Chapter 9 (Unemployment and Its Natural Rate) Flashcards
The problem of unemployment is usefully divided into two categories
the long-run problem and the short-run problem
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.
We discuss four explanations for the economy’s natural rate of unemployment:
job search, minimum-wage laws, unions, and efficiency wages
Statistics Canada defines the labor force as
Labour force = Number of employed + Number of unemployed
Statistics Canada defines the unemployment rate as a percentage
unemployment rate= (Number of unemployed/labor force) x100
The labor-force participation rate measures the percentage of the total adult population of Canada that is in the labor force:
Labour-force participation rate = (Labor force/adult population) x 100
To see how these data are computed, consider the figures for 2014. In that year, 17.80 million people were employed, and 1.32 million people were unemployed. The labor force was
Labour force = 17.80 + 1.32 = 19.12 million. The unemployment rate was
Unemployment rate = (1.32/19.12) X 100 = 6.90 percent.
Because the adult population was 28.98 million, the labor-force participation rate was
Labour-force participation rate = (19.12/28.98) X 100 = 65.98 percent.
Hence, in 2014, two-thirds of Canada’s adult population were participating in the labor market, and 6.9 percent of those labor-market participants were without
work.
This result has prompted some labor economists to
label the 2008-09 recession a mancession because
it affected the unemployment rates of males more than the unemployment rates of females
A final point worth making about measuring unemployment is that it is sometimes misleading to make international comparisons
In the United States, for example, the unemployment rate is defined slightly differently than it is in Canada. One example of the difference is that in the United States, the labor force is defined as the number of people aged 16 years and above actively seeking employment, whereas in Canada the age cut-off is 15 years and above.
These individuals may have tried to find a job but have given up after an unsuccessful search. Such individuals, labelled
discouraged searchers by Statistics Canada, do not show up in unemployment statistics, even though they are truly workers without jobs.
the average spell of unemployment in Canada lasted
20.8 weeks.
Unfortunately, averages can hide a lot of interesting variation
Average values also hide the fact that there may be a wide dispersion of unemployment experiences across individuals
such as those who give up and are discouraged
In short, a high employment ratio is a good indicator of a successful economy along many dimensions
suggest that economists and policymakers must be
careful when interpreting data on unemployment and when designing policies to help the unemployed. Most people who become unemployed will soon find jobs. Policy solutions directed toward fixing the unemployment problem should be directed toward those suffering prolonged spells of unemployment
The natural rate of unemployment
is what economists judge to be the rate of unemployment to which the economy tends to return in the long run
The observed unemployment rate differs from the natural rate due to the existence of
cyclical unemployment. Cyclical unemployment arises due to short-run economic fluctuations
The first explanation is that it takes time for workers to search for the jobs that are best suited for them. The unemployment that results from the process of matching workers and jobs is sometimes called
frictional unemployment, and it is often thought to explain relatively short spells of unemployment.
The next three explanations for unemployment suggest that the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. This occurs when the quantity of labor supplied
exceeds the quantity demanded. Unemployment of this sort is sometimes called
structural unemployment, and it is often thought to explain longer spells of unemployment. As we will see, this kind of unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium.
we will examine three possible reasons for an above-equilibrium wage:
minimum-wage laws, unions, and efficiency wages
Job search is the process of
matching workers with appropriate jobs. If all workers
and all jobs were the same, so that all workers were equally well suited for all jobs, job search would not be a problem.
Frictional unemployment is often the result of changes in
the demand for labor among different firms (preference for one product or brand over the other).
Changes in the composition of demand among industries or regions are called
sectoral shifts. Because it takes time for workers to search for jobs in the new sectors, sectoral shifts temporarily cause unemployment. (a company closes say in QC but opens in SK).
Frictional unemployment is inevitable simply because
the economy is always changing (rise and fall of inductries altogether).
Because frictional unemployment is the result of a well-functioning economy that rewards innovation and new ideas, we should always expect
frictional unemployment to be greater than zero.
