CHAPTER 28
Unemployment
In this chapter
• How is unemployment measured?
• What is the “natural rate of unemployment? What is a cyclical
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?
IDENTIFYING UNEMPLOYMENT
Categories of Unemployment
• The problem of unemployment is usually divided into two
categories.
• The long-run problem and the short-run problem:
• The natural rate of unemployment
• The cyclical rate of unemployment
IDENTIFYING UNEMPLOYMENT
Natural Rate of Unemployment
• The natural rate of unemployment is unemploymentthat does
not go away on its own even in the longrun.
• It is the amount of unemployment that the economynormally
experiences.
IDENTIFYING UNEMPLOYMENT
Cyclical Unemployment
• Cyclical unemployment refers to the year-to-yearfluctuations
in unemployment around its naturalrate.
• It is associated with with short-term ups and downsof the
business cycle.
IDENTIFYING UNEMPLOYMENT
Describing Unemployment
• Three Basic Questions:
• How does government measure the economy’s rate of
unemployment?
• What problems arise in interpreting the unemployment data?
• How long are the unemployed typically without work?
How Is Unemployment Measured?
• Unemployment is measured by the Bureau ofLabor Statistics
(BLS).
• In the context of Vietnam, data on employment are reported by
General Statistic Officer (GSO)
• It surveys randomly selected households every month.
• The survey is called the Current Population Survey.
How Is Unemployment Measured?
• Based on the answers to the survey questions, the BLS or GSO
places each adult into one of three categories:
• Employed
• Unemployed
• Not in the labor force
• The BLS considers a person an adult if he or she is over 16 years
old.
• GSO considers a person an adult if he or she is over 15 years old
How Is Unemployment Measured?
• A person is considered employed if he or she has spent most of
the previous week working at a paid job.
• A person is unemployed if he or she is on temporary layoff,
is looking for a job, or is waiting for the start date of a new job.
• A person who fits neither of these categories,such as a full-time
student, homemaker,… is not in the labor force
How Is Unemployment Measured?
• The labor force is the total number of worker, including both the
employed and the unemployed
• The unemployment rate is calculated as the percentage of the labor force
that is unemployed
Number unemployment
Unemployment rate = × 100
Labor force
• The labor-force participation rate is the percentage of the adult
population that is in the labor force.
Labor force
Labor force participation rate = × 100
Adult population
Table 1: The Labor-Market Experiences of VariousDemographic
Groups
Does the Unemployment Rate Measure What We Want It To?
• It is difficult to distinguish between a person who is unemployed
and a person who is not in the labor force.
• Discouraged workers, people who would like to work but have
given up looking for jobs after an unsuccessful search, don’t show
up in unemployment statistics.
• Other people may claim to be unemployed in order to receive
financial assistance, even though they aren’t looking for work.
How Long Are the Unemployed without Work?
• Most spells of unemployment are short.
• Most unemployment observed at any giventime is long-term.
• Most of the economy’s unemployment problemis attributable to
relatively few workers who arejobless for long periods of time.
Why Are There Always Some People Unemployed?
• In an ideal labor market, wages would adjust to balance the
supply and demand for labor, ensuring that all workers would be
fully employed.
Why Are There Always Some People Unemployed?
• Structural unemployment is the unemployment that results
because the number of jobs available in some labor markets is
insufficient to provide a job for everyone who wants one.
• It is caused by a wage rate higher than equilibrium
• Why is there Structural Unemployment?
• Minimum-wage laws
• Unions
• Efficiency wages
Why Are There Always Some People Unemployed?
• Frictional unemployment refers to the unemployment that results
from the time that it takes to match workers with jobs. In other
words, it takes time for workers to search for the jobs that are best
suit their tastes and skills
• Job search
• The process by which workers find appropriate jobs given their
tastes and skills.
• It takes time for qualified individuals to be matched with
appropriate jobs.
Why Some Frictional Unemployment is Inevitable
• Search unemployment is inevitable because the economy is
always changing.
• Changes in the composition of demand among industries or
regions are called sectorial shifts.
• It takes time for workers to search for and find jobs in new
sectors.
