1. Chapter 14: UNEMPLOYMENT
AND ITS NATURAL RATE

2. Problem of unemployment
The long-run unemployment or the natural rate of unemployment is the amount of unemployment that the economy normally experiences
The Short-run unemployment or cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate
We focus on the natural rate of unemployment

3. Outline Measurement of unemployment rate
Interpretations of unemployment data
Explain the determinants of natural rate of unemployment

4. Measurement of unemployment
Source is the Labour Force Survey
Each surveyed household is classified as
Employed
Unemployed
Not in the labour force
Labour force= # employed+ # unemployed
Unemployment rate is the percentage of labour force that is unemployed

5. Measurement of unemployment
Labour-Force Participation Rate (LFPR) is the percentage of adult population that is in the labour force
Unemployment rates: Variation by region, by age, and by gender

6. Measurement of unemployment
Participation rate
Source: Statistics Canada, CANSIM, table

7. Labour Force Participation Rates by Gender: 1976-2002
                                                                   
Source: Statistics Canada, CANSIM, table

8. Unemployment rates by gender, 1976-2001

9. Unemployment rates for age group: 15-24 years and for all 15+

10. CANADA: AVERAGE WEEKS UNEMPLOYED, BOTH SEXES ( 15 YEARS AND OVER), 2002
Jan 15
Feb
16.3
Mar
17.9
Apr
17.3
May
15.9
Jun
Jul
15.6
Aug
Sep
Oct 16
Nov
Dec
15.8

11. Unemployment Rates by Region
    
Source: Statistics Canada, CANSIM, table

12. Problems with the measurement of unemployment
Movements into and out of labour force are common
Behaviour of EI beneficiaries
Discouraged workers
Duration of unemployment
Most spells of unemployment are short, and most unemployment at any given time is long-term
Low LFPR

13. Types of unemployment
Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run
Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes
Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

14. Types of unemployment
Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run
Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes
Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

15. Natural and observed rate of unemployment, 1976-2001

16. Unemployment and causes
Frictional unemployment
Job search: the process by which workers find appropriate jobs given their tastes and skills
Public policy and job search: EI
Causes of Structural unemployment:
Minimum-wage laws: above equilibrium wage
Unions and collective bargaining: type of cartel
Efficiency wages are above equilibrium wages paid by firms to increase worker productivity

17. The theory of efficiency wages
Why do firms want to pay higher wages?
Worker health
Worker turnover
Worker effort
Worker quality
Worker-quality variant of efficiency wage theory illustrates the principles of adverse selection and moral hazard