UNIT 5 - UNEMPLOYMENT

• Employed


  Paid employees, self-employed, and unpaid workers in a family business
• Unemployed


  People not working who have looked for work during previous 4 weeks
• Not in the labor force (Inactive)

  Everyone else
• Labor force


  The total # of workers, including the employed and unemployed
• Labor force participation rate


  % of the adult population that is in the labor force
• Unemployment rate ("u-rate")


  % of the labor force that is unemployed
• Calculating labor force statistics


  Compute the labor force, u-rate, adult population, and labor force participation rate
• What Does the U-Rate Really Measure?
• Types of unemployment


  • Frictional
  • Structural
  • Cyclic
  • Long stop duration
• Even when the economy is doing well, there is always some unemployment
• Natural rate of unemployment


  The normal rate of unemployment around which the actual unemployment rate fluctuates
• Cyclical unemployment


  The deviation of unemployment from its natural rate, associated with business cycles
• Unemployment Insurance (UI)


  A govt program that partially protects workers' incomes when they become unemployed
• UI increases frictional unemployment

  Because UI benefits end when a worker takes a job, so workers have less incentive to search or take jobs while eligible to receive benefits
• Benefits of UI


  • Reduces uncertainty over incomes
  • Gives the unemployed more time to search, resulting in better job matches and thus higher productivity
• Structural unemployment occurs when not enough jobs to go around
• Minimum-wage laws


  The min. wage may exceed the eq'm wage for the least skilled or experienced workers, causing structural unemployment
• Unions


  A worker association that bargains with employers over wages, benefits, and working conditions
• When unions raise the wage above eq'm


  Quantity of labor demanded falls and unemployment results
• Efficiency wages


  Firms voluntarily pay above-equilibrium wages to boost worker productivity
• Reasons why firms might pay efficiency wages

  • Worker health
  • Worker turnover
  • Worker quality
  • Worker effort
• Reasons why firms might pay efficiency wages

  • Worker health
  • Worker turnover
  • Worker quality
  • Worker effort
• Worker health


  In less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, makes them healthier, more productive.
• Worker turnover


  Hiring & training new workers is costly. Paying high wages gives workers more incentive to stay, reduces turnover.
• Worker quality


  Offering higher wages attracts better job applicants, increases quality of the firm's workforce.
• Worker effort


  Workers can work hard or shirk. Shirkers are fired if caught. If market wage is above equilibrium wage, there aren't enough jobs to go around, so workers have more incentive to work not shirk.
• Frictional unemployment


  It takes time to search for the right jobs. Occurs even if there are enough jobs to go around.
• Structural unemployment


  When wage is above equilibrium, not enough jobs. Due to min. wages, labor unions, efficiency wages.
• The natural rate of unemployment consists of frictional unemployment and structural unemployment.
• Cyclical unemployment is the deviation of unemployment from its natural rate and is connected to short-term economic fluctuations.
• Phillips curve


  Shows the short-run trade-off between inflation and unemployment
• The Phillips curve illustrates a negative association between the inflation rate and the unemployment rate.
• Higher aggregate-demand

  Higher output & Higher price level, Lower unemployment & Higher inflation
• Lower aggregate-demand

  Lower output & Lower price level, Higher unemployment & Lower inflation
• Long-run Phillips curve

  It is vertical. Unemployment rate tends toward its normal level (natural rate of unemployment). Unemployment does not depend on money growth and inflation in the long run.
• If the central bank increases the money supply slowly, the inflation rate is low and unemployment is at the natural rate. If the central bank increases the money supply quickly, the inflation rate is high and unemployment is at the natural rate.
• Natural rate of unemployment

  The unemployment rate toward which the economy gravitates in the long run. Not necessarily socially desirable. Not constant over time.
• Labor-market policies can affect the natural rate of unemployment and shift the Phillips curve.