Employment And Unemployment · 05.09.2017 · Employment and Unemployment, Measurement •Unemployment rate is a measure of Labor market tightness. • It can serve as a index for

Oct, 2016

Employment And UnemploymentInstructor: Xi Wang

Does Employment Status Matter?

• Yes! Recall that Production=Expenditure=Income?

• For the income, 2/3 of it is labor income

• It means that most of our income comes from our job!!!

• Employment Matters?

Does Employment Status Matter? Example

• What happens in The Great Depression

• Unemployed

Does Employment Status Matter? Example

• What happens in The Great Depression?

Dorothea Lange's Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, age 32, a mother of seven children, in Nipomo, California, March 1936


ØEmployment Matters? Yes! Then next question is how to Measure:

ØQ:How shall we measure unemployment or employment status of our economy?

ØUnemployment rate- To measure what is the fraction of people get employed.

ØA fraction of what kind of people? Whole population?


ØDoes it make sense to check what is the fraction out of our whole population get employed or unemployed?

ØNo!

ØSince not all of these people are willing to or able to work.

ØMotivation of unemployment rate is to Measure tightness of labor market

ØSo only the people stay in this market is our concern------Labor force.

Employment and Unemployment, Measurement

ØWhat is Labor force? Those people who wants and is eligible to work, even though he may not have a job yet.

ØNumber of Unemployed +Number of Employed = Labor force

ØLabor force+ not willing or able to work(Not in labor force)= Potential workers

ØPotential workers: civilian non-institutional population ages 16 and over; Hence children under 16 years of age, people on active duty in the military, and institutionalized people(in Jail or nursing house) are not Potential workers.

Labor force, not labor force: An example

• People got retired----not in labor force

• People aged 20 still in college, not in labor force

• Jim quits his previous job, now is still searching a new one.

• Jim is in the labor force, but unemployed

• John is working, John is in the labor force, and employed.


ØWhy don't we just use quantity of

employed to measure market tightness?

• Not comparable cross countries and

time

vUnemployment rate

EmployedUnemployedUnemployedForceLabor

Unemployed

ratent Unemployme

ratent Unemployme


• Unemployment rate is a measure of Labor market tightness.

• It can serve as a index for our aggregate economy :

• How does unemployment rate move cross time? By “cross time”, people generally mean “across recessions and booms”

WorkersPotentialForceLabor rateion participat forceLabor


• How does unemployment rate move cross time?

WorkersPotentialForceLabor rateion participat forceLabor

Notes: Grey area means recession

Employment and Unemployment, Pattern 1

• Any Pattern?

Ø(1)When the overall economy suffers a recession—a period in which GDP falls—the unemployment rate tends to rise. So unemployment rate negatively correlated with GDP growth

• The Great Depression of the 1930s, for example

• 2008-2010

Ø(2) Unemployment rate is never close to zero, lower bound 4 percent.

Employment and Unemployment, Pattern 2

• Who gets Unemployed?

• High educated and middle aged tend to have lower unemployed rate

• Explanation?

Kinds of unemployment rate: Natural unemployment rate

• The natural rate of unemployment is the rate around which the actual rate of unemployment fluctuates

• You can imagine n.r.u is close to the mean of unemployment rate.

• Cyclical unemployment is defined as the deviation of the unemployment rate from its natural rate(driving force of this unemployment is Business cycle)

• Example: if n.r.u=6%, now our u.r=8% then c/u=8%-6%=2%

• Frictional Unemployment: short run in nature; consists of those temporarily between jobs. i.e Job searching---asymmetric information

• Structural Unemployment: results from deep-rooted conditions & fundamental changes in our economy. i.e job dismatching

• Cyclical Unemployment: this is the type that arises as a result of our economic instability/business cycles. Difference between current unemployment rate and Natrual rate

Kinds of unemployment rate

Natural unemployment rate, Full employment

• Recall our pattern of unemployment, never hit zero

• In a market-based economy, there will always be some unemployment, it may comes from structual unemployment or frictional unemployment (Recall definition?)--- These unemployment is healthy, so we tend to think that nature unemployment is the best status. --- Full employment means natural unemployment rate is attained.

• Cyclical unemployment? Recall the pattern of unemployment? Negatiely correlated with GDP growth!

Labor Market : Demand and Supply analysis- Can we explain unemployment?

Read Quiz 3

Labor Market, Demand

• What is the fundermental Property of Demand Curve?

• Downward sloping!

• Demand curve is a result of Optimization process of buyer!

• Who is going to purchase labor? Firms!

Labor Market, DemandNumber of workers

hired

Total Cost ($)wage rate: $4/person

Total Benefit ($) Net Benefit ($) Marginal Cost Marginal Benefit

0 0 0 0 -------- -----------

1 4 8 4 4 8

2 8 15 7 4 7

3 12 21 9 4 6

4 16 26 10 4 5

5 20 30 10 4 4

6 24 33 9 4 3

7 28 35 7 4 2

8 32 36 4 4 1

Labor Market, Demand: MC=MB?Number of workers

hired

Total Cost ($)wage rate: $4/person

Total Benefit ($) Net Benefit ($) Marginal Cost Marginal Benefit

0 0 0 0 -------- -----------

1 4 8 4 4 8

2 8 15 7 4 7

3 12 21 9 4 6

4 16 26.5 10.5 4 5.5

5 20 31 11 4 4.5

6 24 33 9 4 2

7 28 35 7 4 2

8 32 36 4 4 1


ØWhat is the fundermental Property of Demand Curve?

