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					Unemployment and Its
    Natural Rate

    Chapter 27




                 2013/1/16
              IN THIS CHAPTER
                YOU WILL . . .
1.Learn about the data used to measure the amount
   of unemployment
2. Consider how unemployment arises from the
   process of job search
3. Consider how unemployment can result from
   minimum-wage laws
4.See how unemployment can arise from
   bargaining between firms and unions
5. Examine how unemployment results when firms
 choose to pay efficiency wages


                  Teacher: gulnur yusup   2013/1/16
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



              Teacher: gulnur yusup   2013/1/16
Categories of Unemployment

The economy’s natural rate of unemployment
refers to the amount of unemployment that the
economy normally experiences.
Cyclical unemployment refers to the year-to-
year fluctuations in unemployment around its
natural rate, and it is closely associated with
the short-run ups and downs of economic
activity.


                Teacher: gulnur yusup   2013/1/16
     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?

                Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?

 Unemployment is measured by the Bureau
 of Labor Statistics (BLS).
   It surveys 60,000 randomly selected
   households every month.
   The survey is called the Current Population
   Survey.




                 Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?

 Based on the answers to the survey
 questions, the BLS places each adult
 into one of three categories:
   Employed
   Unemployed
   Not in the labor force



                Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?
 The BLS considers a person an adult if he or
she is over 16 years old.
 A person is considered employed if he or she has
spent most of the previous week working at a
paid job.
 A person is unemployed if he or she is on
temporary layoff, is looking for a job, or is
waiting for the start date of a new job.



                  Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?

 The BLS defines the labor force as the
 sum of the employed and the
 unemployed.
 A person who fits neither of these
 categories, such as a full-time student,
 homemaker, or retiree, is not in the labor
 force.


               Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?

 labor force the total number of workers,
 including both the employed and the
 unemployed
 Labor force = Number employed +
 Number of unemployed




               Teacher: gulnur yusup   2013/1/16
 The Breakdown of the Population
            in 2001


                        Employed                Labor force
                      (135.1 million)         (141.8 million)

    Adult
  population
(211.9 million)   Unemployed (6.7million)


                    Not in labor force
                      (70.1million)


                      Teacher: gulnur yusup   2013/1/16
   How is Unemployment Measured?


     The unemployment rate is
     calculated as the percentage of the
     labor force that is unemployed.


                     Number unemployed
Unemployme nt rate =                    100
                        Labor force

                 Teacher: gulnur yusup   2013/1/16
    How is Unemployment Measured?


      The labor-force participation rate is
      the percentage of the adult
      population that is in the labor force.


                                     Labor force
Labor - force participation rate =                   100
                                   Adult population

                      Teacher: gulnur yusup   2013/1/16
How is Unemployment Measured?

 Labor force=135.1+6.7=141.8million
 Unemployment rate=
 (6.7/141.8)×100=4.7%
 Labor-force participation rate=
 (141.8/211.9)×100=66.9%




              Teacher: gulnur yusup   2013/1/16
   Labor-Force Experiences of Various
      Demographic Groups (2001)
Demographic         Unemployment               Labor-Force
    Group               Rate                 Participation Rate
Adults (20+)
 White, male                   3.7                  76.8
 White, female                 3.6                  50.2
 Black, male                   8.0                  72.1
 Black, female                 7.0                  65.4
Teenagers (16-19)
  White, male                 13.8                  54.1
  White, female               11.4                  52.8
  Black, male                 30.5                  38.0
  Black, female               27.5                  37.4
                     Teacher: gulnur yusup        2013/1/16
            Unemployment Rate Since 1960
Percent
of Labor
   Force

                                                          Unemployment rate
   10

    8

    6

    4
                                           Natural rate of
                                           unemployment
    2
    0
           1960   1965   1970       1975          1980   1985    1990       1995   2000


                                Teacher: gulnur yusup           2013/1/16
                                        Labor-force Participation Rates
Labor-force Participation


                                        for Men and Women Since 1950
                       100
Rate (in percent)




                                                             Men
                            80


                            60


                            40                             Women


                            20


                            0
                                 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 ’98

                                                  Teacher: gulnur yusup   2013/1/16
MORE WOMEN ARE WORKING
 NOW THAN EVER BEFORE.




