chapter 8

Unemployment rate

• Defining and measuring unemployment

  • Employment is the total number of people currently employed (ft or pt)

    • Employment rate

      • = number of employed workers / adult pop * 100

  • Unemployment

    • People who are over 15 and:

      • Do not currently have paid job

      • Are available for work

      • Have been looking for job in past 4 weeks

    • Disabled and retired people don’t count

  • Labour force

    • = employment + unemployment

  • Labour force participation rate

    • Percentage of working-age pop in labour force

    • = (labour force) / (pop over age 15) * 100

  • Unemployment rate

    • Percentage of people in labour force unemployed

    • = # of unemployed workers / labour force * 100

• Significance of the unemployment rate

  • Good (not perfect) at telling how easy it is to find job in economy

  • Quit rate

    • Fraction of workers voluntarily leaving their jobs

    • Lower when unemployment high

  • How unemployment rate can overstate true level of unemployment

    • If people are confident about finding work they will remain unemployed to wait for an offer they really like

  • How unemployment rate can understate true level of unemployment

    • Official unemployment rate omits workers in 3 categories

      • Discouraged workers

        • Not currently searching for job as they have little hope of finding job - given up

      • Marginally attached workers

        • Not working or looking for a job as they are waiting for employment to begin (eg. recall after layoff or new job in next several weeks)

        • Looked for work in past 12 months but not past 4 weeks

      • Underemployed workers

        • Visibly underemployed

          • Have jobs working fewer hours than desired

        • Invisibly underemployed

          • Jobs that don’t use full skills leading to lower wages 

    • Unemployment doesn’t measure quality of jobs 

  • Varies among demographic groups

    • Younger people and people close to retirement are harder to find jobs

  • Different regions have different unemployment

• Growth and unemployment

  • During recessions unemployment usually rises and

  • During expansion unemployment usually falls

    • Economy doesn’t always grow fast enough to reduce unemployment

  • Jobless recovery or growth recession

    • A period where real GDP growing at a below average rate and unemployment is rising

• Economists also look at different indicators to indicate health of economy

  • Labour force participation

  • Number of full time jobs

  • Avg wages

2 types of unemployment:

The natural rate of unemployment

• Job creation and job destruction

  • Job separations

    • Worker fired or quits voluntarily

  • Job loss caused by

    • Structural change in economy

      • Industries rise and fall as new tech and consumer taste changes

    • Poor management performance or bad luck at companies

• Frictional unemployment

  • Workers engaged in job search

    • Workers who spend time looking for employment

    • Normal for people to spend time looking for a first job or new job after layoff

  • Unemployment due to time workers spend in job search

    • Some level is inevitable due to economic change

      • Even a good thing as economy is more productive if workers work in jobs that match their skills

    • Scarcity of info

  • Exists even when # of people looking for jobs = # of jobs

  • In periods of low unemployment, unemployment shorter due to high levels of frictional unemployment (opposite for times of high unemployment)

Structural unemployment

• Unemployment resulting when more people seeking jobs in particular labour market than jobs available at current wage rate

• Try to tell level by looking at unemployment at peak of business cycle

• Can be modelled by supply and demand

  • When wage rate is above equilibrium wage, structural unemployment is difference between quantity supplied and demanded

  • Changes in labour demand

  • Job seekers > job vacancies

• Causes: 

• Minimum wages

  • Govt. mandated floor on wage rate

  • Irrelevant for most workers as equilibrium wage is higher

  • Raises wage above equilibrium for less skilled workers and creates structural unemployment

  • Put in place to make sure working people can afford to live

    • Comes at cost of eliminating opp to work for workers willing to work for less

    • Can lead to higher employment as employers who employ large portion of some job market have market power and can lower equilibrium wage by restricting hiring

• Unions

  • Organizations of workers who bargain collectively with employers to raise wages and living standards for members

  • Can have effects similar to minimum wage

• Efficiency wages

  • Wages that employers set above equilibrium wage to make their workers work better

  • Creates more people who want that high paying job but cant get it

• Side effects of govt policies

  • Generous EI benefits reduce incentive for workers to find job

• Mismatches between employees and employers

  • Shift in the economy leading to fall of some industries

Natural rate of unemployment

• Normal unemployment rate where the actual unemployment rate fluctuates

  • Called non-accelerating inflation rate of unemployment (NAIRU)

• Rate of unemployment from frictional + structural unemployment

• Cyclical unemployment

  • Deviation of actual unemployment from natural rate

  • Share of unemployment arising from downturns of business cycle

• Actual unemployment = natural UE + cyclical UE

• Natural unemployment = frictional unemployment + structural unemployment

Changes in natural rate of unemployment

• Estimates show natural rate of ue fluctuates over time

• Caused by:

• Changes in labour force characteristics

  • People who are older are more likely to have lower frictional unemployment and lower unemployment

  • More women entering labour force means more people looking for work and more natural unemployment

• Changes in labour market institutions

  • Stronger labour unions can cause more unemployment

  • Temporary employment agencies

  • Gig companies such as uber help people work for less than minimum

  • Technological change

    • Increase demand for skilled workers familiar with the tech and decrease for unskilled workers

• Changes in govt. Policies

  • High minimum wage

  • High ei benefits reducing incentive for workers to work

  • Job training programs provide skills to workers reducing natural rate of unemployment

  • Employment subsidies for workers or employers

    • Increase incentive to work

Inflation and deflation

• The level of prices doesn’t matter

  • If you cut a workers wage in half but also cut their expenses in half, there real wage (wage rate / price level) hasn’t changed

  • Real income (income / price level) in canada has increased since 1970 despite inflation

• Rate of change of prices matters

  • Rate of inflation is different than price level

  • High rates of inflation impose significant economic costs as resources are wasted

    • Shoe-leather costs

      • Increased costs of transactions cause by inflation

        • (wear and tear caused by extra running around)

      • High Inflation discourages people from holding money

        • Move money to other assets

      • Hyperinflation occurs when price rise by 50% or more each month

        • 13000% per year

        • Causes people to use up resources to hold money in more valuable assets

    • Menu costs

      • Real cost of changing a listed price

      • Listed price

        • Price listed on most things we buy

      • Retailers have to change prices super often on things

    • Unit of account costs

      • Costs arising from way inflation makes money a less reliable unit of measurement

      • Unit of account role of money

        • Role of the dollar for making economic calculations and creating contracts

      • Inflation reduces th quality of economic decisions

        • Economy is less efficient because uncertainty cause by changes in dollar amount

      • Businesses pay taxes on phantom gains

        • Profits offset by inflation

• Winners and losers of inflation

  • Interest rate

    • Price lender chargers for the use of his/her savings for a year

  • Nominal interest rate

    • Interest rate in dollar terms

  • Real interest rate

    • = Nominal interest rate - rate of inflation

  • Loan contracts are usually carried out in dollar terms with nominal interest rates

    • If actual inflation rate is higher than expected

      • Borrowers gain at the expense of lenders

    • If actual inflation rate lower than expected

      • Lenders gain at expense of borrowers

  • Unexpected inflation

    • Difference between actual and expected rates of inflation

    • Redistributes wealth arbitrarily among people

  • Unexpected Inflation discourages people from entering into long term contracts

  • Unexpected deflation creates winners and losers too

• Inflation is easy, disinflation is hard

  • Disinflation

    • Bringing inflation rate down

    • Much harder when higher inflation established in economy

      • Have to create a recession

  • If you want to bring down unemployment, you have to create inflation