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Rob GodbyUniversity of Wyoming

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■ “Job loss means lower livingstandards in the present, anxietyabout the future, and reduced self-esteem.”

■ Unemployment in the is usuallydivided into two categories:1 . The Natural Rate of Unemployment

-Structural Unemployment-Frictional Unemployment

2 . The Cyclical Rate of Unemployment

Unemployment Rate

Time

CyclicalUnemployment

Natural Unemployment(Trend)

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■ Natural Rate of Unemployment representspersistent joblessness that does not goaway on its own even in the long run.Refers to the amount of unemploymentthat the economy normally experiences.

■ Cyclical Unemployment refers to the year-to-year fluctuations in unemploymentaround its natural rate. Deals with short-term fluctuations associated with the upsand downs of the business cycle.

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■ How is unemployment measured◆ is it accurate

■ What affects it by group?

■ What affects “duration” ofunemployment?

■ Why does unemployment exist atall?

■ Are there policies that can reduceit?

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■ The Monthly Unemployment Rate iscalculated by:◆ The BLS surveying 60,000 randomly

selected households and categorizingeach adult (i.e. >16 years old) as:

1 . Currently employed (have a payingjob- full or part-time).

2 . Unemployed but actively seeking ajob.

3 . Not in the labor force (i.e. neither ofabove).

������������ �������■ A person is employed if he or she

has spent most of the previous weekworking at a paid job.

■ A person is unemployed if he or sheis:◆ on temporary layoff

◆ is looking for a job◆ is waiting for the start of a new job

■ A person in neither category is not inthe labor force.

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■ The Labor Force is the number ofemployed persons plus the numberof unemployed.

■ The Unemployment Rate is:

u = U/(E+U)✦ “u” is the unemployment rate

✦ “U” is the number ofunemployed persons

✦ “E+U” is the labor force

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■ The Labor-Force Participation Rateillustrates the fraction of thepopulation that has chosen toparticipate in the labor market.

■ The Labor-Force Participation Rateis:

PR = (E+U) / Population

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■ Of the adult population,approximately 33% are not part ofthe labor force (do not “participate”in the labor market).

■ Although we usually hear onlyabout the national unemploymentrate, unemployment rates andparticipation rates vary significantlyby gender, age and race.

DemographicGroup

UnemploymentRate % (1995)

Labor ForceParticipationRate % (1995)

Adults:Total 5.6 66.6

White, male 4.9 75.7White, female 4.8 59.0Black, male 10.6 69.0

Black, female 10.2 59.5Teenagers: (16-

19 yrs. old)Total 17.3 53.5

White, male 15.6 58.5White, female 13.4 55.5Black, male 37.1 40.1

Black, female 34.3 39.8

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■ It is hard to distinguish between aperson who is unemployed and aperson who is not in the laborforce.

■ It is suggested that the“unemployment rate is inaccuratelylow” because it doesn’t reflect:◆ Underemployed◆ Discouraged workers

■ The “underemployed” are thosewho are working part time whenthey really want full-time work.

■ Discouraged Workers are thosewho have given up looking for workand report that they are no longerin the labor force, when in fact, theywould be willing to work if offered asuitable, stable job (they shouldactually count as unemployed).

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■ Discouraged workers reducemeasured unemployment becausethey are not included when actuallythey should be. In the calculation, Ushould increase, increasing thenumerator proportionately more thanthe denominator.

u = U/(E+U)so should be bigger in the

presence of discouraged workers.

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■ This is the term used to refer topeople who, when they lose theirjobs, have difficulty finding a new onedue to their lack of job skills.◆ i.e. -workers with limited skills and

education. In a modern economy,they may experience very longperiods of unemployment.

◆ Examples: fishermen, assembly-lineand textile workers.

#�������������� �������■ Most of the economy’s unemployment

problem is attributable to the relativelyfew workers who are jobless for longperiods of time structurallyunemployed).

■ The rate of unemployment isdetermined by the number of joblessand the average duration ofjoblessness they experience.◆ The average duration of unemployment

is very short (< 10 weeks) for themajority of the unemployed (75%).

