Topic 7: Unemployment

1. Topic 7: Unemployment Econ 2410-008

2. Introduction/Motivation • We studied how productivity impacts economic well-being. • An even more obvious determinant of well-being is unemployment. • A country that keeps its workers employed will probably have a higher standard of living than one that does not.

3. Introduction/Motivation • Two components of unemployment: • Long run—normal trend in unemployment (over many years) • Short run—cyclical trend around the long run trend. • Before we delve into why unemployment happens, we need to lead with a few definitions

4. Identifying Unemployment • BLS collects data on unemployment • Releases data every month • Data is collected from a regular survey of 60,000 household call the Current Population Survey (CPS) • BLS website: http://www.bls.gov/

5. Labor Market Definitions • BLS categorizes each adult (age 16+) into three categories • Employed • Unemployed • Not in Labor Force

6. Employed • People are considered employed if they: • did any work for pay or profit during the survey week • did non-pay work at a family business (such as a farm or family owned store) • have a job but were not at work for some reason (vacation, sick leave, temporary lay off with guarantee return). • Part Time and temporary work count

7. Unemployed • People are classified as unemployed if they meet the following criteria: • Did no work during the survey week • Have no job to which they plan on returning • Have ACTIVELY sought employment in the last 4 weeks • Are currently available for work

8. Not In Labor Force • People are classified as “not in the labor force” if they are: • in the armed forces • institutionalized (prison or medical facility) • not working and have not sought work in the last 4 weeks (retired, permanently disabled, etc.)

9. Current Labor Market Condition • Data available at: http://www.bls.gov/news.release/empsit.t01.htm

10. Various Calculations • Labor Force • Unemployment Rate • Labor Force Participation Rate • Calculate using BLS table

11. Long Term Trends Percent Year

12. How accurate is the data? • What do we really want to know from this data: • Seems pretty simple, just tell us the percentage of people in the US who want to work but can’t find work. • Does the BLS’s data do this? • We have to pay special attention to a few issues

13. Issues with mobility • Movement in and out of the labor force. • People enter and exit the labor force periodically throughout their lives due to a number of reasons • Pregnancy/child rearing • Going back to school full time • Leaving retirement to work. • Over HALF of unemployment spells end with people exiting the labor market.

14. Issues • Unemployment statistics may be difficult to interpret: • How hard is a person really looking for work? • What about work “under the table?” • What about people that just give up on finding work?

15. Discouraged Workers • Unemployed individuals who simply give up on actively seeking a job. • This is something that you may have heard thrown around by politicians. • Would an increase in discouraged workers, holding all else equal, increase or decrease the unemployment rate?

16. Other Measures • Because of possible problems with using the unemployment rate to measure labor market health, the BLS calculates a number of other measures • http://www.bls.gov/news.release/empsit.t15.htm

17. Duration of Unemployment • Whether unemployment is typically short term or long term effects how large of a problem it really is. • Economists have spent much time investigating and have come to the consensus that: • Most spells of unemployment are short, and most unemployment observed at any given time is long-term.

18. Duration of Unemployment • Might seem odd at first, but if most unemployed individuals find work within a few weeks, then they are not likely to be picked up by the monthly survey compared to those that are long term unemployed. • Simple four person example

19. Why is there unemployment? • Let’s transition from making observations about unemployment and data to investigating why unemployment exists. • Theoretical model of the labor market using supply and demand.

20. Reality vs. Theory • The labor market never truly clears since some portion is always unemployed. • Why? • Two types of unemployment: • Frictional • Structural

21. The Frictional and Structural of it all • Frictional Unemployment • Job Search • Structural Unemployment • Minimum Wage Laws • Unions and Collective Bargaining • Efficiency Wages

22. Frictional Unemployment • Job Search • Process by which workers find appropriate jobs • Results in unemployment because of the time it takes to find a desirable job match • Movements in the market for goods and services often lead to frictional unemployment • Google and Yahoo example • Sectoral shifts

23. Policy’s Impact on Frictional • Unemployment insurance • Program design to offer laid off workers partial protection against job loss. • Currently available for up to 99 weeks • Unintentional Consequences • How does this change the incentives for unemployed individuals to find jobs? • Results of empirical research.

24. Structural Unemployment • Minimum Wage Laws • Unions and Collective Bargaining • Efficiency wages

25. Minimum Wage Laws • Review what we already know about this. • Who is most often affected by minimum wage laws? • Does the minimum wage affect overall wage levels in the economy?

26. Unions and collective bargaining • Union—an associate of workers that bargain with employers over wages, benefits and working conditions. • In the past, Unions played a significant role in the US labor market. • Now, only 11.4% of the US work force (as of 2010) is unionized

27. Unions and collective bargaining • A union is a type of cartel • Cartel—group of sellers joining together to assert joint market power. • Unions conduct collective bargaining with employers. • Union workers earn about 10%-20% more than similar non-union workers.

28. Unions’ Impact on the Labor Market • How does this increase in wages over similar workers affect certain areas of the labor market? • Would this result in a surplus or shortage of people wanting union jobs?

29. Regulation of Unions • Unions are regulated by the National Labor Relations Board (NLRB) • Unions are always a political hot topic. • See the controversy in WI over the governor’s attempts to remove collective bargaining rights from state employees. • Any opinions on this?

30. The Good, The Bad, and The Ugly • Are unions good or bad for the economy? • Up for debate and no clear consensus from researchers • Bad • They are a cartel that inflates wages above what the market would dictate • Leads to inefficient and inequitable outcomes • Good • Necessary antidote to firms’ market powers • Forces firms to respond to worker complaints

31. Theory of Efficiency Wages • Efficiency Wages—wages that employers choose to pay above the prevailing market wage or equilibrium wage. • Expressed as early as Alfred Marshall in 1920 • If firms choose to do this, what happens to the labor market?

32. Why Efficiency Wages? • Avoid Shirking • Shirking—doing less work than what was agreed upon. • It is very hard for employers to detect shirking. • Managers may increase wages to increase the cost of job loss • Incentivizes workers to perform better without having to increase management oversight.

33. Why Efficiency Wages? • Adverse Selection— “bad” results that occur due to asymmetric information • Asymmetric information refers to information not being fully shared between both sides of the market. • Low wages may attract low skill, low output workers and firms have no way of screening these people out

34. Why Efficiency Wages? • Adverse Selection • Managers may choose to offer higher wages to increase the quality of the applicant pool and bring in higher quality workers • Increasing the size and quality of the applicant pool decreases the chances of hiring a shirker or low quality worker. • Applicable to the education debate?

35. Why Efficiency Wages? • Sociological Theories: • Popularized by George Akerlof (2001 Nobel Prize Winner) • Higher wages increase worker morale • Higher morale increases productivity. • A happy workforce is a productive work force.