The Natural Rate of Unemployment

1
Chapter 14

• The Natural Rate of Unemployment

2
Ch 14 Outline

• Unemployment Defined
• How Measured
• Causes of Unemployment
• Govt Policy Unemployment

My Job- Blown Away!
3
Unemployment

• Lowers living standard, creates anxiety.
• 2 categories
• . Natural Rate of Unemployment
• . Cyclical Rate of Unemployment

4
Measuring Unemployment

• Adult Population A16
• Unemployed U if
• on temporary layoff
• looking for job
• waiting for start of new job

5
Not in Labor Force

• NLF
• Some Students
• Homemakers
• Retirees
• Discouraged Workers

Discouraged
6
Measuring Unemployment

• Adult Pop A16 LF NLF
• Labor Force LF E U
• Unemployment Rate
• U Rate U/(LF) x 100

Need a Job!
7
Measuring Unemployment

• U 10 million
• E 90 million
• NLF 20 million
• Labor Force LF LF E U
  
• 100 m 90 m 10
  m
• Unemployment Rate is
• U Rate U/(LF) x 100
• 10 m/(90m10m) x 100 10

8
Measuring Unemployment
Give us a Break!

• Laborforce Participation Rate fraction of
  population working for pay or
  looking for work
• Labor-Force Participation Rate is
• P Rate (LF / A16) x 100
• P Rate 100m/120mx 100
• P Rate 83.3

9
Labor Market Branch Diagram
E 90m
LF 100m
A16 120 m
U 10m
NLF 20m
10
Unemployment Rate (U Rate)
E 90m
LF 100m
A16 120 m
U 10m
U Rate (U/LF) x 100 (10m/100m)x100 10
NLF 20m
11
Participaton Rate (P Rate)
E 90m
LF 100m
A16 120 m
U 10m
P Rate (LF/A16) x 100 (100m/120m)x100 83.3
NLF 20m
12
U Rate Measurement Correct?

• Measured U Rate too LOW due to
• Underemployment
• Discouraged workers

Id wear any of these hats to get a job with
decent pay
13
Duration of Unemployment

• Most unemployment a few jobless a long time.
• Average duration short (lt 10 weeks) for most
  unemployed (75).

14
Labor Market Equilibrium
Wage
We
Equilibrium
Labor
Le
15
Why unemployment?

• In ideal labor market, would be at equilibrium
• Four reasons ideal missed
• Minimum-wage laws
• Unions
• Efficiency wages
• Job search

16
Minimum-Wage Laws

• Minimum-wage above equilibrium (We) creates
  Unemployment!.

17
Minimum-Wage Laws
Price of Labor
Supply
We
Demand
Quantity of Labor
Le
18
Minimum-Wage Laws
Price of Labor
Supply
WM
Minimum Wage
Demand
Quantity of Labor
LS
LD
19
Why unemployment? Minimum-Wage Laws
Price of Labor
Supply
WM
Surplus or Unemployment
Demand
Quantity of Labor
LS
LD
20
Unions and Collective Bargaining

• Union bargains over wages conditions.
• .
• Collective bargaining Process where unions
  firms agree on terms of employment .

What a lousy contract!
21
Unions and Collective Bargaining

• Strike union witholds labor.
• Short Run Workers worse off
• Longer Run Rehired workers better off .
• Unions secure wages above (We) equilibrium.

22
Labor Market in Equilibrium
Wage
We
We
Labor
Le
Le
23
Spill-Over Effect
Wage Union Non-Union
WU
We
We
Labor
Le
Le
24
Spill-Over Effect
Wage Union Non-Union
WU
We
We
WN
Labor
Le
Le
25
Spill-Over Effect
Wage Union Non-Union
WU
We
We
WN
Labor
Le
Le
26
Efficiency Wage

• Efficient if wages above (We).
• Fords 5 a Day (1915)
• More profitable if wages higher
  than (We).
• Causes Unemployment

27
Theory of Efficiency Wage

• Efficiency Wages benefit firm
• Worker Health Workers more productive.
• Worker Turnover Less likely to switch jobs
• Worker Effort Dont want to lose job.
• Worker Quality Employ better pool of workers.

Underwater Fish Crossing...............
28
Job Search Unemployment

• Inevitable economy changes
• Causes
• New entrants
• Re-entrants
• Re-locators
• Job quitters

I get to relocate to Cleveland! Yes!
29
Job Search Unemployment

• Qualified people seek out best jobs.
• NOT caused by a wage above equilibrium.

Just Crawlin along searchinout my best
opportunity
30
Public Policy and Job Search

• Government-run employment agencies
• info
• job banks
• Public training programs
• Ease workers from declining
  industries
• help disadvantaged

31
Public Policy Job Search

• Unemployment insurance
• Increases search unemployment
• Generally 1/2 pay for 1/2 year if qualify

Generally dont qualify if fired or quit
32
Public Policy Job Search

• Change unemployment insurance
• Govt job info service match applicants
  positions
• Support re-training programs

33
Conclusion

• Public policies toward labor markets have had
  conflicting effects.