1. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko “The Economic Way of Thinking” 11 th Edition Chapter 15: Employment and Unemployment

2. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 2 of 35 Chapter 15 Outline Introduction Unemployment and Non-employment Employed, Not Employed and Unemployed Labor-Market Decisions Unemployment Rates and Employment Rates Costs and Decisions

3. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 3 of 35 Chapter 15 Outline Unemployment and Recessions Why Does Unemployment Persist? The Phillips Curve Reducing Unemployment by Illusion: Inflation and the Misdirection of Labor Labor Market Policies

4. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 4 of 35 Introduction What do we mean by unemployment?

5. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 5 of 35 Unemployment and Non-Employment Observations –Approximately half of the people in the US are not employed. –A quarter are under the age of 16. –One-eighth are over 65. Questions –How do we distinguish between the unemployed and the not employed? –When does unemployment become a problem?

6. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 6 of 35 Employed, Not Employed and Unemployed Unemployment data –Bureau of Labor Statistics (BLS) –Current Population Survey Census Bureau Monthly survey – 60,000 households

7. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 7 of 35 Employed, Not Employed and Unemployed Who is counted? –Non-institutional people over age 16 Classifications –Employed –Unemployed –Not in the labor force

8. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 8 of 35 Employed, Not Employed and Unemployed Unemployed –In the non-institutional population. –Over age 16. –Without employment during survey week. –Made efforts to find employment during the last 4 weeks. –Be available for work.

9. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 9 of 35 Employed, Not Employed and Unemployed Unemployment Rate = Unemployed / Labor Force

10. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 10 of 35 Employed, Not Employed and Unemployed Deriving Unemployment Data –Total population –Minus under age 16 or institutionalized –Equals non-institutional population –Minus those not in labor force –Minus those employed –Equals those unemployed

11. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 11 of 35 Labor Market Decisions Non-institutional Population Seeks employment (in the labor force) Does not seek employment (not in the labor force) Accepts employment (employed) Does not accept employment (unemployed)

12. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 12 of 35 Labor Market Decisions BLS definition of unemployed implies: –A decision to actively seek employment. –A decision not to accept any of the employment opportunities available.

13. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 13 of 35 Unemployment Rates and Employment Rates Unemployment Rate = –# unemployed / labor force Employment Rate = –# employed / non-institutional population

14. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 14 of 35 Unemployment Rates and Employment Rates Questions –Why hasn’t the large increase in labor force participation caused the unemployment rate to rise? –Does technology reduce the number of jobs?

15. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 15 of 35 Costs and Decisions Teenagers living at home with free room and board. –In school – limited availability to job market. –If deciding on college – will not make a job commitment. –Can afford long job search. –Can afford to quit a job to find a better one.

16. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 16 of 35 Costs and Decisions A person loses his / her job –Incentive to find another job. Decreases as unemployment benefits increase. –Likely to remain unemployed. Member of multi-earner family. Eligible for unemployment benefits.

17. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 17 of 35 Costs and Decisions With high expectations of finding a job… –More people will enter the labor force. –People will search in occupations where employment expectations are greater.

18. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 18 of 35 Costs and Decisions All 3 scenarios will lead to an increase in unemployment rates. –Teenagers living at home. –Worker who loses his / her job. –People with high expectations. Would this increase indicate a weaker economy?

19. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 19 of 35 Unemployment and Recessions RecessionsUnemploymentRecoveryUnemployment Rate Peak Rate 19545.5% 19586.8% 19616.7% 19758.5% 19829.7% 19927.4% 19535.5% 19574.3% 19605.5% 19734.9% 19795.8% 19905.5% 19984.4%

20. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 20 of 35 Why Does Unemployment Persist? After a recession has ended… –Firms will wait to expand until recovery is certain. –Firms become more efficient during recession.

21. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 21 of 35 Why Does Unemployment Persist? Employers have an incentive to keep wages high. –Keep workers from leaving. –Easier to reduce employment than wages. –Unemployed do not put downward pressure on wages. Employers more attentive to those on the payroll.

22. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 22 of 35 Why Does Unemployment Persist? Wage rate Number of employed D S W1W1 Q1Q1 Q2Q2 surplus WeWe QeQe Why won’t the wage rate fall to W e ?

23. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 23 of 35 Why Does Unemployment Persist? Conclusions: –A persistent surplus of labor will exist. –Quantity supplied of labor will be greater than the quantity demanded. –There is a chronic shortage of jobs and a chronic surplus of job seekers.

24. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 24 of 35 The Phillips Curve Economist A. W. Phillips (1958) –Unemployment increased when Money wage rates were increasing slowly. –Unemployment decreased when Money wage rates were increasing rapidly.

25. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 25 of 35 The Phillips Curve Policy makers proposed –Unemployment might be reduced With an inflationary increase in money supply. –Unemployment and Inflation Inversely related

26. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 26 of 35 The Phillips Curve If full employment causes inflation –Will inflation bring about full employment?

27. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 27 of 35 Reducing Employment by Illusion Inflation rate Unemployment rate 0 1 2 3 4 5 6 456 69 68 56 66 67 55 65 57 59 62 60 63 64 54 58 61 A “well-behaved” Phillips curve: U.S., 1954 - 69.

28. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 28 of 35 Reducing Employment by Illusion Unemployment rate 0 1 2 3 4 5 6 468 A “not-so- well-behaved” Phillips curve: U.S., 1970 - 81. 957 7 8 9 10 11 74 80 78 81 75 79 73 70 72 71 77 76 Inflation rate

29. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 29 of 35 Reducing Employment by Illusion What caused the Phillips Curve to dissolve? –Distinguish between real and nominal wages. –Is the unemployment rate close to the natural rate?

30. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 30 of 35 Labor Market Policies What can the government do to lower unemployment? –Reduce economic fluctuations. –Job skills training. –Abolish unemployment compensation. –Improve quality of information on the economy.

31. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 31 of 35 Labor Market Policies Western European Policies –Designed to reduce unemployment –Discourage employers from hiring new workers Nearly impossible to lay-off workers –Increased unemployment

32. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 32 of 35 Once Over Lightly Many people not employed are not in the labor force – and not unemployed. Difference between not employed and unemployed is not always clear. Expected advantages of alternative opportunities determine decisions as to labor force entry.

33. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 33 of 35 Once Over Lightly Expected benefits and costs as to labor force entry have been changing in recent years. Labor markets and commodity markets differ. Unemployment rate and inflation rate. Government labor market policies and effect on unemployment.

34. © 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 34 of 35 End of Chapter 15 QUESTIONS?