UNEMPLOYMENT!!!

Introduction

A job loss means a lower living standard in the present, anxiety about the future, and reduced self-esteem.

A country that saves and invests a high fraction of its income enjoys more rapid growth in its capital stock and its GDP and a higher living standard.

An even more obvious determinant of a country’s standard of living is the amount of unemployment it typically experiences.

•      When a country keeps its workers as fully employed as possible, it achieves a higher level of GDP.

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. The designation natural does not imply that this rate of unemployment is desirable. Nor does it imply that it is constant over time. It merely means that this unemployment does not go away on its own even in the long-run.

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.

IDENTIFYING UNEMPLOYMENT

A person is considered employed if he or she 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 the first two categories, such as a full-time student, homemaker, or retiree, is not in the labor force.

The labor force: is the sum of the employed and the unemployed.

The unemployment rate: is the percentage of the labor force that is unemployed.

The labor-force participation rate:  the percentage of the total adult population that is in the labor force.

The normal rate of unemployment around which the unemployment rate

fluctuates is called the natural rate of unemployment.

DOES THE UNEMPLOYMENT RATE MEASURE
WHAT WE WANT IT TO?

Movements into and out of the labor force are very common. Entrants into the labor force: include young workers looking for their first jobs and older workers who had previously left the labor force but have now returned to look for work.

Not all unemployment ends with the job seeker finding a job. Unemployment ends when the unemployed person leaves the labor force.

Because people move into and out of the labor force so often, statistics on unemployment are difficult to interpret.

Discouraged workers:  individuals who would like to work but have given up looking for a job.

Some of those who report being unemployed may not, in fact, be trying hard to find a job.

WHY ARE THERE ALWAYS SOME PEOPLE UNEMPLOYED?

In most markets in the economy, prices adjust to bring quantity supplied and quantity demanded into balance. In an ideal labor market, wages would adjust to balance the quantity of labor supplied and the quantity of labor demanded. This adjustment of wages would ensure that all workers are always fully employed.

There are always some workers without jobs, even when the overall economy is doing well. The unemployment rate never falls to zero; instead, it fluctuates around the natural rate of unemployment.

Why actual labor markets depart from the ideal of full employment?

Frictional unemployment: it takes time for workers to search for the jobs that are best suited for them.

Structural unemployment: the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. This kind of unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium.

Three possible reasons for an above-equilibrium wage: minimum-wage laws, unions, and efficiency wages.

WHY SOME FRICTIONAL UNEMPLOYMENT IS INEVITABLE?

One reason why economies always experience some unemployment is job search.

Frictional unemployment is often the result of changes in the demand for labor among different firms.

Similarly, because different regions of the country produce different goods, employment can rise in one region while it falls in another.

Changes in the composition of demand among industries or regions are called sectorial shifts. Because it takes time for workers to search for jobs in the new sectors, sectorial shifts temporarily cause unemployment.

Frictional unemployment is inevitable simply because the economy is always changing.

Government programs try to facilitate job search in various ways. One way is through government-run employment agencies, which give out information about job vacancies. Another way is through public training programs, which aim to ease the transition of workers from declining to growing industries.

MINIMUM-WAGE LAWS, UNIONS AND COLLECTIVE BARGAINING

A union is a worker association that bargains with employers over wages and working conditions.

A union is a type of cartel. Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power.

When a union raises the wage above the equilibrium level, it raises the quantity of labor supplied and reduces the quantity of labor demanded, resulting in unemployment. Those workers who remain employed are better off, but those who were previously employed and are now unemployed at the higher wage are worse off.

ARE UNIONS GOOD OR BAD FOR THE ECONOMY?

Economists disagree about whether unions are good or bad for the economy as a whole.

Critics argue that unions are merely a type of cartel. When unions raise wages above the level that would prevail in competitive markets, they reduce the quantity of labor demanded, cause some workers to be unemployed, and reduce the wages in the rest of the economy.

The resulting allocation of labor is both inefficient and inequitable. It is inefficient because high union wages reduce employment in unionized firms below the efficient, competitive level. It is inequitable because some workers benefit at the expense of other workers.

Advocates of unions contend that unions are a necessary antidote to the market power of the firms that hire workers.

Unions are important for helping firms respond efficiently to workers’ concerns. Whenever a worker takes a job, the worker and the firm must agree on many attributes of the job in addition to the wage: hours of work, overtime, vacations, sick leave, health benefits…

No consensus among economists about whether unions are good or bad for the economy. Like many institutions, their influence is probably beneficial in some circumstances and adverse in others.

THE THEORY OF EFFICIENCY WAGES

A fourth reason why economies always experience some unemployment—in addition to job search, minimum-wage laws, and unions—is suggested by the theory of efficiency wages.

According to this theory, firms operate more efficiently if wages are above the equilibrium level. Therefore, it may be profitable for firms to keep wages high even in the presence of a surplus of labor.

Why should firms want to keep wages high?  Normally, we expect profit maximizing firms to want to keep costs—and therefore wages—as low as possible.

Paying high wages might be profitable because they might raise the efficiency of a firm’s workers.

Types of efficiency-wage theory

Link between wages and worker’s health: Better paid workers eat a more nutritious diet, and are healthier and more productive.

Link between wages, and worker’s turnover.

Link between wages, and worker’s effort: High wages make workers more eager to keep their jobs and, thereby, give workers an incentive to put forward their best effort.

Link between wages, and worker’s quality: By paying a high wage, the firm attracts a better pool of workers to apply for its jobs.

Summary

The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search.

By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded. The resulting surplus of labor represents unemployment.

When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor.

Firms may find it profitable to pay wages above the equilibrium level. High wages can improve worker health, lower worker turnover, increase worker effort, and raise worker quality.