Unemployment

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Transcript Unemployment

BUS 530: ECONOMIC CONDITIONS
ANALYSIS
LECTURE 6:
Unemployment
LECTURE 6 Unemployment
slide 0
Contents
 Economic classification of population and
measurement of unemployment
 Working of the labor market
 Natural rate of unemployment
 Types of unemployment
 Causes of unemployment and policy response
slide 1
Learning Objectives
 Understand the working of the labor market and
factors contributing to unemployment
 Learn about macroeconomic policies for
reducing unemployment
slide 2
Composition of Population in terms of
Economic Status
slide 3
Definitions used in Bangladesh
Employed: A person who was either working
during the previous week for one or more hours for
pay or profit or working without pay in a family farm
or enterprise during the week or found not working
but had a job or business from which he/she was
temporarily absent during the week
slide 4
Definitions used in Bangladesh
Unemployed: A person who is involuntarily out of
gainful employment during the reference period
but either has been actively looking for a job or
was willing to work but not looking for work
because of illness
slide 5
Important Formulae
Crude Activity Rate =
Labor Force * 100%
Population
Refined Activity Rate = Labor Force * 100%
Population ≥ 15yrs
Unemployment Rate =
Unemployed * 100%
Labor Force
slide 6
Labor Force Survey 2005-06
Items
Number (in
millions)
Population
148.8
Labor Force
56.7
Outside the Labor Force
92.1
Employed
54.1
Unemployed
2.6
Children below 15 years
53.2
Household work, other inactive, old & disabled, discouraged
worker
38.9
Crude Activity Rate (%)
38.1
Refined Activity Rate (%)
59.3
Unemployment Rate (%)
4.5
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Natural Rate of Unemployment
 The unemployment rate: the fraction of the civilian
workforce that is unemployed
 The “Natural” rate of unemployment:
The average or long-run rate of unemployment
around which the economy fluctuates.
 In a recession, the actual unemployment rate rises
above the natural rate.
 In a boom, the actual unemployment rate falls
below the natural rate.
LECTURE 6 Unemployment
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Natural Rate of Unemployment




5-6% for the developed economies
Exists in the developing economies as well
Difficult to get rid of this type of unemployment
Thus when a country has 5-6% of
unemployment, it is considered to be fully
employed
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Actual and Natural Rates of Unemployment
in the U.S., 1960-2006
Percent of labor force
12
10
Unemployment rate
8
6
4
Natural rate of
unemployment
2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
LECTURE 6 Unemployment
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Percentage
Bangladesh Unemployment Rate
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1984
1985
1986
LECTURE 6 Unemployment
1989
1991
Year
1996
2000
2003
2005
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Labor Force and Unemployment Rate
Notation:
L = workers in labor force
E = employed workers
U = unemployed workers
U/L = unemployment rate
LECTURE 6 Unemployment
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Assumptions:
1.
L is exogenously fixed (no population growth).
2.
During any given month,
s = fraction of employed workers
that become separated from their jobs
s is called the rate of job separation
f = fraction of unemployed workers
that find jobs
f is called the rate of job finding
s and f are exogenous
LECTURE 6 Unemployment
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The Transitions between Employment and
Unemployment
s E
Employed
Unemployed
f U
LECTURE 6 Unemployment
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The Steady State Condition
 Definition: the labor market is in steady state, or
long-run equilibrium, if the unemployment rate is
constant.
 The steady-state condition is:
s E = f U
# of employed
people who
lose or leave
their jobs
LECTURE 6 Unemployment
# of unemployed
people who find
jobs
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Finding the “EQUILIBRIUM”
Unemployment Rate
f U = s  E
= s  (L – U )
= sL – sU
Solve for U/L:
(f + s) U = s L
so,
LECTURE 6 Unemployment
U
s

L sf
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The “NATURAL” Rate of Unemployment
 Therefore, the natural rate of unemployment is
defined as:
Rate of job separation (s)
Rate of job separation (s) + Rate of job finding (f)
LECTURE 6 Unemployment
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Class Exercise
 Suppose
 1% of employed workers lose their jobs
 19% of unemployed workers find jobs
 Find the natural rate of unemployment
LECTURE 6 Unemployment
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Answer
 Each month,
 1% of employed workers lose their jobs
(s = 0.01)
 19% of unemployed workers find jobs
(f = 0.19)
 The natural rate of unemployment:
U
s
0.01


