1. Chapter 15 – Long term Unemployment  How is unemployment measured?  What is the “natural rate of unemployment”?  Why are there always some people unemployed?  How is unemployment affected by unions and minimum wage laws?  What is the theory of efficiency wages, and how does it help explain unemployment? 0

2. 1 I. Measuring unemployment Bureau of Labor Statistics (BLS) divides population into 3 groups:  Employed:  Unemployed:  Not in the labor force: The labor force

3. 2 labor force participation rate = 100 x Labor force participation rate: % of the adult population that is in the labor force Unemployment rate (“u-rate”): % of the labor force that is unemployed u-rate = 100 x

4. Adult population in the US in June 2008 # of employed = 145.9 million, # of unemployed = 8.5 million, not in labor force = 79.2 million Labor force = U-rate= Population= LF participation rate= 3

5. 4 Labor Market Statistics for Whites & Blacks, June 2008 Adults (20 yrs & older) u-rateLF part. rate White, male4.5%76.1% White, female4.260.4 Black, male9.371.5 Black, female7.464.3

6. 5 Labor Market Statistics for Whites & Blacks, June 2008 Teens (16-19 yrs) u-rateLF part. rate White16.643.9 Black29.627.9

7. 6 Labor Market Statistics for Other Groups, June 2008 All ages u-rateLF part. rate Asian4.567.4 Hispanic7.769.0

8. 7 Labor Market Statistics by Education Level, June 2008 Adults (25 yrs & older) u-rateLF part. rate less than h.s.8.7%45.9% h.s. diploma5.162.8 some college or assoc degree 4.271.9 bachelor’s degree or more 2.378.1

9. 8 LF Participation Rates by Sex, 1950-2007 Men Women

10. 9 Limitation of the u-rate: Q: In each case, what happens to the u-rate and does it give an accurate impression of what’s happening in the labor market? A.Sue lost her job and begins looking for a new one. B.Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work. C.Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field.

11. 10 A.Sue lost her job and begins looking for a new one. u-rate A u-rate gives the impression that the labor market is B. Jon has been out of work since last year, becomes discouraged, stops looking for work. workers  would like to work but U-rate A u-rate gives the impression that the labor market is

12. 11 C.Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one. U-rate. Labor market is The u-rate is not a perfect indicator It excludes It does not distinguish between It does not reveal whether Reporting errors

13. 12 The Duration of Unemployment Most spells of unemployment are  Typically 1/3 of the unemployed and 2/3 have been unemployed  Only 20% have been unemployed Yet, most observed unemployment  The small group of long-term unemployed persons has fairly little turnover, so it accounts for

14. 13 2. Reasons for unemployment - Cyclical and Natural Ra te There’s always some unemployment, though the u-rate fluctuates from year to year. Natural rate of unemployment  Cyclical unemployment  

15. 0 2 4 6 8 10 12 1960196519701975198019851990199520002005 U.S. Unemployment, 1960-2007 Natural rate of unemployment Unemployment rate percentage of labor force

16. 15 Reasons for a positive natural rate of unemployment Even when the economy is doing well, there is always some unemployment, because, Frictional unemployment  short-term for most workers Structural unemployment  usually longer-term

17. 16 Reasons for Frictional unemployment:  Workers have different Job search is the process of  Sectoral shifts are changes in the Such shifts displace some workers, The economy is always changing, so

18. 17 Public Policy and frictional unemployment  Govt employment agencies  Public training programs  Unemployment insurance (UI) and its effect:

19. 18 Reasons for Structural Unemployment Structural unemployment occurs when W L D S WEWE W1W1

20. 19 i. Minimum-Wage Laws  The min. wage may the equilibrium The group most affected by minimum wage laws ii. Unions a worker association that bargains with employers over Unions use their market power to The typical union worker earns

21. 20 Effects of Unionization – negatives and positives  When unions raise the wage above  “Insiders” – workers who remain employed “Outsiders” – workers who lose their jobs Some outsiders go to non-unionized labor markets  Unions counter the market power of

22. 21 iii. Efficiency Wages  The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to 1. improve worker’s 2. reduce worker’s 3.improve worker’s 4.improve worker’s

23. 22 Reasons for a positive natural rate of unemployment: A Summary The natural rate of unemployment consists of  frictional unemployment  It takes time to search for the right jobs  Occurs even if there are enough jobs to go around  structural unemployment  When wage is above eq’m, not enough jobs  Due to min. wages, labor unions, efficiency wages