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Chapter 14 Unemployment and Its Natural Rate. Identifying Unemployment Job Search Minimum-wage Laws Unions and Collective Bargaining The theory of efficiency wages. “A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem.”
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Chapter 14 Unemployment and Its Natural Rate • Identifying Unemployment • Job Search • Minimum-wage Laws • Unions and Collective Bargaining • The theory of efficiency wages
“A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem.” • The problem of unemployment is usually divided into two categories: The Natural Rate of Unemployment (long-run problem) : represents persistent joblessness that does not go away on its own even in the long-run. Refers to the amount of unemployment that the economy normally experiences. The Cyclical Rate of Unemployment (short-run problem): refers to the year-to-year fluctuations in unemployment around its natural rate. Deals with short-term fluctuations associated with the ups and downs of the business cycle.
Identifying unemployment • How is unemployment measured? Measuring unemployment is the job of Statistics Canada. Monthly Unemployment Rate is calculated by: • Statistics Canada surveying 52,000 randomly selected households and categorizing each adult (i.e. aged 15 and older) as: Currently employed (have a paying job). A person is employed if he or she has spent most of the previous week working at a paid job. Unemployed but actively seeking a job. A person is unemployed if he or she is: • on temporary layoff • is looking for a job • is waiting for the start of a new job
Not in the labour force (i.e. neither of above). A person in neither category is not in the labour force. • TheLabour Forceis the number of employed persons plus the number of unemployed. • TheUnemployment Rate is: U = [B/(A+B)] x 100 • “U” is the unemployment rate • “B” is the number of unemployed persons • “A+B” is the labour force • See Figure 14-1 on page 291. • TheLabour-Force Participation Rate illustrates the fraction of the population that has chosen to participate in the labour market. • TheLabour-Force Participation Rate is: PR = [(A+B) / Population] x 100
See Table 14-1 and Figure 14-2 on page 293 • See Figure 14-3 on page 295 • Does the unemployment rate measure what we want it to? • Where it is easy to distinguish between a person with a full-time job and a person who is not working at all, it is hard to distinguish between a person who is unemployed and a person who is not in the labour force. • It is suggested that the “unemployment rate is inaccurately low” because it doesn’t reflect: • Underemployed: are those who are working part-time when they really want full-time work. • Discouraged workers: are those who have given up looking for work and report that they are no longer in the labour force, when in fact, they would be willing to work if offered a suitable, stable job.
How long are unemployed people without work? • Most of the economy’s unemployment problem is attributable to unemployed workers who are jobless for long periods of time. • The rate of unemployment is the product of the number of jobless and their average duration of joblessness. • The average duration of unemployment (>14 weeks) has been increasing over time from 35% in 1977 to 47% in 1996. • In 1996, 28% of unemployed people in Canada were unemployed for just four weeks or less, while 25% were unemployed for between 5 to 13 weeks. Most of the economy’s unemployment problem in that year was attributable to the 47% unemployed people who were job less for 14 weeks or more.
“ Most spells of unemployment are short, and most unemployment observed at any given time is long-term.” • Assume: you meet a total of 55 unemployed people, 52 of them are unemployed for one week and three are unemployed for the full year. This means that 52/55 or 95% of unemployment spells end in one week.Thus, most spells of unemployment are short. • Consider the total amount of unemployment. The three people unemployed for one year( 52 weeks) make up a total of 156 weeks of unemployment. Together with the 52 people unemployed for one week, this makes 208 weeks of unemployment. In this example, 156/208 or 75% of unemployment is attributable to those individuals who are unemployed for a full year. Thus, most unemployment observed at any given time is long-term.
