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Chapter 23 Unemployment
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Some key terms
Unemployment rate
the percentage of the labour force without a job but registered as being willing and available for work
Labour force
those people holding a job or registered as being willing and available for work.
Participation rate
the percentage of the population of working age declaring themselves to be in the labour force
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3. Unemployment: Selected countries
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4. Labour market flows LABOUR FORCE Working Unemployed Non-participants
It is tempting to see the labour market in static terms.
LABOUR FORCE
Working
Unemployed
Non-participants
but...
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Labour market flows
LABOUR FORCE
Working
New hires
Recalls
Unemployed
Job-losers
Lay-offs
Quits
Taking
a job
Retiring
Temporarily
leaving
Discouraged
workers
Re-entrants
New entrants
Non-participants
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6. More on labour market flows
The size of these flows is surprisingly high.
At October 2009, the stock of unemployed people claiming jobseekers’ allowance was 1.7 million in the UK.
A much larger number, around 4.2 million people had flowed into and out of unemployment during the previous 12 months.
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Types of unemployment
Frictional
the irreducible minimum level of unemployment in a dynamic society
people between jobs
the ‘almost unemployable’
Structural
unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes
it takes time for ex-coal miners to retrain with other skills
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8. Types of unemployment (2)
Demand-deficient unemployment
occurs when output is below full capacity
‘Keynesian’ unemployment occurs in the transitional period before wages and prices have fully adjusted
Classical unemployment
created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect
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9. Keynesian unemployment
Beginning at E, suppose
labour demand falls to LD’. A
LD’ AJ LF
With sticky wages and prices in the short run, the economy will move to equilibrium at A
Real wage E F w*
and there will be unemployment of AF. Of which EF will be voluntary and AE will be involuntary (i.e. Keynesian). w2 H
If labour demand remains at LD’, the new equilibrium when wages and prices have fully adjusted will be at G. G LD
Number of workers
LD – Labour demand; LF – Labour force; AJ – those willing to work
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10. Classical unemploymentw2
Suppose that union power
succeeds in maintaining a
real wage of w2. AJ LF A N2
Equilibrium is at A B
of which BC is voluntary C
and unemployment is AC,
Real wage
and AB is involuntary. w*
To the extent that this
unemployment reflects a
conscious decision by
unions to restrict employment,
it is all voluntary unemployment. LD N* N1
Number of workers
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11. A ‘modern’ view of unemployment
Modern analysis stresses the difference between voluntary and involuntary unemployment.
Voluntary unemployment
when a worker chooses not to accept a job at the going wage rate
Involuntary unemployment
when a worker would be willing to accept a job at the going wage but cannot get an offer
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12. The natural rate of unemployment
The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium.
This is entirely voluntary.
It includes:
frictional unemployment
structural unemployment
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13. The natural rate of unemployment
LD: labour demand AJ
AJ: the number of workers
prepared to accept jobs LF
LF: size of labour force
Real wage LD
AJ is to the left of LF
because some members
of the labour force are
between jobs, others are
waiting for better offers. w* N* N1
Equilibrium is at w*,N*.
The distance EF is the
natural rate of unemployment. E F
Number of
workers
It is determined by normal labour market turnover, structural mismatch, union power and incentives in the labour market.
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14. UK equilibrium unemployment
3 periods in which involuntary unemployment became important
the Thatcher squeeze in the early 1980s,
the Major squeeze in the early 1990s
the aftermath of the financial crash
Sources: R. Layard, S. Nickell and R. Jackman, Unemployment, Oxford University Press, 1991; S. Nickell, ‘Inflation and the UK Labour Market’, in T. Jenkinson, Readings in Macroeconomics, Oxford University Press, 1996; authors’ estimates
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15. Supply-side economics
entails the use of microeconomic incentives to alter
the level of full employment
the level of potential output
the natural rate of unemployment
In the long run, the performance of the economy can only be changed by affecting the level of full employment and the corresponding level of potential output.
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16. Tax cuts and unemploymentw1
Firms pay a gross wage
of w1 AJ
Real wage w3
w1 > w3 (the take-home
net pay of workers). LF
AB is the amount of tax A B N1
Equilibrium is at N1 w2 N2 E
Without tax, equilibrium
is at E. F
Unemployment is now EF.
Unemployment is BC C LD
EF < BC i.e. unemployment
is reduced.
Number of workers
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17. Other supply-side policies
Trade union reform
reducing the power of trade unions may limit distortions in the labour market
Other labour supply policies
training and retraining measures
improving the efficiency of the labour market
Reducing the replacement ratio
such measures may affect frictional and structural unemployment
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18. Annual fraction of workers hired or fired (%)
Countries with
greater job stability
are probably slower
to experience initial
unemployment, but, when unemployment does increase, they are also less successful at helping people out of unemployment back into work.
Source : OECD Employment Outlook, 2009
In the medium run the fiscal burden of unemployment benefits is likely to be greater in countries with less flexible labour markets.
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Hysteresis
The idea that a (short-run) fall in aggregate demand can lead to a persistence of unemployment even when the fall in aggregate demand has been reversed.
This could help to explain high and persistent unemployment in Europe in the 1980s.
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20. Hysteresis (continued)
Four channels:
Insider-outsider distinction
only those in work take part in wage bargaining & they protect their own positions
Discouraged workers
people stop looking for jobs
Search and mismatch
firms and workers get used to low search
Capital stock
low levels of investment in recession lead to permanently low capital stock levels
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