Economics

• Unemployment


  The most important economic issue in public discussion
• Unemployment


  • - It hits a few people hard rather than affecting everybody a little bit
  • It creates insecurity as many people will think their own job is in danger
• Unemployment occupies a central role in economic policy discussions due to the severe negative impact on individuals and the insecurity about who will be hit next
• Labour force


  All people capable of working and willing to work between the ages of 15 and 64
• Labour force participation rate

  Percentage share of the labour force of the total population of 15 to 64 year-olds
• Employment rate


  Ratio between those actually working and the total number of 15 to 64 year-olds
• The Swiss labour market is frequently cited as a showcase of very low unemployment and high employment compared to other OECD countries
• Cyclical unemployment


  Unemployment created during a period of economic weakness, since a limited overall economic demand means that there are more unemployed people than jobs available
• Natural rate of unemployment


  The number of available positions equals the number of unemployed. "Natural" here does not mean that this rate cannot be changed by policy.
• Beveridge Curve


  Graph illustrating the correlation between the number of unemployed and the number of available positions
• Structural unemployment


  Unemployment caused by structural change, where the qualification of the applicants is not appropriate for the qualification profile of new jobs
• Frictional unemployment


  Unemployment caused by job switching where the new job first needs to be found. Frictional unemployment is also referred to as search unemployment.
• Cyclical unemployment occurs if the economy is in a recession. The starting point is a decline in overall economic demand. Because the wages for employees are fixed for a certain amount of time meaning that they do not fall when demand falls, jobs are lost in the economy as a whole. This hurts the entire economy and thus occurs simultaneously across most sectors during an economic downturn. When overall demand picks up again, cyclical unemployment declines as well.
• At point X the economy is in a recession. The economies' capacity is underutilized which means that not all production factors can be completely utilized as demand is too small. This under-utilisation means on the one hand that not all of the available capital goods such as buildings or machines are being used. On the other hand (and this is what is of particular interest to us here) not all of the labour force that would have a job in a normal economic situation can be employed. This in turn means that unemployment in a recession is relatively high, since the "normal" natural unemployment rate (structural and frictional unemployment) is enhanced by cyclical unemployment.
• At point Y however, the economy is at full capacity and there is no cyclical unemployment but "only" the natural rate of unemployment.
• Cyclical unemployment is thus a macroeconomic phenomenon. It means that we examine the overall economic demand and determine that unemployment is increasing in all markets because all wages are fixed for a certain period of time.
• Structural unemployment occurs if demand in a certain market declines because its goods (e.g. typewriters) are pushed off the market by more advanced products (e. g. computers). The decline in demand then leads to structural unemployment if wages are inflexible, since a specific form of labour now has a supply overhang. It is important to understand that at the same time other industries grow and thus create more demand for labour. One can observe declining and expanding sectors and thus a decline in demand in certain labour markets and demand growth in others.
• The structural unemployment created in this process is the result of the low adaptability of wages. In other words this type of unemployment would not exist with completely flexible wage adjustments. It would merely mean that a decline in demand would lead to reduced employment in a single sector but not to overall unemployment.
• If the wages are fixed, for example by utilizing a minimum wage equal to the original wage w,, a decrease in demand leads to involuntary unemployment. A number of workers q, would like to work for this wage. However, the companies would only offer a job to q, workers. This means an unemployment rate of q,- q, is created.
• If wages remain at level w,, then q people are still prepared to work for this wage. But in reality only q workers would be in demand at this wage since w, is too high for companies when compared to the new equilibrium wage w. The difference between q, and q3 equals the number of people in this industry who are involuntarily unemployed.
• Such unemployment therefore always occurs when real wages, the price for a certain type of labour on the labour market, cannot react flexibly to changes in demand for whatever reason.
• Factors influencing labour market flexibility


  • Labour market regulations
  • Education and training
• Labour market regulations


  Directing the labour market through legal measures
• The challenge in labour market regulation is finding a balance between workforce protection and flexibility. In doing so it must be taken into consideration that when protections are too strong they give rise to the illusion that jobs can be secured permanently. In a market economy going through structural changes this is simply not possible. Any attempt to guarantee jobs in a certain industry undermines the adaptability and the willingness to adapt among employees and has as a consequence that at some point the necessary adaptation is going to occur as a shock.
• Forms of labour market regulations limiting flexibility


  • Minimum wages
  • Collective bargaining agreements
  • Employment protection legislation
  • Unemployment benefits
  • Active labour market policies
• Advances in productivity


  Lead to the creation of additional jobs
• We will not run out of work due to advances in productivity
• Minimum wages


  Legally or contractually set wage minimums with country-wide or industry-wide obligation
• Collective bargaining agreements


  Wage negotiations between representatives of employers (industry association) and employees (unions) whose results become valid for the entire industry
• Labour market regulations


  • Minimum wages
  • Collective bargaining agreements
  • Regulations governing the hiring and firing of employees
  • The design of unemployment insurance
  • Regulations of working hours
• Minimum wages


  Direct intervention in the price mechanism, creates a supply overhang and leads to demand that is too low
• Collective bargaining agreements


  The more negotiations become centralised, the less easy it becomes to take the individual situations into consideration, in particular the various productivity levels among the employees
• Unit labour costs


  Wage costs per unit of a good or service produced
• The correlation between wages and productivity is not merely static for a certain point in time but also dynamic

  
• Real wages in what were previously developing countries rise at the same pace as productivity
• Dismissal protection


  Laws designed to prevent or hinder the dismissal of workers
• Unemployment insurance


  Social security that guarantees unemployed people an income during their search for a new job
• Protective regulations that are too extensive can lead to the worsening of unemployment instead of the desired reduction
• The design of various labour market regulations is decisive when trying to understand the structural causes of the natural rate of unemployment

  
• Education and training are further factors influencing structural unemployment that in a broad sense can be politically influenced