Unemployment Flashcards
natural and cyclical unemployment
the natural unemployment rate is the rate of unemployment in an economy when it is neither in a boom or a bust
the cyclical unemployment rate is the rate in a boom (when it is lower than the natural rate) or a bust (when it is higher)
full employment occurs when unemployment is at it’s “natural” rate (not when literally everyone in the labour force is employed)
what is the formula for the natural rate of unemployment and how do you get it
if f is the job finding rate and s the job separation rate,
during booms Uf>Es
during busts Ufat the natural rate Uf=Es
because E=L-U,
Uf=Es can be rearranged to get
U/L = s/(s+f)
so the natural unemployment rate is the separation rate over the sum of the separation and finding rates
what are labour market policies
policies to decrease the unemployment rate by increasing the job finding rate and decreasing the job separation rate
“Active” labour market policies
government programs to increase the job finding rate, such as
making unemployment benefits conditional upon job seeking efforts and giving workers in declining industries training so that they can find work in other industries
unemployment insurance
unemployment insurance pays a fraction of a an unemployed person’s former wages FOR A LIMITED TIME ONLY
it makes unemployment less difficult and thus prevents people from taking on jobs that are poorly matched for them out of desperation (increasing productivity)
HOWEVER, by reducing the opportunity cost of being employed, unemployment insurance can lead to people not trying very hard to find a job . Studies have shown that recipients of UI usually don’t become employed until they stop receiving it
Governments therefore have to find a duration and level of unemployment insurance that will allow people to support themselves while unemployed but not act as disincentive to finding work
Employment Protection Legislation
policies that make firing workers more difficult such as making employees give high severance pay and making it illegal to fire workers without certain conditions (such as grave misconduct)
this reduces s but also makes employers reluctant to employ (reducing f) so the effect on unemployment is ambiguous
most economists believe that very strong EPL reduces f more and therefore increases unemployment
the usa has the opposite system (fire at will)
setting wages
there are two systems for setting wages:
decentralised: employee and employer negotiate one on one
centralised: employee (union) and employer representatives for an industry in a country meet and negotiate the wages for everyone in the industry.
Because the workers in unions are already in the industry, they are likely to negotiate for higher wages and more job protection, which make employers reluctant to hire new people (reducing f and harming people in the industry who are unemployed)
dual labour markets
EPL results in some workers (mainly middle aged) having EPL and therefore high-paying, secure jobs and others (mainly younger people) not having EPL and only getting temporary, low-paid jobs.
workers without EPL aren’t productive because they feel that there’s no point in working hard when they know they don’t have a future with the company
and employers don’t give them skills because they don’t see the point when they know the employee won’t stay with them
there have been attempts in some countries recently to create contracts in which EP/job security gradually increases
Payroll taxes (trivial point)
tax on employing a worker
lowers f
but governments use this tax anyway because it’s difficult to evade
