Chapter 9: Unemployment and Labor Market

Unemployment

situation in which someone wants to work but cannot find a job in the current market

Labor force

people who are in the working age population and are either employed or unemployed;people who are currently working ro who are actively trying to find a job. 

Unemployment RATE

The number of unemployed people divided by the number of people in the labor force.

Unemployment rate formula

(# of unemployed)/(labor force) x 100 = unemplyed/employed +unemployed x 100

Labor force participation rate

the number of people in the labor force divided by the working age population

labor force participation rate formula

labor force/working ape population x 100

Discouraged workers

people who have looked for work in the past year, but have given up looking bc of the condition of the labor market (not counted in the unemployment market)

Unemployed

workers who are 9either working less than they would like to or are working in jobs below their skill level 

Unemployment rate chart

• periods of cyclical unemployment as it goes up and down

• always have some forms of structural, seasonal, frictional real wage

• when the economy goes into recessions market by the gray areas, the economy is shrinking, unemployment rate goes up 

Labor force

unemployed + employed

Unemployment rate

(unemployment /labor force) x 100

Labor force rate

(labor force)/(working age population) x 100

labor demand curve

a graph showing the relationship btwen the total quantity of labor demanded by all firms in the economy and wage rate

Labor supply curve

a graph showing the relationship btwn total labor supplied in the economy and wage rate

Explain how wage rates above equilibrium cause unemployment

• equilibrium wage is where labor supply (workers willing to work = labor demand (job firms want to offer))

• If wage rate is set above equilibrium, the wage is now more expensive for employers

• at this higher wage

  • more workers are willing to work bc jobs pays better (labor supply increases)

  • fewer firms are willing to hire bc workers cost more (labor demand decreases)

• create a surplus of labor: there are more people looking for jobs than there are jobs available 

• wages above equilibrium increase labor supply but reduce labor demand —> unemployment 

Perfect labor market

• if labor markets perfect, there is no unemployment 

• the intersection of the curves identifies the market equilibrium

Perfect labor market

everyone is price takers

no unemployment —> supply = demand

Unemployment exists

when factors cause the labor market to be “imperfect”

Market imperfections

lack of information, lack of competition, cost of eating

government regulation

minimum wage

Frictional unemployment

when someone isn’t happy w the job they have and quit and they’re looking for a job, so they’re unemployed. It’s temporary unemployment as it’s their personal choice to get a better job

Structural unemployment

when the skill sets of workers doesn’t match the skill sets of the jobs that is available to them. fast moving dynamic

Seasonal unemployment

temporary loss of jobs that happens for workers declines during certain times of the year, often due to cyclical changes.

Cyclical unemployment

caused by short term economic fluctuations in the economy. Economists use the term business cycles to describe patterns of short term ups and downs. When economic activity falls below long term potential, we have cyclical unemployment. Economy is in recession. Economy is not at full efficiency 

Natural Rate of Unemployment

• labor markets are dynamic

• institutions and policies matter

• technology and globalization

• demographics

• business cycles interact w structure

Natural rate of unemployment formula

the normal level of unemployment that persists in an economy in the long fun.

classical unemployment/real wage

unemployment that results from wages being higher than market-cleaning level.

Why is there a cyclical component of unemployment

caused by short term economic fluctuations

During recessions, cyclical unemployment

firms cut production —> they need fewer workers —> unemployment rises

during expansions, cyclical unemployment

firms increase output—> hire more worker —> unemployment falls

The cycle happens bc total demand for goods and services fluctuates

• If spending drops, firms don’t sell as much, so they lay people off

• if spending rises, firms need more workers to meed demand

cyclical unemployment only exists

when an economy is below potential output

identify factors that may stop wages from falling to equilibrium level

• minimum wage laws

• efficiency wage theory

• implicity contracts

• menu costs and coordination issues

• social/psychological factors