Transcript 3.5 Unemployment and Inflation

3.5 Unemployment
Unemployment

Full Employment

Equilibrium on the aggregate labor
market
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What rate is generally considered to
be full-employment in America?
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Underemployment
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
People cannot find full-time work.
Unemployment Rate
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Formula:
%
Unemployed/Labor Force =
2006 Figures Around 5%
90 Vietnam5.50 90 Denmark5.50 90 Romania5.50 91 Lithuania5.30 92
Australia5.20 93 United States5.10 93 Austria5.10 94 Burma5.00 95
Luxembourg4.90 96 Brunei4.80 97 United Kingdom4.70 98 Saint Kitts
and Nevis4.50 99 Japan4.30 100 Taiwan4.20 100 Ireland4.20 100
Norway4.20 100 China
Colombia
10.20 60 Spain10.10 61 Turks and Caicos Islands10.00 Turkey10.00 61
Greenland10.00 61 Egypt10.00 61 France10.00 62 India9.90 62
Brazil9.90 63 Saint Pierre and Miquelon9.80 63 Slovenia9.80 64
Ecuador
Weaknesses of
Unemployment Measures
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Definitional Problems
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Accounting Problems
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Solution: Standardized Measure

International Labour Organization (ILO)
• Used by Organisation of Economic Cooperation and
Development (OECD)
• www.oecd.org
Costs of Unemployment
Loss of output
 Lost tax base
 Increased Transfer Payments
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Opportunity costs
• (roads vs. unemployment benefits)
Tax Increases
 Barriers to entry
 Deskilling of workforce
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Social Costs
Dignity vs. Dependence
 Self-image
 Crime, Drug Abuse, Physical abuse
 Health
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Depression
 Stress
 Mental Health
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Types of Unemployment
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Structural(mismatch between skills and
demand of economy)
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Regional
• Industries specific to a region
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Sectoral
• Segments suffer temporary or permanent decline
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Technological
• Technology replaces workers
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Frictional
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Short term/ during job search
Seasonal
Natural Rate of
Unemployment
Some people voluntarily reject the
real wage rate (equilibrium)
 There is always some
unemployment
 Pg. 418
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Cyclical/Demand Deficient U
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Keynesian Unemployment
Business Cycle affects Unemployment
Involuntary unemployment Pg. 419
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ADL shifts left
• Distance
• ADL1 to ADL2
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Why don’t wages clear?
How are AD and ADL correlated?
• See pg. 420
Downward Sticky Supply
Curve
Pg. 420
 Same effect as minimum wage
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Real Wage Unemployment
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Classical View
Disequilibrium Unemployment
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Unemploy exceeds natural rate
Doesn’t clear to real wage (equil)
Voluntary + Involuntary Unemployment
Diagrams pg. 421
Why doesn’t in clear?
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Minimum wage legislation
Unions
Social Benefits (no incentive to accept lower
wages).
Measures to Deal With
Unemployment
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Interventionist
Increase demand for labor through
fiscal and monetary stimulation of AD
 Demand Management (Keynes)
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• Increase ADL by increasing AD in economy
• Shift in ADL right = Full employment
• Diagram 422
Supply Side Intervention
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Govt. intervention in factor markets to
enhance:
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Attractiveness of labor
Availability of labor
(ie. Supply of labor)
Secondary affect = increased DL
How?
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Training and education incentives
Increase
• Skills
• Job mobility
• Decrease search costs for employers and labor
Market Solutions pg. 423425
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Removing market imperfections
Decrease union power
 Lower minimum wage
 Lower taxes on labor
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Decreasing Natural Rate of
Unemployment
Shift ASL right
 How?
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• Incentives to work
•
•
•
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Lower social benefits
Lower income taxes
Increase labor flexibility
Retraining and Eduction
• Reduce time between jobs
Critics of market policies
Social Inequality
 Marginal Tax decreases don’t affect
ASL
 Voluntary is often involuntary
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