 0.05, or 5%
L s  f 0.01  0.19
LECTURE 6 Unemployment
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Policy Implications
 Any policy aimed at lowering the natural rate of
unemployment must either reduce the rate of job
separation (s) or increases the rate of job finding (f).
 Similarly, any policy that affects the rate of job
separation (s) or the rate of job finding (f) also
changes the natural rate of unemployment, Because:
U
s

L
sf
LECTURE 6 Unemployment
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Why is there Unemployment?
 If job finding were instantaneous (s = 0, f = 1),
then all spells of unemployment would be brief,
and the natural rate would be near zero.
 There are two reasons why f < 1 and s > 0:
1. job search
2. wage rigidity
LECTURE 6 Unemployment
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Job Search & Frictional Unemployment
 Frictional unemployment: The unemployment
caused by the time it takes workers to search for a
job
 Occurs even when wages are flexible and there
are enough jobs to go around
 Occurs because
 workers have different abilities, preferences
 jobs have different skill requirements
 geographic mobility of workers not instantaneous
 flow of information about vacancies and job
candidates
is imperfect
LECTURE
6 Unemployment
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Sectoral Shifts
 defintion: Changes in the composition of
demand among industries or regions.
 example: Technological change
more jobs repairing computers,
fewer jobs repairing typewriters
 example: A new international trade agreement
labor demand increases in export sectors,
decreases in import-competing sectors
 Result: frictional unemployment
LECTURE 6 Unemployment
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Structural change over the long run - US
Agriculture
1960
Manufacturing
Other industry
2000
Services
73.5%
57.9%
4.2%
9.9%
17.2%
28.0%
1.6%
7.7%
LECTURE 6 Unemployment
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Structural Change in Employment: Bangladesh
Year 2000
Year 2005
Service
Service
17% 4%
13%
Agriculture
16%
63%
14%
Agriculture
24%
Manufactur
ing
Others
LECTURE 6 Unemployment
48%
Manufacturi
ng
Others
slide 25
More examples of Sectoral Shifts
 Late 1800s: decline of agriculture,
increase in manufacturing
 Late 1900s: relative decline of manufacturing, increase
in service sector
 1970s: energy crisis caused a shift in demand away from
gas guzzlers toward smaller cars.
LECTURE 6 Unemployment
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Public Policy and Job Search
Govt programs affecting unemployment
 Govt employment agencies:
disseminate info about job openings to better
match workers & jobs.
 Public job training programs:
help workers displaced from declining industries
get skills needed for jobs in growing industries.
LECTURE 6 Unemployment
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Unemployment insurance (UI)
 UI pays part of a worker’s former wages for a
limited time after losing his/her job.
 UI increases search unemployment,
because it reduces
 the opportunity cost of being unemployed
 the urgency of finding work
 Rate of job finding, f
 Studies: The longer a worker is eligible for UI,
the longer the duration of the average spell of
unemployment.
LECTURE 6 Unemployment
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Benefits of UI
 By allowing workers more time to search,
UI may lead to better matches between
jobs and workers, which would lead to greater
productivity and higher incomes.
LECTURE 6 Unemployment
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Unemployment Benefits
 Provided in developed countries
 Eligibility excludes new entrants to the labor
force and those giving up job voluntarily
 Raises aggregate demand and contributes
toward early recovery of an economy from
recession
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Why is there Unemployment?
U
s