Public Policy and Job Search
• Government programs can affect the time it takes unemployed workers to find
new jobs.
• These programs include the following
• Government-run employment agencies
• Public training programs
• Unemployment insurance
•Government-run employment agencies give out information about job vacancies in
order to match workers and jobs more quickly.
•Public training programs aim to ease the transition of workers from declining to
growing industries and to help disadvantaged groups escape poverty
Public Policy and Job Search
Unemployment insurance is a government program that partially protects
worker’ incomes when they become unemployed
• Offers workers partial protection against job losses
• Offers partial payment of former wages for a limited time to those who are laid
off
However, unemployment increases the amount of search unemployment
• It reduces the search efforts of the unemployed
• It may improve the chances of workers being matched with the right jobs.
Public Policy and Job Search
• Structural unemployment occurs when the quantity of labor
supplied exceeds the quantity demanded.
• Structural unemployment is often thought to explain longer
spells of unemployment.
MINIMUM-WAGE LAWS
• When the minimum wage is set above the levelthat balances
supply and demand, it createsunemployment.
Figure 4: Unemployment from a Wage Above the Equilibrium Level
Wage
Surplus of labor
Labor supply
= Unemployment
Minimum
wage
𝑊𝐸
Labor demand
0
𝐿𝐷 𝐿𝐸 𝐿𝑆 Quantity of Labor
UNIONS AND COLLECTIVE BARGAINING
• A union is a worker association that bargain swith employers
over wages and working conditions.
• In the 1940s and 1950s, when unions were at their peak, about a
third of the U.S. labor force was unionized.
• A union is a type of cartel attempting to exert its market power.
UNIONS AND COLLECTIVE BARGAINING
• 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 refers to when the union organizes a withdrawal of
labor from the firm.
UNIONS AND COLLECTIVE BARGAINING
• A strike makes some workers better off and other workers
worse off.
• Workers in unions (insiders) reap the benefits of collective
bargaining, while workers not in the union (outsiders) bear some
of the costs.
• By acting as a cartel with ability to strike or otherwise impose
high costs on employers, unions usually achieve above-
equilibrium wages for their members
Are Unions Good or Bad for the Economy?
Critics argue that unions cause the allocation of labor to be
inefficient and inequitable.
• Wages above the competitive level reduce the quantity of
labor demanded and cause unemployment.
• Some workers benefit at the expense of other workers.
Are Unions Good or Bad for the Economy?
• Advocates of unions contend that unions are an necessary antidote
to the market power of firms that hire workers.
• They claim that unions are important for helping firms respond
efficiently to worker’s concerns.
THE THEORY OF EFFICIENCY WAGES
• Efficiency wages are above-equilibrium wages paid by firms in
order to increase worker productivity.
• The theory of efficiency wages states that firms operate more
efficiently if wages are above the equilibrium level.
THE THEORY OF EFFICIENCY WAGES
A firm may prefer higher than equilibrium wages for the
following reasons:
• Worker Health: Better paid workers eat a better diet and thus are
more productive.
• Worker Turnover: A higher paid worker is lessl ikely to look
for another job.
THE THEORY OF EFFICIENCY WAGES
A firm may prefer higher than equilibrium wages for the
following reasons:
• 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.
Summary
• The unemployment rate is the percentage ofthose who would
like to work but don’t havejobs.
• The Bureau of Labor Statistics calculates thisstatistic monthly.
• The unemployment rate is an imperfectmeasure of joblessness.
Summary
• In the U.S. economy, most people who becomeunemployed find
work within a short period oftime.
• Most unemployment observed at any giventime is attributable to
a few people who areunemployed for long periods of time.
Summary
• One reason for unemployment is the time ittakes for workers to
search for jobs that bestsuit their tastes and skills.
• A second reason why our economy always hassome
unemployment is minimum-wage laws.
• Minimum-wage laws raise the quantity of laborsupplied and
reduce the quantity demanded.
Summary
• A third reason for unemployment is the marketpower of unions.
• A fourth reason for unemployment is suggestedby the theory of
efficiency wages.
• High wages can improve worker health, lowerworker turnover,
increase worker effort, andraise worker quality.
