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Lecture 5 Unemployment
Principles
of Macroeconomics KOF, ETH Zurich, Prof. Dr. Jan-Egbert Sturm
Fall Term 2008
General Information
23.9. Introduction Ch. 1,230.9. National Accounting Ch. 10, 11
7.10. Production and Growth Ch. 1214.10. Saving and Investment Ch. 1321.10. Unemployment Ch. 1528.10. The Monetary System Ch. 16, 174.11. International Trade (incl. Basic Concepts of Supply, Demand,
Welfare)Ch. 3, 7, 9
11.11. Open Economy Macro Ch. 1818.11. Open Economy Macro Ch. 1925.11. Aggregate Demand and Aggregate Supply Ch. 202.12. Monetary and Fiscal Policy Ch. 219.12. Phillips Curve Ch. 2216.12. Overview
/ Q&A
Unemployment and social problems
Each one-point increase in the unemployment rate in the U.S. is associated with:
920 more suicides650 more homicides4,000 more people admitted to state mental institutions3,300 more people sent to state prisons37,000 more deathsincreases in domestic violence and homelessness
Unemployment and earnings growth in the U.S.
-5-4-3-2-1012345
1965 1970 1975 1980 1985 1990 1995 2000
%
growth rate of inflation-adjusted hourly earningschange in Unemployment rate
-5-4-3-2-1012345
1965 1970 1975 1980 1985 1990 1995 2000
%
growth rate of inflation-adjusted hourly earningschange in Unemployment rate
IDENTIFYING UNEMPLOYMENT•
How Is Unemployment Measured?• Categories of Unemployment
•
The problem of unemployment is usually divided into two categories, the long-run problem and the short-run problem.
–
The natural rate of unemployment –
The cyclical rate of unemployment
How is Unemployment Measured?
•
Natural Rate of Unemployment•
The natural rate of unemployment
is
unemployment that does not go away on its own even in the long run.
•
It is the amount of unemployment that the economy normally experiences.
How Is Unemployment Measured?
•
Cyclical Unemployment•
Cyclical unemployment
refers to the year-to-year
fluctuations in unemployment around its natural rate.
•
It is associated with with short-term ups and downs of the business cycle.
0%
2%
4%
6%
8%
10%
12%
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Unemployment
rate in Germany, 1960-2003
Incl. Eastern Germany
Western Germany
Unemployment
rates
since
1990
0
2
4
6
8
10
12
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
0
2
4
6
8
10
12
United States Euro area Germany Switzerland
% %
How Is Unemployment Measured?
•
Describing Unemployment: Three Basic Questions•
How does government measure the economy’s rate of unemployment?
•
What problems arise in interpreting the unemployment data?
•
How long are the unemployed typically without work?
How Is Unemployment Measured?
•
Based on the answers to the survey questions (SAKE), the BFS places each adult into one of three categories:•
Employed
•
Unemployed•
Not in the labor force
How Is Unemployment Measured?
•
Employed vs. unemployed•
The BFS considers a person as potentially part of the labor force if he or she is over 15 and below 74 years old.
•
A person is considered employed if he or she has spent at least one hour of the previous week working at a paid job or in an unpaid job in a family-run business (e.g. on a farm) or have been on temporary leave (maternity, military service, illness) from their job.
•
A person is unemployed if he or she did not work in the reference week, has been looking for a job for four weeks, and is immediately available for a new job.
•
A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force.
How Is Unemployment Measured?
•
Labor Force•
The labor force
is the total number of workers,
including both the employed and the unemployed.
•
The BFS defines the labor force as the sum of the employed and the unemployed.
Figure 1 The Breakdown of the Population in 2006
AdultPopulation
(7.5 million)
Labor Force(4.47 million)
Employed(4.3 million)
Not in labor force(3.03 million)
Unemployed (170.000)
How Is Unemployment Measured?
•
The unemployment rate
is calculated as the percentage of the labor force that is unemployed.
Unemployment rate = Number unemployedLabor force
∗ 100
Unemployment
rate in Switzerland
2.5% 2.8% 3.1%
KOF-Forecast 09/2008seco 09/2008
KOF Forecast 09/2008U
nem
ploy
men
tra
te in
%
0
1
2
3
4
2005 2006 2007 2008 2009 2010
Unemployment
rate across
age groups
(CH)
0
1
2
3
4
5
6
7
8
9
1019
91
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0
1
2
3
4
5
6
7
8
9
10
15-24 years 25-39 years 40-54 years 55-64 years
% %
How Is Unemployment Measured?
•
The labor-force participation rate
is the percentage of the adult population that is in the labor force.
Labor force participation rate
Labor forceAdult population
= 100X
Labor Force participation, Switzerland
50
55
60
65
70
75
80
85
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Men Women Total
Employed/Population
0%
10%
20%
30%
40%
50%
60%
70%
TUR
RO
PO
LM
AL
HU
NS
LRM
EX
BE
LFR
ALI
TG
RE
ITA
BU
LS
LO LAT
FIN
UK
IA
UT
ES
TG
ER
CY
PK
OR
PO
RS
WU
SA
SP
AIR
EC
ZEC
AN
JAP
NE
TA
US
NO
RD
EN
NZL
SW
IIC
ELU
X
Does the Unemployment Rate Measure What We Want It To?
•
It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.•
Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.
•
Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.
How Long Are the Unemployed without Work?
•
Most spells of unemployment are short.•
Most unemployment observed at any given time is long-term.
•
Most of the economy’s unemployment problem is attributable to relatively few workers who are jobless for long periods of time.
Why Are There Always Some People Unemployed?
•
In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed.
Quantity of labor
Wage Labor Supply
Labor Demand
WE
QE
Why Are There Always Some People Unemployed?