Why are there always some unemployed people? • In an ideal labour market, wages would adjust to balance the supply of labour and the demand of labour, ensuring all workers full employment. • Of course, reality does not resemble this ideal. There are always some workers without jobs, even when the overall economy is doing well. See Figure 14-4 on page 299. • Natural Rate of unemployment: the rate of unemployment to which the economy tends to return in the long run • Cyclical unemployment: the deviation of unemployment from its natural rate. Cyclical unemployment arises due to short-run economic fluctuations. • There are four ways to explain unemployment is the long run. The first is that it takes time for workers to search for the jobs that are best suited for them. The other three ways are:
Minimum-wage laws • Unions • Efficiency wages We will discuss them later. • Frictional unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. (relatively short spells of unemployment) • Structural unemployment: unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one. (longer spell of unemployment)
Job Search • Search unemployment results from the fact that it takes time for qualified individuals to be matched with available jobs. • This unemployment is different from the previous three types. ( page 8) It is not caused by a wage rate higher than equilibrium. It is caused by the time spent in searching or waiting for the “right” job. • Why some frictional unemployment is inevitable • Frictional unemployment is inevitable simply because the economy is always changing. Situations that cause this type of unemployment include: • New entrants into the job market • Re-entrants into the labour force • Relocations • Job quitters
For example, car manufacturing, petroleum and aircraft manufacturing industries were very minor sources of employment in Canada 90 years ago. Today, these are three of the largest employers in the Canadian economy. • At the same time, agriculture has fallen from being the largest single source of employment in Canada in 1911 to only a minor source of employment today. • Recent estimates for Canada indicate that the mismatch between available jobs and people seeking employment explains why roughly one out of every eight unemployed workers is unemployed. • Public Policy and Job Search • Even if some frictional unemployment is inevitable, the precise amount is not. The faster information spreads about job openings and worker availability, the more rapidly the economy can match workers and firms.
If policy can reduce the time it takes unemployed workers to find new jobs, it can reduce the economy’s natural rate of unemployment. • Government programs try to facilitate the job search process in the following ways: • Government-run employment agencies: Gives out information about job vacancies in order to match workers and jobs more quickly. • Government-run training programs: Aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. • These programs can either increase or decrease the time it takes the unemployed to find new jobs, depending on whether the programs are privately-or government-run.
Employment Insurance ( EI) programs: • Increases the amount of search unemployment without intending to • Offers workers partial protection against job loss. • Partial payment of former wages for a limited time period. • Because EI benefits stop when a worker takes a new job, we might expect that the unemployed would devote less effort to job search and be more likely to turn down unattractive job offers. • On the other hand, the design of the EI provides an incentive for people to enter the labour force when they might not otherwise have done so. Because EI increases the total income people receive by working: They not only earn a wage while working, but also become eligible to collect EI benefits should they leave the job.
Minimum-wage laws • When a minimum-wage law forces the wage to remain above the level that balances supply and demand, it creates a surplus of labour. • See Figure 14-5 on page 305 • If the wage is kept above the equilibrium level for any reason, the result is unemployment.
Unions and Collective Bargaining • A union is a worker association that bargains with employers over wages and working conditions. • A union is a type of cartel. • The process by which unions and firms agree on the terms of employment is called collective bargaining. • A strike will be organized if the union and the firm cannot reach an agreement. • A strike makes some workers better off and other workers worse off: (1) Striking workers worse off in the short-run. (2) Rehired workers better off in the long-run. • By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually result in above equilibrium wages for their members.
Are Unions good or bad for the economy • Advocates of unions contend that unions are an necessary antidote to the market power of the firms that hire workers. ( “company town” case) In this case, a union may balance the firm’s market power and protect the workers from being at the mercy of the firm owners. • Advocates of unions also claim that unions are important for helping firms respond efficiently to workers’ concerns. Even if unions have the adverse effect of pushing wages above the equilibrium level and causing unemployment, they have the benefit of helping firms keep a happy and productive work force.
The Theory of Efficiency Wages • Efficiency wages: above-equilibrium wages paid by firms in order to increase worker productivity. • Firms operate more efficiently if wages are above the equilibrium level. • Even in the presence of an excess of labour, firms may be more profitable by keeping wages higher than equilibrium. • Unemployment caused by this theory is similar to that caused by the minimum-wage laws and unions. • Higher than equilibrium wages are set to promote the following goals of the firm: • Worker Health: Better paid workers eat better and thus are more productive. • Worker Turnover: A higher paid worker is less likely to look for another job.
Worker Effort: Higher wages motivate workers to put forward their best effort. • Worker Quality: Higher wages attract a better pool of workers to apply for jobs.
