economy normally experiences.

32. 31 Natural rate of unemployment Unemployment rate = 0?

33. 32 NO!!

34. 33 Natural Rate of Unemployment –The unemployment rate that is estimated to prevail in the long run when all workers and employers have fully adjusted to any changes in the economy –When seasonally adjusted the natural rate of unemployment should only take into account frictional and structural unemployment Unemployment

35. 34 What is Full Employment? The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates

36. 35 = natural rate of unemployment (NRU) = frictional unemployment + structural unemployment Full employment Actual unemployment = NRU + deficient-demand unemployment

37. 36 Unemployment and Full Employment Full employment exists when the unemployment rate equals the natural rate of unemployment. –It fluctuates periodically –Economists disagree about the size of the natural rate and the extent to which it fluctuates –A situation in which there is no cyclical unemployment

38. 37 What percent unemployment is considered Full Employment? The natural rate of unemployment changes over time, but today it is considered to be about 5% in the US.

39. 38 Question –Does full employment mean that everybody has a job? Unemployment

40. 39 Why can’t the unemployment rate be zero? Because there will always be some people seeking employment

41. 40 Why Are There Always Some People Unemployed? Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suited for them.

42. 41 Job Search Unemployment Job search is the process by which workers find appropriate jobs given their tastes and skills. Job search unemployment results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.

43. 42 Job Search Unemployment This unemployment is different from the other types of unemployment. u It is not caused by a wage rate higher than equilibrium. u It is caused by the time spent searching for the “right” job.

44. 43 The Inevitability of Job Search Unemployment Search unemployment is inevitable because the economy is always changing. Changes in the composition of demand among industries or regions are called sectoral shifts. It takes time for workers to search for and find jobs in new sectors.

45. 44 Figure 9.1Wage dispersion (normal distribution) Q.9.3? Frequencies/Probability Wages 7000 5000 9000 50%

46. 45 $ Amount of search 0 Figure 9.2Optimal amount of search for a job MB MC Optimal amount of search

47. 46 Public Policy and Job Search Government programs can affect the time it takes unemployed workers to find new jobs (search duration). These programs include the following: u Government-run employment agencies u Public training programs u Unemployment insurance

48. 47 Public Policy and Job Search Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly.

49. 48 Public Policy and Job Search Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.

50. 49 Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. u Offers workers partial protection against job losses. u Offers partial payment of former wages for a limited time to those who are laid off. Public Policy and Job Search

51. 50 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. Public Policy and Job Search

52. 51 Figure for 7.8.3.4.b Wage dispersion (normal distribution) Frequencies/Probability Wages 7000 5000 9000

53. $ Amount of search 0 Figure for Q9.4(a) The effect of higher unemployment benefit on the amount of search & unemployment rate (UR) MB MC MC’ 52 Dr. Lam Pun Lee Advanced Level Microeconomics Advanced Level Macroeconomics Search Theory of Unemployment

54. 53 Figure for Q9.4(b) Better information will reduce chances of finding a higher-pay (& lower-pay) job Frequencies Wages

55. 54 $ Amount of search 0 Figure for Q9.4(b) The effect of better information on the amount of search & unemployment rate (UR) MB MC MB’

56. 55 Other causes of unemloyment Possible Reasons for an Above-Equilibrium Wage Minimum-wage laws Unions

57. 56 Minimum-Wage Laws When the minimum wage is set above the level that balances supply and demand, it creates unemployment.

58. 57 Unemployment from a Wage Above the Equilibrium Level... WEWE Quantity of Labor LELE 0 Labor demand Wage Surplus of labor = Unemployment Minimum wage LDLD LSLS Labor supply

59. Figure 5 Unemployment caused by minimum wages laws Labour 0 D S Real wage rate (w) Unemployment 58 Dr. Lam Pun Lee Advanced Level Microeconomics Advanced Level Macroeconomics Unemployment

60. 59 Unions and Collective Bargaining A union is a worker association that bargains with employers over wages and working conditions. In the 1940s and 1950s, when unions were at their peak, about a third of the U.S. labor force was unionized. A union is a type of cartel attempting to exert its market power.