•
Frictional unemployment
refers to the unemployment that results from the time that it takes to match workers with jobs. •
In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.
•
Structural unemployment
is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
JOB SEARCH •
Job search
is the process by which workers
find appropriate jobs given their tastes and skills.
•
It results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.
JOB SEARCH •
This unemployment is different from the other types of unemployment.
•
It is not caused by a wage rate higher than equilibrium.
•
It is caused by the time spent searching for the
“right”
job.
Why Some Frictional Unemployment Is Inevitable
•
Search unemployment is inevitable because the economy is always changing.
•
Changes in the composition of demand among industries or regions are called sectoral
shifts.
•
It takes time for workers to search for and find jobs in new sectors.
Public Policy and Job Search
•
Government programs can affect the time it takes unemployed workers to find new jobs.
•
These programs include the following:•
Government-run employment agencies
•
Public training programs•
Unemployment insurance
Public Policy and Job Search
•
Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly.
•
Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.
Public Policy and Job Search
•
Unemployment insurance
is a government program that partially protects workers’
incomes when they become unemployed. •
Offers workers partial protection against job losses.
•
Offers partial payment of former wages for a limited time to those who are laid off.
Public Policy and Job Search
•
Unemployment insurance •
increases the amount of search unemployment.
•
reduces the search efforts of the unemployed.•
may improve the chances of workers being matched with the right jobs.
Public Policy and Structural Unemployment
•
Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded.
•
Structural unemployment is often thought to explain longer spells of unemployment.
•
Why is there Structural Unemployment?•
Minimum-wage laws
•
Unions•
Efficiency wages
Why is there unemployment?
•
There are two reasons why there is a positive natural rate of unemployment:
1. job search2. wage rigidity
DONENext
Unemployment from real wage rigidity
Labor
Real wage
Supply
Demand
Unemployment
Rigid real wage
Amount of labor willing to work
Amount of labor hired
If the real wage is stuck above the equilibrium level, then there aren’t enough jobs to go around.
Reasons for wage rigidity
1.
Minimum wage laws / unemployment benefits
2.
Labor unions
3.
Efficiency wages
MINIMUM-WAGE LAWS•
When the minimum wage is set above the level that balances supply and demand, it creates unemployment.
Figure 5 Unemployment from a Wage Above the Equilibrium Level
Quantity ofLabor
0
Surplus of labor =Unemployment
Laborsupply
Labordemand
Wage
Minimumwage
LD LS
WE
LE
The minimum wage in the U.S.:•
In Sept 1996, the minimum wage was raised from $4.25 to $4.75. Here’s what happened:
Unemployment rates, before & after3rd
Q 1996 1st
Q 1997
Teenagers 16.6% 17.0%Single
mothers 8.5% 9.1%
All workers 5.3% 5.3%•
Other studies: A 10% increase in the minimum wage increases teenage unemployment by 1-3%.
%
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 000
5
10
15
20
25
0
5
10
15
20
25%
Without degree
Academic degree
Professional degree
Total
Qualification specific unemployment rates in Germany
UNIONS AND COLLECTIVE BARGAINING•
A union
is a worker association that
bargains with employers over wages, benefits and working conditions.
•
A union is a type of cartel attempting to exert its market power.
UNIONS AND COLLECTIVE BARGAINING•
The process by which unions and firms agree on the terms of employment is called collective bargaining.
UNIONS AND COLLECTIVE BARGAINING•
A strike
will be organized if the union and
the firm cannot reach an agreement.• A strike occurs when the union organizes a
withdrawal of labor from the firm.
UNIONS AND COLLECTIVE BARGAINING•
A strike makes some workers better off and other workers worse off.
•
Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.
UNIONS AND COLLECTIVE BARGAINING•
By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members.
•
Union workers earn 10 to 20 percent more than nonunion workers.
Are Unions Good or Bad for the Economy?
•
Critics argue that unions cause the allocation of labor to be inefficient and inequitable.
•
Wages above the competitive level reduce the quantity of labor demanded and cause unemployment.
•
Some workers benefit at the expense of other workers.
Are Unions Good or Bad for the Economy?
•
Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers.
•
They claim that unions are important for helping firms respond efficiently to workers’
concerns.
THE THEORY OF EFFICIENCY WAGES•
Efficiency wages
are above-equilibrium
wages paid by firms in order to increase worker productivity.
•
The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level.
THE THEORY OF EFFICIENCY WAGES•
A firm may prefer higher than equilibrium wages for the following reasons:• Worker health: Better paid workers eat a better diet
and thus are more productive.• Worker turnover: A higher paid worker is less likely to
look for another job.• Worker quality: Higher wages attract a better pool of
workers to apply for jobs.• Worker effort: Higher wages motivate workers to put
forward their best effort.
Henry Ford’s $5 Workday•
1914
•
Introduction of daily wage of $5 (twice the prevailing wage: $2.34)
•
Results in favor of efficiency wage theory:• Greater effort• lower absenteeism• etcetera
Summary
•
The unemployment rate is the percentage of those who would like to work but don’t have jobs.
•
The Federal Statistical Office calculates this statistic monthly.
•
The unemployment rate is an imperfect measure of joblessness.
Summary
•
In the Swiss economy, most people who become unemployed find work within a short period of time.
•
Most unemployment observed at any given time is attributable to a few people who are unemployed for long periods of time.
Summary
•
One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills.
•
A second reason why our economy always has some unemployment is minimum-wage laws.
•
Minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded.
Summary
•
A third reason for unemployment is the market power of unions.
•
A fourth reason for unemployment is suggested by the theory of efficiency wages.
•
High wages can improve worker health, lower worker turnover, increase worker effort, and raise worker quality.