$��������������� �������!■ In an ideal labor market, wages would

adjust to balance the supply of laborand the demand of labor, ensuring allworkers full employment.

■ Four reasons why the ideal is missed:◆ Minimum-wage laws

◆ Unions◆ Efficiency wages

◆ Job search “frictions”

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■ When a minimum-wage law forcesthe wage to remain above the levelthat balances supply and demand,it creates a surplus of labor.

■ Suppose all labor was the sameand a single wage cleared themarket...

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Quantity ofLabor

Demand

Equilibriumwithout

Minimum Wa ge

Supply

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Quantity ofLabor

Supply

Demand

PM

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Minimum Wa geLaw Established

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Quantity ofLabor

Demand

PM

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Surplus orUnemployment

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■ Labor is not all the same

■ Research has shown that minimumwage laws may be too low◆ In New Jersey the minimum wage

was increased while in neighboringstates it was not.

◆ No appreciable difference in the NJunemployment rate occurred due tothe policy. Higher minimum wagesbecame a Presidential policy goal.

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■ A union is a worker associationthat bargains with employers overwages and working conditions.

◆ A union is a type of cartel.■ The process by which unions and

firms agree on the terms ofemployment is called collectivebargaining.

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■ A strike will be organized if the union andthe firm cannot reach an agreement.

◆ A strike makes some workersbetter off and other workers worseoff: (1) Striking workers worse offin the short-run. (2) Rehiredworkers better off in the long-run.

■ By acting as a cartel with ability to strikeor otherwise impose high costs onemployers, unions usually result in aboveequilibrium wages for their members.

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■ At wages set above equilibrium:◆ a very large number of qualified

workers are willing to accept the jobs

◆ there are very few jobs and seldomany job openings for aspiring workers(job shortage)

◆ workers tend to hold out acceptingother jobs in hopes of one day landingthe high paying union job

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■ Firms operate more efficiently if wagesare above the equilibrium level.

■ Even in the presence of an excess oflabor, firms may be more profitable bykeeping wages higher than equilibrium.

■ Unemployment caused by this theory issimilar to that caused by the minimum-wage laws and unions.

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■ Higher than equilibrium wages are set topromote the following goals of the firm:

◆ Worker Health: Better paid workers eatbetter and thus are more productive.

◆ Worker Turnover: A higher paid workeris less likely to look for another job.

◆ Worker Effort: Higher wages motivateworkers to put forward their best effort.

◆ Worker Quality: Higher wages attract abetter pool of workers to apply for jobs.

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■ Unemployment that results from the factthat it takes time for qualified individualsto be matched with available jobs.

■ This unemployment is different from theprevious three types. It is not causedby a wage rate higher than equilibrium.It is caused by the time spent insearching or waiting for the “right” job.

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■ Search unemployment is inevitablebecause the economy is alwayschanging. Situations that cause thistype of unemployment include:◆ New entrants into the job market◆ Re-entrants into the labor force

◆ Relocations◆ Layoffs due to competition in the

economy

◆ Job quitters

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■ Government programs try to facilitatejob find in the following ways:◆ Government-run employment

agencies◆ Public training programs

◆ Unemployment insurance

■ These programs can reduce the timeor increase the time it takesunemployed workers to find newjobs.

■ Government-run employmentagencies:◆ Better information about job

vacancies and potential workers inorder to match workers and jobsmore quickly.

■ Public training programs:◆ Aim to ease the transition of workers

from declining to growing industriesand to help disadvantaged groupsescape poverty.

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■ Unemployment insurance:◆ Partial payment of former wages

for a limited time period only tothose “who were laid off...”

◆ Increases the amount of searchunemployment without intendingto.

◆ Reduces “costs” of joblessness.

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■ Since unemployment can impose unusual hardshipson individuals and families, it is an important concernof policymakers.

■ Measured using a national survey.

■ (u)nemployment rate = U/(E+U) x 100■ Unemployment rates differ by race, age and gender

■ Official u-rates may understate true problem due tounderemployment and discouraged workers.

■ Characteristics of work force may influence u-rates.

■ Public policies may have conflicting and sometimescontradictory effects (UI or minimum wage laws).