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2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E RUnemploymentMacroeonomicsP R I N C I P L E S O FP R I N C I P L E S O FN.Gregory MankiwPremium PowerPoint Slides by Ron Cronovich15In this chapter,look for the answers to these questions:How is unemployment measured?What is the“natural rate of unemployment”?Why are there always some people unemployed?How is unemployment affected by unions and minimum wage laws?What is the theory of efficiency wages,and how does it help explain unemployment?1 1UNEMPLOYMENTLabor Force StatisticsProduced by Bureau of Labor Statistics(BLS),in the U.S.Dept.of Labor Based on regular survey of 60,000 householdsBased on“adult population”(16 yrs or older)2UNEMPLOYMENTLabor Force StatisticsBLS divides population into 3 groups:Employed:paid employees,self-employed,and unpaid workers in a family businessUnemployed:people not working who have looked for work during previous 4 weeksNot in the labor force:everyone elseThe labor force is the total#of workers,including the employed and unemployed.3UNEMPLOYMENTlabor force participation ratelabor forceadult population=100 xLabor Force StatisticsLabor force participation rate:%of the adult population that is in the labor force Unemployment rate(“u-rate”):%of the labor force that is unemployedu-rate#of unemployedlabor force=100 x4UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 1 1 Calculate labor force statistics5Compute the labor force,u-rate,adult population,and labor force participation rate using this data:Adult population of the U.S.by group,June 2008#of employed145.9 million#of unemployed8.5 millionnot in labor force79.2 million5UNEMPLOYMENTLabor force=employed+unemployed=145.9+8.5=154.4 million U-rate=100 x(unemployed)/(labor force)=100 x 8.5/154.4=5.5%A C T I V E L E A R N I N G A C T I V E L E A R N I N G 1 1 Answers6 6UNEMPLOYMENT Population=labor force+not in labor force=154.4+79.2=233.6LF partic.rate=100 x(labor force)/(population)=100 x 154.4/233.6=66.1%A C T I V E L E A R N I N G A C T I V E L E A R N I N G 1 1 Answers7 7UNEMPLOYMENTLabor Market Statistics for Different GroupsThe BLS publishes these statistics for demographic groups within the population.These data reveal widely different labor market experiences for different groups.8UNEMPLOYMENTLabor Market Statistics for Whites&Blacks,June 2008Adults(20 yrs&older)u-rateLF part.rateWhite,male4.5%76.1%White,female4.260.4Black,male9.371.5Black,female7.464.39UNEMPLOYMENTLabor Market Statistics for Whites&Blacks,June 2008Teens(16-19 yrs)u-rateLF part.rateWhite16.643.9Black29.627.910UNEMPLOYMENTLabor Market Statistics for Other Groups,June 2008All agesu-rateLF part.rateAsian4.567.4Hispanic7.769.011UNEMPLOYMENTLabor Market Statistics by Education Level,June 2008Adults(25 yrs&older)u-rateLF part.rateless than h.s.8.7%45.9%h.s.diploma5.162.8some college or assoc degree4.271.9bachelors degree or more2.378.112UNEMPLOYMENTLF Participation Rates by Sex,1950-2007MenWomen13UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Limitations of the u-rate14In each of the following,what happens to the u-rate?Does the u-rate give an accurate impression of whats happening in the labor market?A.Sue lost her job and begins looking for a new one.B.Jon,a steelworker who has been out of work since his mill closed last year,becomes discouraged and gives up looking for work.C.Sam,the sole earner in his family of 5,just lost his$80,000 job as a research scientist.Immediately,he takes a part-time job at McDonalds until he can find another job in his field.14UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers15A.Sue lost her job and begins looking for a new one.u-rate risesA rising u-rate gives the impression that the labor market is worsening,and it is.15UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers16B.Jon has been out of work since last year,becomes discouraged,stops looking for work.Discouraged workers would like to work but have given up looking for jobsclassified as“not in the labor force”rather than“unemployed”U-rate falls because Jon is no longer counted as unemployed.A falling u-rate gives the impression that the labor market is improving,but it is not.16UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Answers17C.Sam lost his$80,000 job,and takes a part-time job at McDonalds until he finds a better one.U-rate unchanged because a person is“employed”whether they work full or part time.Things are worse,but the u-rate fails to show it.17UNEMPLOYMENTWhat Does the U-Rate Really Measure?The u-rate is not a perfect indicator of joblessness or the health of the labor market:It excludes discouraged workers.It does not distinguish between full-time and part-time work,or people working part time because full-time jobs not available.Some people misreport their work status in the BLS survey.Despite these issues,the u-rate is still a very useful barometer of the labor market&economy.18UNEMPLOYMENTThe Duration of UnemploymentMost spells of unemployment are short:Typically 1/3 of the unemployed have been unemployed under 5 weeks,2/3 have been unemployed under 14 weeks.Only 20%have been unemployed over 6 months.Yet,most observed unemployment is long term.The small group of long-term unemployed persons has fairly little turnover,so it accounts for most of the unemployment observed over time.Knowing these facts helps policymakers design better policies to help the unemployed.19UNEMPLOYMENTCyclical Unemployment vs.the Natural RateTheres always some unemployment,though the u-rate fluctuates from year to year.Natural rate of unemploymentthe normal rate of unemployment around which the actual unemployment rate fluctuates Cyclical unemploymentthe deviation of unemployment from its natural rateassociated with business cycles,which well study in later chapters20UNEMPLOYMENT0246810121960 1965 1970 1975 1980 1985 1990 1995 2000 2005U.S.Unemployment,1960-2007Natural rate of unemploymentUnemployment ratepercentage of labor force21UNEMPLOYMENTExplaining the Natural Rate:An OverviewEven when the economy is doing well,there is always some unemployment,including:Frictional unemploymentoccurs when workers spend time searching for the jobs that best suit their