Unemploymentcopy Aug2011

Primer on Employment/Unemployment
The Labor Force

The labor force includes all persons over age fifteen who are either working for pay or actively seeking paid employment. People who are not employed or are not actively seeking work are not considered part of the labor force.
The Labor Force The labor-force participation rate is the percentage of the population working or seeking employment.
Production Possibilities
A growing labor force creates long-run economic growth. Economic growth is an increase in output (real GDP); an expansion of production possibilities.
Labor Force Growth

Investment Goods (units per year)
C
A F
Labor-force growth increases production possibilities
Consumption Goods (units per year)
Definitions
Unemployment rate:
the percentage of the labor force without a job but registered as being willing and available for work
Discouraged Workers
A discouraged worker is an individual who is not actively seeking employment but would look for or accept a job if one were available. Discourage workers are not counted as part of the unemployment problem after they give up looking for a job.
Okuns Law
Okuns Law asserts that 1% more
unemployment is estimated to equal 2 percent less output.
Q: Will we ever have 0% unemployment?

A: No. There are several reasons why the unemployment rate will never reach 0%, and they are detailed in the next slides.
Classification of Unemployment
Cyclical workers are laid-off business environment conducive because is not
Structural -
Brought about by the mismatch in skills possessed by workers to that of the industry requirement.
Caused by the decision to look for job that offers financial and moral satisfaction
Frictional -
The labour market

Real wage
AJ
LD: labor demand LF
LF: size of labor force

AJ: the number of workers prepared to accept jobs LD
Number of workers
AJ is to the left of LF because some members of the labor force are between jobs, others are waiting for better offers.
The labour market

Real wage
LD: labor demand LF: size of labor force AJ: the number of workers prepared to accept jobs Equilibrium is at w*, N*. LD N* N1 Number of workers The distance EF is the: Natural Rate of Unemployment.
AJ
LF
w*
Is the Natural Rate of Unemployment:1. The number of people registered as unemployed? 2. The number of people who cant find suitable jobs? 3. The number of people who refuse to accept a job at the going wage rate?
The Natural rate of unemployment

The natural rate of unemployment is the rate of unemployment when the labor market is in equilibrium at the full output level. This is entirely voluntary. It includes: frictional unemployment structural unemployment
Explaining the Natural rate

Real wage
AJ
Labour demand (LD1) is at the full-output level

LF
w1
Natural rate of unemployment

LD1 N1 Number of workers
This may be explained by cultural and technological factors
Explaining the Natural rate

Real wage
AJ
Labour demand (LD2) is below the full-output level

LF
w1
w2 LD2
N2N1
Natural rate of unemployment?

LD1 This would mean that most workers are involuntarily unemployed in a recession
Number of workers
Is involuntary unemployment possible? AJ

Real wage
Case 1
LD A B
LF
w1 w*
Trade Unions maintain wages higher than equilibrium rate.

N1
AB is involuntary unemployment - this is CLASSICAL unemployment

N* Number of workers
Is involuntary unemployment possible? AJ

Real wage
Case 2
LD LD1
LF
Demand for Labor (LD1) is below full-output level (recession)
w* w1
C D
CD is involuntary unemployment - this is Keynesian or demanddeficient unemployment
N1 N* Number of workers
Different views of unemployment

Keynesian
Real wage
Monetarist
AJ
Concern is with the economy operating below the full-output level
LF
w1 w2 LD2
Concern is with increasing the fulloutput level

LD1
N2N1
Number of workers
Different solutions to unemployment

Keynesian
Real wage AJ
Monetarist
LF
Demand management w1 policies to reduce w2 involuntary unemployment

N2N1
Use SupplySide policies to close gap between AJ and LF

LD1
LD2
Number of workers
Supply Side Policies

Real wage
Reduce
LD1 AJ LF
Frictional Unemployment.
Structural Unemployment. Classical Unemployment.
w1
Shift the AJ curve to the right
N1 Number of workers
Decrease wage rigidity

Reduce
Frictional Unemployment.
Reduce time between jobs
Provide job information Part of the reason why people remain unemployed may be that they are unaware of the availability of jobs providing more extensive and accurate information, for example in Job Centres should reduce this problem.

Reduce
Structural Unemployment.
Reduce mismatch of skills
Improve training/education this helps to ensure a better match between jobs on offer and jobs seekers - a example might be the provision of training to redundant mine workers so they would be capable of taking jobs in the computer industry.

Reduce Classical Unemployment. Reduce wage rigidity
Improve wage flexibility In practice this means convincing people that they should accept LOWER wage rates. Therefore anything that allows workers to remain unemployed (high unemployment benefits or job seekers allowance) should be reduced. Restriction on free market wage flexibility such as Minimum Wage laws, should be removed. Institutional restrictions, such as Trade unions power in wage determination, should be reduced.

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Primer on Employment/Unemployment

The Labor Force

Labor Force Growth

Labor-force growth increases production possibilities

Consumption Goods (units per year)

Q: Will we ever have 0% unemployment?

The labour market

LD: labor demand LF

LF: size of labor force

The labour market

The Natural rate of unemployment

Explaining the Natural rate

Labour demand (LD1) is at the full-output level

Natural rate of unemployment

This may be explained by cultural and technological factors

Explaining the Natural rate

Labour demand (LD2) is below the full-output level

Natural rate of unemployment?

Is involuntary unemployment possible? AJ

Trade Unions maintain wages higher than equilibrium rate.

AB is involuntary unemployment - this is CLASSICAL unemployment

Is involuntary unemployment possible? AJ

Demand for Labor (LD1) is below full-output level (recession)

CD is involuntary unemployment - this is Keynesian or demanddeficient unemployment

Different views of unemployment

Concern is with the economy operating below the full-output level

Concern is with increasing the fulloutput level

Different solutions to unemployment

Demand management w1 policies to reduce w2 involuntary unemployment

Use SupplySide policies to close gap between AJ and LF

Supply Side Policies

Shift the AJ curve to the right

Decrease wage rigidity

Supply Side Policies

Reduce time between jobs

Supply Side Policies

Reduce mismatch of skills

Supply Side Policies

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