61. 60 Unions and Collective Bargaining The process by which unions and firms agree on the terms of employment is called collective bargaining.

62. 61 Unions and Collective Bargaining A strike will be organized if the union and the firm cannot reach an agreement. A strike refers to when the union organizes a withdrawal of labor from the firm.

63. 62 Unions and Collective Bargaining A strike makes some workers better off and other workers worse off. Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.

64. 63 Unions and Collective Bargaining By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above equilibrium wages for their members. Union workers earn 10 to 20 percent more than nonunion workers.

65. 64 Are Unions Good or Bad for the Economy? Critics argue that unions cause the allocation of labor to be inefficient and inequitable. u Wages above the competitive level reduce the quantity of labor demanded and cause unemployment. u Some workers benefit at the expense of other workers.

66. 65 Are Unions Good or Bad for the Economy? Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers. They claim that unions are important for helping firms respond efficiently to workers’ concerns.

67. 66 Question –What are the costs of unemployment? Unemployment

68. 67 Answer –Lost real output (= GDP gap) Early 1990s unemployment rate was 7% in the USA Factory output was 80% of potential Lost output was 4% of total production or $275 billion of goods and services that could have been produced –Personal psychological impact Unemployment

69. 68 Costs of Unemployment Loss of skill and experience Financial burden to society Family and social problems Living standard of the unemployed and their families becomes worse off.

70. 69 ©1999 South-Western College Publishing Box 7.1 Okun’s Law Percentage of unemployment Percentage deviation of GDP from trend - 30 - 10 - 20 0 10 20 30 40 1015202530 50 3%below trend According to Okun’s law, a 1% rise in unemployment causes GDP to fall 3% below trend.

71. 70 Question –How would you show the cost of unemployment on a production possibilities curve? Unemployment

72. 71 Consumer Goods Capital Goods Production Possibilities K1K1 C1C1 34

73. 72 Measures to reduce unemployment Frictional unemployment –provide more job-market information & better employment services –cut unemployment benefits –reduce personal income tax Structural unemployment –provide job training and retraining programs –reduce unemployment benefits –decrease personal income tax

74. 73 Measures to reduce unemployment Deficient-demand unemployment –practise fiscal and monetary policies to increase aggregate demand to eliminate recessionary gap

75. 74 Problems in using unemployment statistics

76. 75 Understate unemployment Unemployment statistics are not comprehensive. Disguised workers

77. 76 Overstate unemployment Registered unemployed Inactive unemployed

78. 77 It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. Does the Unemployment Rate Measure What We Want It To??

79. 7872 5. People who are not working will be counted as employed if they are a. on vacation. b. absent from their job because of bad weather. c. absent from their job because of a labor dispute. d. all of the above. D. A person who works at least 1 hour per week for pay or at least 15 hours per week as an unpaid worker in a family business is counted as employed regardless of the special situations listed in a, b, and c.

80. 7973 6. Frictional unemployment applies to a. workers with skills not required for existing jobs.. b. short periods of unemployment needed to match jobs and job seekers. c. people who spend long periods of time out of work.. d. unemployment related to the ups and downs of the business cycle. B. Frictional unemployment includes people changing jobs, initially entering the labor force, or re-entering the labor force.

81. 8074 7. Structural employment is caused by a. shifts in the economy that make certain job skills obsolete. b. temporary layoffs in industries such as construction. c. the impact of the business cycle on job opportunities. d. short-term changes in the economy. A. Structural unemployment is long-term unemployment because the skills of unemployed workers do not match the skills required for existing jobs.

82. 8175 8. Unemployment that is due to a recession is a. involuntary unemployment. b. frictional unemployment. c. structural unemployment. d. cyclical unemployment. D. Only cyclical unemployment is attributable directly to the business cycle.