Lecture 3
3.3.2015
Unemployment and
Its Natural Rate
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IDENTIFYING UNEMPLOYMENT
• 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
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IDENTIFYING UNEMPLOYMENT
• Natural Rate of Unemployment
• It is the amount of unemployment that the economy
normally experiences.
• The natural rate of unemployment is unemployment
that does not go away on its own even in the long
run.
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IDENTIFYING UNEMPLOYMENT
• 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.
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Outline
• Determinants of an economy’s natural rate of
unemployment
• How is unemployment measured?
• Problems with interpreting unemployment statistics
• Duration of unemployment
• 4 ways to explain unemployment in the long run
• Frictional unemployment
• Structural unemployment – minimum-wage laws, unions,
and efficiency wages
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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.
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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
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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.
• A person who fits neither of these categories, such as a
full-time student, homemaker, or retiree, is not in the
labor force.
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How Is Unemployment Measured?
• Labor Force
• The labor force is the total number of workers,
including both the employed and the unemployed.
• The BLS defines the labor force as the sum of the
employed and the unemployed.
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How Is Unemployment Measured?
• The unemployment rate is calculated as the
percentage of the labor force that is
unemployed.
Unemployment rate =
Number unemployed
Labor force
100
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• The labor-force participation rate is the
percentage of the adult population that is in the
labor force.
How Is Unemployment Measured?
Labor force participation rate
Labor force
Adult population
 100
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U.S. Labor Statistics (2009)
Under age 16; 71.2
Homemakers, In Education,
Retired, Discouraged
workers etc.; 81.6
; 0 ; 0
Employed; 139.9
Unemployed; 14.3
Labor Force; 154.2
Millions, Source: Bureau of Labor Statistics
Population
Working-Age Population
Labor Force
Table 1 The Labor-Market Experiences of Various
Demographic Groups (U.S. 2009)
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Figure 2 Unemployment Rate Since 1960
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10
8
6
4
2
0
1970 19751960 1965 1980 1985 1990 2005
Percent of
Labor Force
1995 2000
Natural rate of
unemployment
Unemployment rate
Figure 3 Labor Force Participation Rates for Men
and Women Since 1950
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100
80
60
40
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 2000
Labor-Force
Participation
Rate (in percent)
Women
Men
1995
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Czech Republic 1990-2009
year
1985 1990 1995 2000 2005 2010
Laborparticipationrate
45
50
55
60
65
70
75
Labor participation rate, total (% of total population ages 15+)
Labor participation rate, male (% of male population ages 15+)
Labor participation rate, female (% of female population ages 15+)
Czech Republic 1990-2009
year
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Unemployment(%laborforce)
0
2
4
6
8
10
12
Unemployment, total (% of total labor force)
Unemployment, male (% of male labor force)
Unemployment, female (% of female labor force)
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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.
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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.
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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.
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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.
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Why Are There Always Some People
Unemployed?
• 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.
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JOB SEARCH
• Job search
• the process by which workers find appropriate jobs
given their tastes and skills.
• results from the fact that it takes time for qualified
individuals to be matched with appropriate jobs.
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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.
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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
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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.
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Public Policy and Job Search
• Unemployment insurance increases the amount
of search unemployment.
• It reduces the search efforts of the unemployed.
• It may improve the chances of workers being
matched with the right jobs.
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Public Policy and Job Search
• Structural unemployment occurs when the
quantity of labor supplied exceeds the quantity
demanded.
• Structural unemployment is often thought to
explain longer spells of unemployment.
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Public Policy and Job Search
• Why is there Structural Unemployment?
• Minimum-wage laws
• Unions
• Efficiency wages
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MINIMUM-WAGE LAWS
• When the minimum wage is set above the level
that balances supply and demand, it creates
unemployment.
Figure 4 Unemployment from a Wage Above the
Equilibrium Level
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Quantity of
Labor
0
Surplus of labor =
Unemployment
Labor
supply
Labor
demand
Wage
Minimum
wage
LD LS
WE
LE
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Minimum wage can cause involuntary
unemployment
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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.
• In these cases, wages are not determined by the
equilibrium of supply and demand in
competitive labor markets.
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UNIONS AND COLLECTIVE
BARGAINING
• The process by which unions and firms agree
on the terms of employment is called collective
bargaining.
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UNIONS AND COLLECTIVE
BARGAINING
• A strike will be organized if the union and the
firm cannot reach an agreement.
• A strike refers to the organized withdrawal of
labor from the firm.
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UNIONS AND COLLECTIVE
BARGAINING
• A strike makes some workers better off and
other workers worse off.
• Workers in unions (insiders) benefit from
collective bargaining, while workers not in the
union (outsiders) bear some of the costs.
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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.
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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.
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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.
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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.
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THE THEORY OF EFFICIENCY
WAGES
• A firm may prefer higher than equilibrium
wages for the following reasons:
• Worker Effort: Higher wages motivate workers to
put forward their best effort.
• Worker Quality: Higher wages attract a better pool
of workers to apply for jobs.
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Example – efficiency wage
Henry Ford doubled wage to $5-a-day
H. Ford “one of the finest cost-cutting moves we ever made.”
Turnover fell, absenteeism
fell, and productivity rose
Is it a good strategy for every firm?
assembly lines - worker turnover,
effort and quality more important
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Summary
• The unemployment rate is the percentage of
those who would like to work but don’t have
jobs.
• The Bureau of Labor Statistics calculates this
statistic monthly.
• The unemployment rate is an imperfect
measure of joblessness.
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Summary
• In the U.S. 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.
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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.
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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.