ØWhy do we have downward sloping demand curve for labor?

ØDiminishing marginal product of labor : each additional worker creates less marginal output than the workers who were hired before; Why? Exhaust your favorite Principle;

ØValue of the marginal product of labor: market value of a worker’s marginal product

Labor Market, Demand Shift


Labor Market, Supply

• What is the general property of supply curve?

• Upward sloping!

• Optimization of Supplyer!

• Who is providing labor to our market? What is their Optimization process?

Labor Market, Supply, Two dimension: How Many?

• How many hours you would like to work given the wage?

• Is there any concern when you decide how many hours to work?

• Yes! More working time means less family time, less trips, less parties

• So you need to balance the time of work

and Leisure. Since We are Lazy!!!

Labor Market, Supply, Two dimension : How Many?

• Let's use a illustrating way to look at labor supply:

• Recall again: What is the normal demand curve looks like? Downward sloping!

• Since Diminishing marginal Benefit

• Now, for example. You have 24 hours per day, you need 8 hours sleep, 1 hour for meals


• Now, for example. You have 24 hours per day, you need 8 hours sleep, 1 hour for meals

• Hence you have 15 hours to work at most!

• What if you decide to work 7 hours? What if you decide to consume 8 hours leisure?

• What do I mean we are lazy? It means leisure is a good, you want to consume it!


ØWhat is the price of Leisure then? (Hint: Price is cost, what is the cost of leisure?)

ØIf Leisure is a normal goods, will you consume less when the price is higher?

ØOk, if you consume less leisure, what does it mean?

ØLabor supply


wage

Leisure15-Leisure

15-Leisure= Working hours

wage

Labor Market, Supply, Two dimension : Yes or No?

• Question: Is working hour negotiable? In most scenario, it is not; 8 hours, 5 days, take it or leave it

• So our previous analysis seems a little problematic, since it is almost impossible to adjust Working hours!

• Does No Negotiation changes our results stating that labor supply is upward sloping?

• Answer is no, it will not change our result.

• Question: Can people make choice in current setting? Yes, take it or leave it!


• Reservation wage;

• Given that working schedule is fixed. A typical labor contract would looks like: 8 hours, 5 days + a wage rate.

• What we can observe is whether people accept this arrangement or not.

• Just like our grading schedule, for example:

• You will not see 100, 99.9 or 85.5 as final grading

• You grading would be A, B, C, D


ØYou grading would be A, B, C, D

ØFor example: 88-100 would be “A”;

ØAll grades ranges below 87(including 87) will be assigned grade “Not A”

ØThen 88 or 87 would be a threshold.

ØAbove threshold Means something.

ØBelow threshold means something else.


ØSimilar here; People will have a reservation wage in her mind

ØReservation wage is a threshold.

ØIf your wage rate lies below this reservation wage, you will reject this offer

ØIf your wage rate lies above, you will accept this offer

ØRemember our auction example? It also has the same idea.


ØGiven a group of people, they have reservation wage, say, monthly $800, $1000, $1100, $1200, $1500

ØHow many of them are to accept my wage rate $700?

ØHow about $900? 1000?1200?

ØHence what is the property of labor supply curve?

Labor Market, Supply Shift

• Changing tastes; M1: Say you become super lazy, you love leisure. Demand for Leisure shift right----Labor supply shift left; M2: You love leisure, so your reservation will move up

• Changing opportunity cost of time. Changi

opportunity cost will have the similar effect.

Since changing opportunity cost have implication

of your evaluation to leisure.

• Changes in population. M1: You have more supply

to aggregate up; M2: You get more people staying in

The pool

Equilibrium，Do We have unemployment?

Labor Market, Equilibrium

Our motivation of this Demand and supply analysis is to analyze unemployment

• But There will be no unemployment in Equilibrium, If we only use simple Demand and supply analysis.

• As we emphasized serveral times, Model is only a simplification

• If we cannot explain the pattern in data, we must have oversimplified something--- Searching, Matching

Labor Market, Why there is unemployment, Friction Part

• (1) Some workers who are only willing to work for a wage above the market-clearing wage, Think about our reservation case.

• (2) Or Worker need to find where the jobs locate, we need to do job-hunting. ----Information friction

• (3) Firms need different labor.---Matching friction, Structual unemployment

• Frictional unemployment is the unemployment resulting from imperfect information about available jobs and from the time-consuming process of job search.

The matching of job seekers to employers is not instantaneous.• Firms do not have complete information on the

skills, experiences, and preferences of job seekers.• Job seekers do not have complete information on

the specifics of each job opening.

Why Is There FRICTIONAL Unemployment?

Labor Market, Why there is unemployment, Market Part

• Wage rigidity, downward wage rigidity

• For example: Labor Contract

Minimum Wage law

Union(the threat of going on strike)

Efficiency wages(book reading!)

Wage rigidity, Distribution of Wage changes in Big firms

Labor Market, Why there is unemployment, Market Part

• Price will lie above equilibrium Price

• Quantity of labor supplied persistently exceeds the quantity of labor demanded----Structural unemployment

Book Reading

• P 196-212

• Quiz 3

Documents

Employment And Unemployment · 05.09.2017 · Employment and Unemployment, Measurement •Unemployment rate is a measure of Labor market tightness. • It can serve as a index for