Chapter 18- Unemployment

Employed

Category that includes people who are paid employees, worked in their own business, or worked as unpaid workers in family business

• Counts full time and part time workers

Unemployed

Category that includes those who aren’t emlpyed, were avaliable for work, and tried to find employment during the previous 4 weeks

Not in the labor force

People who aren’t employed or actively seeking work

• Includes students, homemakers, and people who have retired

Labor Force

The total number of workers, including both the employed and the unemployed

Labor Force Formula

Labor Force = Number of employed + Number of unemployed

Unemployment rate

The percentage of the labor force that is unemployed

Unemployment Rate Formula

Unemployment Rate = (Number of unemployed/ Labor Force) x 100

Labor Force Participation Rate

The percentage of the adult population that is in the labor force

Labor force participation rate formula

Labor force participation rate = (Labor force/ adult population) x 100

• Fraction of the population that has chosen to participate in the labor market

Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates

Cyclical unemployment

The deviation of unemployment from its natural rate

• Unemployment caused by recessions or decrease in demand for goods and services

Discouraged Workers

Individuals who would like to work, but have given up looking for a job

• Are not part of the labor force

Why are discouraged workers not part of the labor force?

Discouraged workers are not actively looking for a job

• Labor force consists of individuals who are either employed or are actively seeking employment

Why is the unemployment rate not accurate?

There are too many changes in the labor force for the unemployment rate to be accurate

Marginally attached workers

Individuals who are neither working nor actively looking for work but want and are available for a job and have looked for work in the past 12 months

• Includes discouraged workers

• Many reasons for not actively searching, such as childcare, transportation issues, etc

Frictional unemployment

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

• Explains short term unemployment

Structural unemployment

Unemployment that results because the number of jobs availiable in some labor markets isn’t enough to provide a job for everyone who wants one

• QS of labor is greater than the QD of labor

• Explains long term unemployment

• Results when wages are above equilibrium level

What is one reason why economies always experience some unemployment?

Economies always experience unemployment because of job search, matching workers with appropriate jobs

Sectoral Shifts

Changes in the composition of demand among industries or recgions

• Takes time for workers to search for jobs in the new sectors, so sectioral shifts temporarily cause unemployment

How does changing patterns of international trade cause frictional unemployment?

Nations export goods for which they have comparative advantage, but comparative advantage might not be stable over time

• Nations might export different goods

• Workers need to move among industries, experiencing frictional unemployment

Unemployment insurance

A government-provided financial support system that offers temporary assistance to individuals who have lost their jobs through no fault of their own

• Offers workers partial protection against job loss

Why does unemployment insurance increase the amount of frictional unemployment without intending to do so?

Unemployment insurance increases frictional unemployment since:

• Because unemployment benefits stop when a worker find a job, the unemployed devote less effort to finding a job

What occurs if the wage is above the equilibrium level?

If the wage is above the equilibrium level, unemployment occurs

How does unemployment occur from a wage above the equilibrium level?

Supply and demand for labor are balanced at equilibrium wage

• If wage is forced to remain above equilibrium level because of minimum wage law, the quantity of labor increases, while the quantity of labor demanded decreases

• Surplus of labor= unemployment

Unions

A worker association that bargains with employers over wages, benefits, and working conditions

Collective Bargaining

The process where employees, through their unions, negotiate with employers to determine wages, benefits, working conditions, and other terms of employment

What occurs when a union bargains with a firm?

When a union bargains with a firm, it asks for higher wages, better beenfits, and better working conditions than a firm would offer without a union

Strike

The organized withdrawl of labor from a firm by a union

What happens when a union raises wages above the equilibrium level?

When a union increases wages above the equilibrium level, it raises the quantity of labor supplied and decreases the quantity of labor demanded, cause unemployment

• Supply of labor increases in other parts of the economy

• Increase in labor supply reduces wages in industries that aren’t unionized

What are the reasons why economies always experience some unemployment?

Economies always experience some unemployment due to:

• Job search

• Minimum wage laws

• Unions

• Efficiency wages

Efficiency wages

Firms operate more efficiently if wages are above the equilibrium level

• Theory that paying workers above the market-clearing wage can increase their productivity, benefiting the company

• Profitable for firms to keep wages high even with a surplus of labor

Why would firms want to pay higher wages? Workers Health

Link between wages and worker health

• Better paid workers eat more nuttuous diet, are healtheir, and thus more proiductive

• More profitable for a firm to pay high wages and have healthy productive workers than pay less and have less healthy and productive workers

• More of a concern in less devleoped coutnries, where cutting wages would influence worker’s health and productivity

Why would firms want to pay higher wages? Workers Turnover

Link between wages and worker turnover

• More a firm pays its workers, the less often workers will choose to leave

• Costly for firms to hire and train new workers, older workers are more productive 

• Higher turnover= higher production costs 

Why would firms want to pay higher wages? Workers Quality

Link between wages and worker quality

• When a firm pays a higher wage, it attracts a better pool of workers to apply for its jobs and increases the quality of its workforce

Why would firms want to pay higher wages? Workers Effort

Link between wages and worker effort

• High wages make workers more eager to keep their jobs and motivates them to put forward their best effort

Population of a town is 100 people. 40 people work full time, 20 work half time but want to work full time, 10 are looking for a job, 10 would like a job but are discouraged, 10 are full time students, and 10 are retired. Number of unemployed?

Unemployed= Are not employed and have been actively looking for work in the last four weeks

10 are unemployed, since they are looking for a job

Population of a town is 100 people. 40 people work full time, 20 work half time but want to work full time, 10 are looking for a job, 10 would like a job but are discouraged, 10 are full time students, and 10 are retired. What is the size of the labor force under these cirumstances?

Labor force= People unemployed + People employed

Unemployed= 10

Employed= 40 +20

So the labor force is 70 people

The main policy goal of the unemployment insurance system is to reduce the?

Income uncertainity that workers face, since provide workers with some income when they get laid off

In a competitive labor market, when the government increases the minimum wage, the result is a (n) __________ in the quantity of labor supplied and a(n) _______ in the quantity of labor demanded

Increase the minimum wage, so more people want to work, increase in QS of labor

Increase in minimum wage, employers don’t want to pay workers more, so decrease in QD of labor

increase, decrease

According to the theory of efficiency wages, what occurs?

Firms may find it profitable to pay above equilibrium wages

• Efficiency wages are higher than the equilibrium wage determined by supply and demand, but nonetheless, paying efficiency wages may be profitable for some firms. Higher wages can increase productivity by increasing worker health, decreasing worker turnover, and increasing worker quality