Unemployment Types and Public Policy

Types of Unemployment

• The unemployment rate never falls to zero.
• It fluctuates around the natural rate of unemployment.
• The natural rate of unemployment is approximately 5.5%.

Cyclical Unemployment

• Cyclical unemployment is the deviation of unemployment from its natural rate.
• During recessions, cyclical unemployment increases.
• During expansions, cyclical unemployment decreases.
• It is considered a short-term problem.

Unemployment Rate

• The unemployment rate is the percentage of the labor force without a job.
• The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates.

Structural Unemployment

• Structural unemployment occurs when jobs are permanently eliminated.
• It explains longer spells of unemployment.
  • Examples:
    • New Technology: "Creative Destruction"
    • International Trade

Frictional Unemployment

• Frictional unemployment happens when workers quit one job in search of a better job.
• The goal is to find appropriate jobs given their tastes and skills.
• It is considered a "Good" kind of unemployment.

Public Policy: Facilitating Job Search

• Government programs aim to facilitate job search.
  • Government-run employment agencies.
  • Public training programs
  • BLS.gov (Bureau of Labor Statistics)

Public Policy: Unemployment Insurance

• Unemployment Insurance is a government program.
• It is for the unemployed who were laid off because their previous employers no longer needed their skills.
• It provides approximately 50% of former wages for twenty-six weeks.

Unemployment Insurance: Pros

• Partially protects workers’ incomes when they become unemployed.
• Reduces the hardship of unemployment.
• More likely to turn down unattractive job offers.
• Less likely to seek guarantees of job security.

Unemployment Insurance: Cons

• Increases the amount of unemployment.
• Unemployment benefits stop when a worker takes a new job.
• Unemployed devote less effort to job search.

Unemployment Insurance: International Comparison

• U.S.:
  • Wage Benefit: 50%
  • Benefit Duration: 0.5 years
• Sweden:
  • Wage Benefit: 80%
  • Benefit Duration: 1.2 years
• Denmark:
  • Wage Benefit: 90%
  • Benefit Duration: 2.5 years
• Spain:
  • Wage Benefit: 70%
  • Benefit Duration: 3.5 years
• Belgium:
  • Wage Benefit: 60%
  • Benefit Duration: Indefinite!
• Germany:
  • Wage Benefit: 63%
  • Benefit Duration: Indefinite!
• France:
  • Wage Benefit: 57%
  • Benefit Duration: 3 years
• England:
  • Wage Benefit: 38%
  • Benefit Duration: Indefinite!
• Japan:
  • Wage Benefit: 60%
  • Benefit Duration: 0.5 years