unemploymentcopy aug2011

8/4/2019 unemploymentcopy aug2011

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Primer onEmployment/Unemployment


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The Labor Force

The labor force includes all persons overage fifteen who are either working for payor actively seeking paid employment.

People who are not employed or are notactively seeking work are not consideredpart of the labor force.


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The Labor Force

The labor-force participation

rate is the percentage of thepopulation working or seekingemployment.


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Production Possibilities

A growing labor force creates long-runeconomic growth.

Economic growth is an increase inoutput (real GDP); an expansion of

production possibilities.


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Labor Force Growth

C

H

GF

D

Labor-force growthincreasesproductionpossibilities

Consumption Goods (units per year)B

A

Investm

entGoods(un

itsperyear)

O


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Definitions

Unemployment rate:

the percentage of the labor forcewithout a job but registered as being

willing and available for work


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Discouraged Workers

A discouraged workeris an individual who isnot actively seeking employment but would look

for or accept a job if one were available.

Discourage workers are not counted as part ofthe unemployment problem after they give up

looking for a job.


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Okuns Law

Okuns Lawasserts that 1% more

unemployment is estimated to equal 2percent less output.


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Q: Will we ever have 0% unemployment?A:No. There are several reasons why the

unemployment rate will never reach 0%, andthey are detailed in the next slides.


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Classification of Unemployment

Cyclical -workers are laid-off becausebusiness environment is notconducive

Structural -Brought about by the mismatch inskills possessed by workers tothat of the industry requirement.

Frictional - Caused by the decision to look forjob that offers financial andmoral satisfaction


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The labour market

Number of workers

Realwage

LD

LD: labor demand

LF

LF: size of labor force

AJ

AJ: the number of workersprepared to accept jobs

AJ is to the left of LFbecause some membersof the labor force arebetween jobs, others are

waiting for better offers.


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The labour market

Number of workers

R

ealwage

LD

LD: labor demand

LFLF: size of labor forceAJAJ: the number of workersprepared to accept jobs

N1

w*

N*

Equilibrium is at w*, N*.

Natural Rateof

Unemployment.

EF

The distance EF is the:


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Is the Natural Rate of Unemployment:-

1. The number of people registered asunemployed?2. The number of people who cant find

suitable jobs?

3. The number of people who refuse toaccept a job at the going wage rate?


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Explaining the Natural rate

Number of workers

Realwage

LD1

LFAJ

w1

N1

Labour demand (LD1) isat the full-output level

Natural rate of unemployment

This may be explainedby cultural andtechnological factors


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Number of workers

Realwage

LD1

LFAJ

w1

N1

Labour demand (LD2) is

below the full-outputlevel

LD2

w2

N2

Natural rate ofunemployment?

Explaining the Natural rate

This would mean that mostworkers are involuntarilyunemployed in a recession


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Is involuntary unemploymentpossible?

Number of workers

Real

wage

Case 1LF

AJ

w*

N*

LD

AB isinvoluntaryunemployment

- this isCLASSICALunemployment

Trade Unions

maintain wageshigher thanequilibrium rate.

w1A B

N1


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Is involuntary unemploymentpossible?

Number of workers

Real

wag

e

Case 2LF

AJ

w*

N*

LD

Demand forLabor (LD1)is below

full-outputlevel(recession)

LD1

w1

C D

N1

CD isinvoluntaryunemployment- this isKeynesian or

demand-deficientunemployment


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Different views ofunemployment

Number of workers

Realwage

LD1

LFAJ

w1

N1

LD2

w2

N2

Keynesian Monetarist

Concern is

with theeconomyoperatingbelow thefull-output

level

Concern iswithincreasingthe full-output level


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Different solutions tounemployment

Keynesian Monetarist

Number of workers

Realwage

LD1

LFAJ

w1

N1

LD2

w2

N2

Use Supply-Side policiesto close gapbetween AJand LF

Demandmanagementpolicies toreduce

involuntaryunemployment


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Supply Side Policies

Number of workers

Real

wage

LD1

LF

AJ

w1

N1

Reduce

FrictionalUnemployment.

StructuralUnemployment.

Classical

Unemployment.

Shiftthe AJcurve totheright

Decreasewagerigidity


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Reduce

FrictionalUnemployment.

Provide job informationPart 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 thisproblem.

Reduce timebetween jobs


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Reduce

StructuralUnemployment.

Improve training/educationthis helps to ensure a better match between jobs on

offer and jobs seekers - a example might be theprovision of training to redundant mine workers sothey would be capable of taking jobs in the computerindustry.

Reduce mismatchof skills


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Reduce

ClassicalUnemployment.

Improve wage flexibilityIn practice this means convincing people that theyshould 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.

Reduce wagerigidity

unemploymentcopy aug2011

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