The natural rate of unemployment:
L s f
 Two reasons why f < 1:
DONE 1. job search
Next  2. wage rigidity
LECTURE 6 Unemployment
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Unemployment from Real Wage Rigidity &
Structural Unemployment
If real wage is
stuck above
its equilibrium
level, then
there aren’t
enough jobs
to go around.
Real
wage
Supply
Unemployment
Rigid
real
wage
Demand
Labor
Amount of
labor hired
LECTURE 6 Unemployment
Amount of labor
willing to work
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Unemployment from Real Wage Rigidity
If real wage is
stuck above
its equilibrium
level, then
there aren’t
enough jobs
to go around.
Then, firms must ration the
scarce jobs among workers.
Structural unemployment:
The unemployment resulting
from real wage rigidity and
job rationing.
LECTURE 6 Unemployment
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Reasons for Wage Rigidity
1.
Minimum wage laws
2.
Labor unions
3.
Efficiency wages
LECTURE 6 Unemployment
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The Minimum Wage
 The minimum wage may exceed the equilibrium wage of
unskilled workers, especially teenagers.
 Studies: a 10% increase in min. wage
reduces teen employment by 1-3%
 Tendency for firms to substitute towards illegal workers
(who are not bound by the min. wage)
 But, the minimum wage cannot explain the
majority of the natural rate of unemployment,
as most workers’ wages are well above
the minimum wage.
LECTURE 6 Unemployment
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Minimum Wage Law
 It is enacted in almost every country so that
forces cannot drive it down too low.
 When wages are pushed up to the level of w*,
unemployment to the extent bc is created, since
supply exceeds demand.
 In addition, there is also unemployment to the
extent of cd, which is due to people looking for
better jobs
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Labor Market
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Labor Unions
 Unions exercise monopoly power to secure higher
wages for their members (collective bargaining).
 When the union wage exceeds the equilibrium
wage, unemployment results.
 Insiders: Employed union workers whose interest
is to keep wages high.
 Outsiders: Unemployed non-union workers who
would be willing to work for lower wages, so there
would be enough jobs for them.
LECTURE 6 Unemployment
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Collective Bargaining by Labor Union
 Every country legalizes labor union activity to
prevent excessive exploitation of labor by the
employer
 Experiences have shown that if politicization of
labor union can be avoided and labor unions
abide by the rules of the game then union
activities can contribute towards congenial
industrial relations
slide 39
Union Membership and Wage RATIOS by Industry,
industry
Private sector (total)
2005
# employed
(1000s)
U % of
total
wage
ratio
105,508
8.5%
122.3
20,381
40.5
121.7
8,053
13.8
156.9
600
9.5
113.7
Manufacturing
15,518
13.7
107.8
Retail trade
14,973
5.8
114.0
Transportation
4,379
24.4
129.2
Finance, insurance
6,304
2.1
90.7
10,951
3.1
90.6
3,312
15.4
112.7
14,045
8
115.1
Government (total)
Construction
Mining
Professional services
Education
Health care
LECTURE 6
Unemployment
wage ratio = 100(union wage)/(nonunion wage)
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3. Efficiency Wage Theory
 Idea: higher wages increase worker productivity by:
 Attracting higher quality job applicants