Even if some frictional unemployment is inevitable, the precise amount is not.
Employment agencies, facilitated job search and so on
In fact, most job search in our economy takes place without intervention
by the government
In Canada, the federal government maintains an Employment Insurance (El) program
This program is intended to ease the burden of those who find themselves unemployed, by temporarily providing them with income ( minimum work requirement, max number of weeks assisted)
These results all suggest that the design of the El program influences behavior in ways that increase the unemployment rate.
May quit a job sooner because it is known to be available and may remain unemployed longer trying to land a better job because they are receiving it
On the basis of such results, some economists have argued that El improves the ability of the economy
to match each worker with the most appropriate job.
Yet economists disagree on whether economic well-being would be
enhanced or diminished by this change in policy.
structural unemployment results when the number of jobs is
insufficient for the number of workers.
To understand structural unemployment, we begin by reviewing how unemployment a
arises from minimum-wage laws.
If the wage is kept above the equilibrium level
for any reason, the result
is unemployment
When a minimum wage law forces the wage to remain above the level that balances supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level
There is a surplus of labor. Because there are more workers willing to work than there are jobs, some workers are unemployed.
When job search is the explanation for unemployment, workers
are searching for the jobs that best suit their tastes and skills.
By contrast, 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
A union is a
worker association that bargains with employers over wages and working conditions
The process by which unions and firms agree on the terms of employment is called
collective bargaining
If the union and the firm do not reach agreement, the union can organize a withdrawal of labour from the firm, called
a strike. Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree to pay higher wages than it otherwise would
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.
Poverty is greatest amongst those dealing with disabilities and those unable to find employment.
Neither of these groups benefits from minimum-wage policies.
A fourth reason why economies always experience some unemployment is suggested by the theory of
efficiency wages. According to this theory, firms operate more efficiently if wages are above the equilibrium level (better pay, happier the worker, the more produced thing).
The first and simplest type of efficiency-wage theory emphasizes the link between
wages and worker health. Worker health concerns are far less relevant for firms in rich countries such as Canada, where the equilibrium wages for most workers are well above the level needed for an adequate diet
A second type of efficiency-wage theory emphasizes the link between
wages and worker turnover. Firms with higher turnover, therefore, will tend to have higher production costs. Firms may find it profitable to pay wages above the equilibrium level in order to reduce worker turnover. (To maintain employees).
A third type of efficiency-wage theory emphasizes the link between
wages and worker effort. High wages make
workers more eager to keep their jobs, giving workers an incentive to put forward their best efforts. If the wage was at the level that balanced supply and demand, workers would have less reason to work hard because if they were fired, they could quickly find new jobs at the same wage. Therefore, firms raise wages
above the equilibrium level, providing an incentive for workers not to shirk their responsibilities
A fourth and final type of efficiency-wage theory emphasizes the link between
wages and worker quality. If the firm responded to a surplus of labour by reducing the wage, the most competent applicants—who are more likely to have better alternative opportunities than less competent applicants— may choose not to apply.
Ford invented the turnover policy in his production line
Others followed. He stated it was the best policy for business. Helped the work between each party on the assembly line since if one was lacking it slowed the whole line.
Many antipoverty advocates argue for consideration of yet another type of wage:
the living wage. Those who advocate for the living wage typically define it as the wage level that allows the earner to afford shelter, food, and the other necessities of life. Often it is defined as a wage sufficient to ensure that no more than 30 percent of it needs to be spent on shelter. Most advocates recognize this would require defining a living wage in excess of the minimum-wage rates listed in the FYI feature “Who Earns the Minimum Wage?’’
The concept of an efficiency wage is based on the notion that a firm may find it in its own best interest to pay a wage in excess of what it otherwise needs to pay (the equilibrium wage)
Doing so may enable the firm to enjoy lower worker turnover and higher productivity. A living-wage ordinance, on the other hand, coerces firms to pay a wage higher than they have found to be in their own best interests
