Week 7: Labour Markets Flashcards
Unemployment rate
the fraction of the labour force that is unemployed
Employment Categories in the Population (5)
- Employed
- Unemployed
- Labour force
- Not in labour force – inactive
- Working age population
Unemployment rate equation
(unemployed/labour force) x100
When is a person unemployed? (3 factors)
- does not have a job that pays a wage
- has actively looked for a job in the past 4 weeks
- is available to work
How are labour markets dynamic?
There is always someone searching for a job and there is always a firm looking to fill a vacancy
Types of unemployment (4)
cyclical, natural, frictional, structural
Cyclical unemployment
employment associated with short-run fluctuations in output
Natural Rate of Unemployment
rate that would prevail with no cyclical unemployment
frictional + structural
Structural Unemployment
labour market failure to match workers and firms
Frictional Unemployment
when workers are between jobs
Actual employment equation
frictional + structural + cyclical
Employment and unemployment over time equation
E(t) + U(t) = L
E(t) = employment U(t) = unemployment L = size of the labour force
Change in unemployment equation
△U(t+1) = sE(t) - fU(t) Where: △U(t+1) = change in unemployment S = job separation rate F = job finding rate
Solving Labour Market Flow Model
- Set change in unemployment to zero
2. Solve for U
Unemployment rate equation
u* = U*/L = s/f+s
How to Alter Natural Rate of Unemployment
- Change the job-finding rate
- Change the job separation rate
Unemployment in Europe since 1980
- Well above the rate in the US
Why has European unemployment increased? (4 reasons)
- Adverse shocks
- High oil prices
- Inefficient labour market institutions
- Welfare benefits
Why is GDP per capita lower in Europe?
- People work fewer hours
- Europeans enjoy more leisure if work is voluntary
Policies and Institutions that can affect f (job finding rate) and s (job separation rate) - 5 factors
- Incentives to open vacancies (value of job)
- Incentives to exert search effort
- Efficiency of search
- Cost of separation
- Outside options for quitters
Labour Market Policies
government programs to help workers search for jobs
Active Labour Market Policies (4 types)
Gov employment agencies, public job training programs, conditional unemployment benefits, Employment Practice Liability
Unemployment Insurance
Pays part of a worker’s former wages for a limited time after the worker loses his/hers job
Advantages of Unemployment Insurance (3)
- Reduced hardship
- Allows workers mote time to search – may lead to better job matches and therefore greater productivity
- May support aggregate demand in recessions by preserving spending power of the unemployed
Disadvantages of Unemployment Insurance
- May increase search unemployment as reduced the opportunity cost of being unemployed
- Gov face problem on choosing the level and duration of UI to find the right balance
Employment Protection Legislation
includes all types of employment protection measures
Pro and Con of temporary jobs
Pro:
Unemployment gets some work some of the time
Con:
No firm incentives to invest in workers, no worker incentives to invest in firms
Payroll taxes
A % withheld from an employee’s salary and paid to a government to fund public programs
Increases cost of labour – reduces value of jobs
Result of payroll taxes
Fewer vacancies are created therefore lower f
Natural Rate of Unemployment Equation
s/(s+ f)
s = job separation rate f = job finding rate
How does EPL affect the labour market flows?
reduces the separation rate as the amount of people being fired reduces and reduces job finding rate as firms are reluctant to hire new workers if they are hard to get rid of