(“Adverse Selection” problem)
Increasing worker effort, reducing “shirking”
(“Moral Hazard” problem)
Reducing turnover, which is costly to firms
Improving health of workers: better nutrition &
productivity (in developing countries)
 Firms willingly pay above-equilibrium wages to raise
productivity, causing structural unemployment.
LECTURE 6 Unemployment
slide 41
LECTURE 6
Unemployment
slide 42
Other Types of Unemployment and
Macroeconomic Policies
LECTURE 6
Unemployment
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Cyclical Unemployment
 Y* represents full employment output level
 Sometimes national output falls due to a fall in
demand, this is called recession. Labor demand
declines, additional unemployment to the extent
of ee*
 This is called cyclical unemployment
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slide 46
Stabilization Policy
 Developed countries can stabilize cyclical
unemployment through expansionary monetary
or fiscal policies
 Expansionary monetary policy increases credit
supply which raises aggregate demand. An
expansionary fiscal policy on the other hand
reduces taxes
slide 47
Disguised Unemployment
 Developing countries are generally not close to
the full employment level. Here, unemployment
does not occur due to periodic demand shortfall.
These countries, like Bangladesh suffer from
disguised unemployment.
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Structural Unemployment
 Large scale unemployment caused by low
productive capacity
 Unlike cyclical unemployment, structural is of
long-term nature
 Reduction of structural unemployment requires
expansion of productive capacity which takes
time
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Seasonal Unemployment
 Periodic Unemployment
 Agricultural workers suffer unemployment during
agricultural lean seasons. Workers in developed
countries can however easily switch skills to
meet varying labor demands
 Can also be countered through government
intervention
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Chapter Summary
1. The natural rate of unemployment
 the long-run average or “steady state” rate of
unemployment
 depends on the rates of job separation and job
finding
2. Frictional unemployment
 due to the time it takes to match workers with jobs
 may be increased by unemployment insurance
CHAPTER 66
LECTURE
Unemployment
slide 51
Chapter Summary
3. Structural unemployment
 results from wage rigidity: the real wage remains
above the equilibrium level
 caused by: minimum wage, unions, efficiency
wages
4. Behavior of the natural rate in the U.S.
 rose from 1960 to early 1980s, then fell
 possible explanations:
trends in real minimum wage,
union membership, prevalence of sectoral shifts,
and aging of the Baby Boomers
CHAPTER 66
LECTURE
Unemployment
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Chapter Summary
5. European unemployment
 has risen sharply since 1970
 probably due to generous unemployment benefits,
strong union presence, and a technology-driven
shift in demand away from unskilled workers
CHAPTER 66
LECTURE
Unemployment
slide 53
Sectoral Shifts
 U.S. Auto Industry (Detroit): Struggling for many years: falling
profits, increased foreign competition, insufficient R&D
- Recently, rising healthcare costs have caused significant increase
in costs
-Auto workers have been leaving the industry to work in the services
sector…healthcare (especially nursing) is an attractive option
-But transition can be painful (new skills, training, going back to
school, etc)
 In a dynamic economy, sectoral shifts occur frequently,
contributing to frictional unemployment:
 often referred to as the “cost” of economic development
LECTURE 6 Unemployment
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Geography of a Recession
U.S. Housing and Labor Markets
January 2008
LECTURE 6 Unemployment
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TREND: The Natural Rate rises during 19601984, then falls during 1985-2006
LECTURE 6 Unemployment
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Explaining the Trend:
The Minimum Wage
9
Dollars per hour
8
The trend in the
real minimum wage
is similar to that of
the natural rate of
unemployment.
7
6
5
minimum wage
in 2006 dollars
4
3
2
minimum wage in
current dollars
1
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
LECTURE 6 Unemployment
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EXPLAINING THE TREND:
Union membership
Union membership
selected years
year
percent of labor force
1930
12%
1945
35%
1954
35%
1970
27%
1983
20.1%
2005
12.5%
LECTURE 6 Unemployment
Since the early
1980s, the natural
rate of unemployment and union
membership have
both fallen.
But, from 1950s
to about 1980,
the natural rate
rose while union
membership fell.
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EXPLAINING THE TREND:
Sectoral shifts
Price per
barrel of oil,
in 2006
dollars
LECTURE 6 Unemployment
From mid 1980s to early 2000s,
oil prices less volatile,
so fewer sectoral shifts.
slide 61
EXPLAINING THE TREND:
Demographics
 1970s:
The Baby Boomers were young.
Young workers change jobs more frequently
(high value of s).
 Late 1980s through today:
Baby Boomers aged. Middle-aged workers
change jobs less often (low s).
LECTURE 6 Unemployment
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Unemployment in Europe, 1960-2005
France
Percent of labor force
12
9
6
Italy
3
U.K.
Germany
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
LECTURE 6 Unemployment
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The Rise in European Unemployment
 Shock
Technological progress has shifted labor demand
from unskilled to skilled workers in recent decades.
 An increase in the “skill premium” – the wage gap
between skilled and unskilled workers.
 Higher unemployment, due to generous govt
benefits for unemployed workers
 strong union presence.
LECTURE 6 Unemployment
slide 64
Percent of workers covered by collective
bargaining
United States
18%
United Kingdom
47
Switzerland
53
Spain
68
Sweden
83
Germany
90
France
92
Austria
98
LECTURE 6 Unemployment
slide 65
Structural Unemployment
Large scale unemployment caused by low
productive capacity
slide 66
Structural Unemployment
Supply is relatively
inelastic, thus
stabilization
measure aimed at
raising aggregate
demand will have
less effect on
aggregate demand
and hence on
demand for labor.
Rather it will cause
general price level
to rise.
slide 67
Actual & Potential GDP
Potential GDP is when
labor and all other
productive assets are fully
employed. The area
between potential and
actual GDP shows the
cost of unemployment.
slide 68