Chapter 15 – Long term Chapter 15 – Long term Unemployment Unemployment

How is unemployment measured?

What is the “natural rate of 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?

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I. Measuring unemployment

Bureau of Labor Statistics (BLS) divides population into 3 groups:

Employed:

Unemployed:

Not in the labor force:

The labor force

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labor force participation rate

= 100 x

Labor force participation rate: % of the adult population that is in the labor force

Unemployment rate (“u-rate”): % of the labor force that is unemployed

u-rate = 100 x

Adult population in the US in June 2008

# of employed = 145.9 million, # of unemployed = 8.5 million,

not in labor force = 79.2 million

Labor force =

U-rate =

Population =

LF participation rate =

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Labor Market Statistics for Whites & Blacks, June 2008

Adults (20 yrs & older)

u-rate LF part. rate

White, male 4.5% 76.1%

White, female 4.2 60.4

Black, male 9.3 71.5

Black, female 7.4 64.3

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Labor Market Statistics for Whites & Blacks, June 2008

Teens (16-19 yrs)

u-rate LF part. rate

White 16.6 43.9

Black 29.6 27.9

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Labor Market Statistics for Other Groups, June 2008

All ages

u-rate LF part. rate

Asian 4.5 67.4

Hispanic 7.7 69.0

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Labor Market Statistics by Education Level,

June 2008

Adults (25 yrs & older)

u-rate LF part. rate

less than h.s. 8.7% 45.9%

h.s. diploma 5.1 62.8

some college or assoc degree

4.2 71.9

bachelor’s degree or more

2.3 78.1

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20

30

40

50

60

70

80

90

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

LF Participation Rates by Sex, 1950-2007

Men

Women

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Limitation of the u-rate:

Q: In each case, what happens to the u-rate and does it give an accurate impression of what’s happening in the labor market?

A. Sue lost her job and begins looking for a new one.

B. Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work.

C. Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field.

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A. Sue lost her job and begins looking for a new one.

u-rate

A u-rate gives the impression that the labor market is

B.Jon has been out of work since last year, becomes discouraged, stops looking for work.

workers would like to work but

U-rate

A u-rate gives the impression that the labor market is

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C. Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one.

U-rate . Labor market is

The u-rate is not a perfect indicator

• It excludes

• It does not distinguish between • It does not reveal whether

• Reporting errors

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The Duration of UnemploymentMost spells of unemployment are Typically 1/3 of the unemployed

and 2/3 have been unemployed Only 20% have been unemployed

Yet, most observed unemployment The small group of long-term unemployed persons has

fairly little turnover, so it accounts for

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2. Reasons for unemployment - Cyclical and Natural Rate

There’s always some unemployment, though the u-rate fluctuates from year to year.

Natural rate of unemployment

Cyclical unemployment

0

2

4

6

8

10

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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

U.S. Unemployment, 1960-2007

Natural rate of unemployment

Unemployment rate

pe

rce

nta

ge

of l

ab

or fo

rce

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Reasons for a positive natural rate of unemployment

Even when the economy is doing well, there is always some unemployment, because,

Frictional unemployment

short-term for most workers

Structural unemployment

usually longer-term

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Reasons for Frictional unemployment: Workers have different

Job search is the process of

Sectoral shifts are changes in the

Such shifts displace some workers,

The economy is always changing, so

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Public Policy and frictional unemployment

Govt employment agencies

Public training programs

Unemployment insurance (UI) and its effect:

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Reasons for Structural Unemployment

Structural unemployment occurs when

W

LD

S

WE

W1

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i. Minimum-Wage Laws

The min. wage may the equilibrium

The group most affected by minimum wage laws

ii. Unions

a worker association that bargains with employers over

Unions use their market power to

The typical union worker earns

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Effects of Unionization – negatives and positives When unions raise the wage above

“Insiders” – workers who remain employed

“Outsiders” – workers who lose their jobs

Some outsiders go to non-unionized labor markets

Unions counter the market power of

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iii. Efficiency Wages

The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to

1. improve worker’s

2. reduce worker’s

3. improve worker’s

4. improve worker’s

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Reasons for a positive natural rate of unemployment: A Summary

The natural rate of unemployment consists of frictional unemployment

It takes time to search for the right jobs Occurs even if there are enough jobs to go around

structural unemployment When wage is above eq’m, not enough jobs Due to min. wages, labor unions, efficiency wages