CH 9 - Unemployment and Its Natural Rate Flashcards
how to measure employement - 3 categories
employed = person spent some of the previous week working at a paid job (working for a family business without pay, who are not at work due to illness or disability, parental leave, vacation)
unemployed = they are on temporary layoff or are looking for a job
Not in the labour force = unable to work, unavailable for work (full-time student, homemaker, retiree), discouraged searchers, volunteer work
Labour force equation
Labour force = number of employed + number of unemployed
Unemployment rate formula
N. of unemployed / labour force x 100
Labour force participation rate
labour force / adult population x 100
Employment rate
employed / working age pop. x 100
Discouraged workers
person who has given up after unsuccessful search
=> Someone who reports being out of the labour force may actually want to work
why unemployment rate is not perfect
- discouraged workers
- part time wants full time
- someone reporting unemployed may not be trying hard to find a job (may be on temporary layoff or just want the employment insurance, or are working and are being paid “under the table”)
Natural rate of unemployment
= amount of unemployment that the economy normally experiences / rate of unemployment to which the economy tends to return in the long run (estimated for Canada to be 6-7%)
=> contains frictional, structural and classical unemployment
Frictional unemployment
difficulty in matching employers and jobseekers (not enough information, different locations), period of search between jobs
Structural unemployment
The economy is constantly changing and so are the skills requirement for jobs, so skills mismatches arise, and some positions remain unfilled
number of jobs available in some labour markets may be insufficient to give a job to everyone who wants one (quantity of labour supplied exceeds the quantity demanded, jobseekers do not have the right skills needed)
real-wage / classical unemployment
when wages are above equilibrium levels, there are not enough jobs (e.g. due to minimum wage laws, labour unions and efficiency wages)
why frictional unemployment is inevitable
1) Frictional unemployment is often the result of changes in the demand for labour among different firms = period of time during the transition is a period of unemployment
2) sectoral shifts - because different regions of the country produce different goods, employment can rise in one region while it falls in another = temporarily cause unemployment
3) Economy is always changing - before more agriculture, now more manufacturing
Gross job creation, destruction, net employment growth def
Gross Job Creation = sum of the increase in the number of jobs across all new and established firms in a given year
Gross Job Destruction = sum of the job losses across all firms that either reduce their employment or go out of business altogether in that year
Net Employment Growth = the difference between job creation and job destruction in that year
gov programs to facilitate job search
1- Government-run employment agencies (give out information about job vacancies)
2- Public training programs (aim to ease transition of workers from declining to growing industries and help disadvantaged groups escape poverty)
Pros: make the economy operate more efficiently, in certain circumstances the private sector is incapable of helping those who lose their jobs (when the job loss is the result of natural disasters)
Cons: Better to let the private market match worker and jobs (much worker education is done privately), Government is no better at disseminating the right information to the right workers and deciding what kind of worker training would be the most valuable
Employment Insurance (EI) Program
federal program intended to ease the burden of those who find themselves unemployed by temporarily providing them with income
Eases the burden of being unemployed but may also cause the (frictional) unemployment rate to be higher than it would be otherwise
Workers pay into the program (premiums) to obtain benefits (employees and employers contribute)
2 considerations for when and for how long someone can collect EI benefits
Number of hours worker in the past year (more hours – longer period of time to collect benefits)
Unemployment rate in the area of residence (high unemployment rate -> longer period + less hours of work to be eligible)
Why EI can also increase unemployment
-> people might not try as hard to find a new job
-> people might enter the labour force when they might not have to leave to collect benefits
3 reasons why wages do not fall to clear markets
1) minimum-wage legislation
2) Labour unions
3) efficiency wages
Minimum wage laws - prevent to clear the market
-> surplus supply of labour
-> causes long term unemployment
-> affect mostly least skilled and least experienced members of the labour force
Unions and collective bargaining - fail to clear market
union= A worker association that bargains with employers over wages, benefits and working conditions
- 30% of Canadian employees
Collective bargaining = the process by which unions and firms agree on the terms of employment
Strike = the organized withdrawal of labour from a firm by a union (when the union and the firm do not come to an agreement) -> threat
-> when they make the wages rise: q of labour demanded falls
insiders - workers who remain employed (better off)
Outsiders – workers who lose their jobs
Are Unions Good or Bad for the Economy?
Critics argue that:
- Unions cause the allocation of labour to be inefficient and inequitable
- Wages above the competitive level reduce the quantity of labour demanded and cause unemployment
- Some workers benefit at the expense of other workers
Advocates argue that :
- Unions are necessary to counter the market power of firms that hire workers
- Unions are important for helping firms respond efficiently to workers’ concerns
The theory of efficiency wages (+reasons why)
-> Firms voluntarily pay above-equilibrium wages to boost worker productivity
1) Worker turnover: New workers are costly and usually less productive in their first few months on the job (more incentive to stay)
2) Worker quality: offering higher wages attracts better job applicants, thereby increasing the quality of a firm’s workforce
3) Worker effort: Higher wages encourage workers to be more productive, thereby increasing firm productivity, and reduce costs associated with monitoring and firing workers who shirk
4) Worker Health: Healthier workers are more productive
2 other factors that influence unemployment
1) taxes on wage income
-> Lower taxes would allow people to keep more of their labour income
-> They would then have more incentive to find a job, which would reduce unemployment
2) degree of difficulty in firing employees
Employers may be reluctant to hire people if they know that it will be difficult to get rid of them, which can also increase unemployment