       Teacher: gulnur yusup   2013/1/16
MORE WOMEN ARE WORKING
 NOW THAN EVER BEFORE.
The increase in women’s labor-force
participation is easy to understand, but the fall
in men’s may seem puzzling. There are several
reasons for this decline.
First, young men now stay in school longer
than their fathers and grandfathers did.
Second, older men now retire earlier and live
longer.
Third, with more women employed, more
fathers now stay at home to raise their
children. Fulltime students, retirees, and stay-
at-home fathers are all counted as out of the
labor force.     Teacher: gulnur yusup 2013/1/16
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
individuals who would like to work but have given up
looking for a job.
Other people may claim to be unemployed in
order to receive financial assistance, even
though they aren’t looking for work.
                  Teacher: gulnur yusup   2013/1/16
HOW LONG ARE THE UNEMPLOYED
      WITHOUT WORK?

 Most people who become unemployed
 will soon find jobs. Yet most of the
 economy’s unemployment problem is
 attributable to the relatively few workers
 who are jobless for long periods of time.




               Teacher: gulnur yusup   2013/1/16
  Why Are There Always Some
    People Unemployed?

 This question refers to the Natural Rate
of Unemployment
   Frictional Unemployment
   Structural Unemployment




              Teacher: gulnur yusup   2013/1/16
Why Are There Always Some People
          Unemployed?

 Frictional unemployment is the unemployment
 that results because it takes time for workers to
 search for the jobs that 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


                  Teacher: gulnur yusup   2013/1/16
Three Possible Reasons for an Above-
    Equilibrium Wage Resulting in
      Structural Unemployment

         Minimum-wage laws
         Unions
         Efficiency wages




             Teacher: gulnur yusup   2013/1/16
    Minimum-wage laws

When the wage is above the equilibrium
level, the quantity of labor supplied
exceeds the quantity of labor demanded,
and workers are unemployed because
they are waiting for jobs to open up.




             Teacher: gulnur yusup   2013/1/16
                 Unions
When a union raises the wage above the
equilibrium level, it raises the quantity of labor
supplied and reduces the quantity of labor
demanded, resulting in unemployment. Those
workers who remain employed are better off,
but those who were previously employed and
are now unemployed at the higher wage are
worse off. Indeed, unions are often thought to
cause conflict between different groups of
workers—between the insiders who benefit
from high union wages and the outsiders who
do not get the union jobs.

                 Teacher: gulnur yusup   2013/1/16
        Efficiency wages

Efficiency wages -above-equilibrium
wages paid by firms in order to increase
worker productivity.
The novel insight of efficiency-wage
theory is that paying high wages might be
profitable because they might raise the
efficiency of a firm’s workers.



             Teacher: gulnur yusup   2013/1/16
   Unemployment from a Wage Above the
   Equilibrium Level...
  Wage
                       Surplus of labor =               Labor
                        Unemployment                    supply
Minimum
   wage
     WE



                                                        Labor
                                                       demand

     0            LD               LE       LS               Quantity
                                                             of Labor
                Teacher: gulnur yusup            2013/1/16
Unions and Collective Bargaining

 A union is a worker association that
 bargains with employers over wages and
 working conditions.
 In the 1940s and 1950s, when unions
 were at their peak, about a third of the
 U.S. labor force was unionized.
 A union is a type of cartel attempting to
 exert its market power.
               Teacher: gulnur yusup   2013/1/16
 Theory of Efficiency Wages

A firm may prefer higher than
equilibrium wages for the following
reasons:
  Worker Health:
  Worker Turnover:
  Worker Effort
  Worker Quality


             Teacher: gulnur yusup   2013/1/16
         Worker Health:
Better paid workers eat a more nutritious diet,
and workers who eat a better diet are healthier
and more productive. A firm may find it more
profitable to pay high wages and have healthy,
productive workers than to pay lower wages
and have less healthy, less productive workers.
This type of efficiency-wage theory is more
relevant for firms in less developed countries
where inadequate nutrition is a more common
problem.

                Teacher: gulnur yusup   2013/1/16
       Worker Turnover:

The more a firm pays its workers, the less
often its workers will choose to leave.
Thus, a firm can reduce turnover among
its workers by paying them a high wage.




              Teacher: gulnur yusup   2013/1/16
        Worker Effort

High wages make workers more
eager to keep their jobs and,
thereby, give workers an incentive
to put forward their best effort.




           Teacher: gulnur yusup   2013/1/16
       Worker Quality

When a firm hires new workers, it
cannot perfectly gauge the quality
of the applicants. By paying a high
wage, the firm attracts a better
pool of workers to apply for its
jobs.



           Teacher: gulnur yusup   2013/1/16

				
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