Transcript View Chapter 18 Presentation

Chapter 18
Unemployment:
Causes and
Consequences
Created by: Erica Morrill, M.Ed
Fanshawe College
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-1
Chapter Focus
 Types
of unemployment
 Wage rigidity
 Voluntary unemployment
 Imperfect information
 Unemployment insurance
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-2
Types of Unemployment
 Frictional
 Structural
 Demand-Deficient
 Seasonal
 Involuntary
(associated with wage
rigidity)
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-3
Search Unemployment
 Imperfect
information on both sides of
the labour market
 Undertaking a job search has costs and
benefits
 determine
if it is worthwhile to initiate the
job search
 determine when to discontinue
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-4
Optimal Job Search
 Marginal
expected benefit equals
marginal expected cost
 Diminishing returns
 Duration - less likely a better offer will
be received
 “Stopping Rule”- minimum acceptable
wage
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-5
Figure 18.1
Optimal Job Search
C
Present value of total
costs and expected
total benefits
Present value of MC
and expected
MB
B
Se
MC
Search duration
MB
Se
Search duration
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-6
Wage Distributions Under
Imperfect and Perfect Information
Figure 18.2
Imperfect Information
Number of Jobs
Number of Jobs
WA
Wage rate
Full Information
We
Wage rate
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Chapter 18-7
Factors Determining Optimal
Search
 Wage
offers and duration of job
 Increase in benefits/decrease in costs
 Dissemination of information
 Vacancies/offers
 Value of leisure/# of other searchers
 Social and labour market policies
 Aggregate economic conditions
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-8
Implicit Contracts
 Firms
and workers are already engaged
in employment relationship
 Explains responses to changes in
production demand
 rigid
wages
 layoffs/rehires
 Reflects
risk-sharing
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-9
Implicit Contract Theory
 Employees
purchase income insurance
from the employer
 The employer can then deal with:
 moral
hazard
 adverse selection
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-10
Figure 18.3 a
Real Wage
Implicit Contracts
W
S
Wa
Da= MPPN X Pa
Wb=k
Db= MPPN X Pb
Nb
No
Employment N
Wages and Employment with Market-Clearing
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-11
Figure 18.3 b
Real Wage
Implicit Contracts
S
W
Wa
W*
Da= MPPN X Pa
k
Db= MPPN X Pb
Nb Nb * N
o
Employment N
Wages and Employment with Implicit Contracts
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-12
Efficiency Wages: Implications
for Unemployment
 Effect
of wages on incentives and
productivity
 Above market wages are used to
enhance productivity
 S-shaped function
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-13
Efficiency Wages: Implications
for Unemployment
 Unemployment
and rigid wages can
coexist
 Firms
refuse to cut wages because of the
adverse work incentives
 Wage
curve
 Higher
unemployment leads to a greater
penalty for shirking thus firms do not have
to pay higher wages
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Chapter 18-14
Insider-Outsider Theory
 Wage
setting is determined by
bargaining
 Costly for the firm to replace workers
 Workers have bargaining power to raise
wages even with excess labour supply
 Explains the existence of high
unemployment and real-wage growth
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-15
Sectoral Shifts and
Unemployment
 Sectors
of the economy are growing at
different rates
 Unemployment occurs as labour
reallocates from the slower sectors to
the fast growing sectors
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Chapter 18-16
Rationale for Unemployment
Insurance

Moral hazard and adverse selection reduce
the profitability of selling insurance
 Private sector may not provide the socially
optimal amount of unemployment insurance
 Therefore, governments introduced
unemployment insurance as part of social
policy
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Chapter 18-17
Effects of Unemployment
Insurance
 Incident
and duration of employment
 Layoffs
 Employment
instability
 Labour supply
 Interregional mobility
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Chapter 18-18
Incident and Duration of
Employment
 Lower
cost of job search
 increasing
the duration of the unemployed
search
 Ineligible
workers are motivated to
accept employment quickly to then
qualify for benefits
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Chapter 18-19
Layoffs
 UI
lowers the cost of adjusting to
fluctuations in demand
 layoffs
 Without
relative to other methods
UI
 employers
who rely on layoffs would have
to pay a compensating wage to attract
employees
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Chapter 18-20
Employment Instability
 UI
may encourage the use of layoffs as
opposed to reductions in hours of work
 This bias can be offset by:
 experience-rated
UI programs
 UI assisted work sharing programs
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-21
Labour Supply

UI impacts labour force participation
 Higher UI causes


some to reduce weeks worked to the minimum
required
others to increase weeks worked in order to
qualify

Labour force participation rises because no
one leaves but new workers enter
 Measure unemployment increases
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Chapter 18-22
Interregional Mobility
 Regional
extended benefits discourage
interregional mobility
 by
providing benefits for longer periods in
regions with high unemployment
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Chapter 18-23
End of Chapter Eighteen
© 2002 McGraw-Hill Ryerson Ltd.
Chapter 18-24