skills and tastesshort-term for most workersStructural unemploymentoccurs when there are fewer jobs than workersusually longer-term22UNEMPLOYMENTJob SearchWorkers have different tastes&skills,and jobs have different requirements.Job search is the process of matching workers with appropriate jobs.Sectoral shifts are changes in the composition of demand across industries or regions of the country.Such shifts displace some workers,who must search for new jobs appropriate for their skills&tastes.The economy is always changing,so some frictional unemployment is inevitable.23UNEMPLOYMENTPublic Policy and Job SearchGovt employment agencies provide information about job vacancies to speed up the matching of workers with jobs.Public training programs aim to equip workers displaced from declining industries with the skills needed in growing industries.24UNEMPLOYMENTUnemployment InsuranceUnemployment insurance(UI):a govt program that partially protects workers incomes when they become unemployed UI increases frictional unemployment.To see why,recall one of the Ten Principles of Economics:People respond to incentives.UI benefits end when a worker takes a job,so workers have less incentive to search or take jobs while eligible to receive benefits.25UNEMPLOYMENTUnemployment InsuranceBenefits of UI:Reduces uncertainty over incomesGives the unemployed more time to search,resulting in better job matches and thus higher productivity 26UNEMPLOYMENTExplaining Structural UnemploymentStructural unemployment occurs when not enough jobs to go around.WLDSWEactual wageW1unemp-loymentOccurs when wageis kept above eqm.There are three reasons for this27UNEMPLOYMENT1.Minimum-Wage LawsThe min.wage may exceed the eqm wage for the least skilled or experienced workers,causing structural unemployment.But this group is a small part of the labor force,so the min.wage cant explain most unemployment.28UNEMPLOYMENT2.UnionsUnion:a worker association that bargains with employers over wages,benefits,and working conditions Unions exert their market power to negotiate higher wages for workers.The typical union worker earns 20%higher wages and gets more benefits than a nonunion worker for the same type of work.29UNEMPLOYMENT2.UnionsWhen unions raise the wage above eqm,quantity of labor demanded falls and unemployment results.“Insiders”workers who remain employed,they are better off“Outsiders”workers who lose their jobs,they are worse offSome outsiders go to non-unionized labor markets,which increases labor supply and reduces wages in those markets.30UNEMPLOYMENT2.UnionsAre unions good or bad?Economists disagree.Critics:Unions are cartels.They raise wages above eqm,which causes unemployment and/or depresses wages in non-union labor markets.Advocates:Unions counter the market power of large firms,make firms more responsive to workers concerns.31UNEMPLOYMENT3.Efficiency WagesThe theory of efficiency wages:Firms voluntarily pay above-equilibrium wages to boost worker productivity.Different versions of efficiency wage theory suggest different reasons why firms pay high wages.32UNEMPLOYMENT3.Efficiency Wages1.Worker healthIn less developed countries,poor nutrition is a common problem.Paying higher wages allows workers to eat better,makes them healthier,more productive.2.Worker turnoverHiring&training new workers is costly.Paying high wages gives workers more incentive to stay,reduces turnover.Four reasons why firms might pay efficiency wages:33UNEMPLOYMENT3.Efficiency Wages3.Worker qualityOffering higher wages attracts better job applicants,increases quality of the firms workforce.4.Worker effortWorkers can work hard or shirk.Shirkers are fired if caught.Is being fired a good deterrent?Depends on how hard it is to find another job.If market wage is above eqm wage,there arent enough jobs to go around,so workers have more incentive to work not shirk.Four reasons why firms might pay efficiency wages:34UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Applying the concepts35Which of the following would be most likely to reduce frictional unemployment?A.The govt eliminates the minimum wage.B.The govt increases unemployment insurance benefits.C.A new law bans labor unions.D.More workers post their resumes at M,and more employers use M to find suitable workers to hire.E.Sectoral shifts become more frequent.35UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Answers36A.The govt eliminates the minimum wage.C.A new law bans labor unions.These are likely to reduce structural unemployment,not frictional unemployment.Which of the following would be most likely to reduce frictional unemployment?36UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Answers37Which of the following would be most likely to reduce frictional unemployment?B.The govt increases unemployment insurance benefits.E.Sectoral shifts become more frequent.These are likely to increase frictional unemployment,not reduce it.37UNEMPLOYMENTA C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Answers38Which of the following would be most likely to reduce frictional unemployment?D.More workers post their resumes at M,and more employers use M to find suitable workers to hire.Likely to speed up the process of matching workers&jobs,which would reduce frictional unemployment.38UNEMPLOYMENTExplaining the Natural Rate of Unemployment:A SummaryThe natural rate of unemployment consists of frictional unemployment It takes time to search for the right jobs Occurs even if there are enough jobs to go around structural unemployment When wage is above eqm,not enough jobs Due to min.wages,labor unions,efficiency wagesIn later chapters,we will learn about cyclical unemployment,the short-term fluctuations in unemployment associated with business cycles.39UNEMPLOYMENTCHAPTER SUMMARYThe unemployment rate is the percentage of those who would like to work who do not have jobs.Unemployment and labor force participation vary widely across demographic groups.The natural rate of unemployment is the normal rate of unemployment around which the actual rate fluctuates.Cyclical unemployment is the deviation of unemployment from its natural rate and is connected to short-term economic fluctuations.4040UNEMPLOYMENTCHAPTER SUMMARYThe natural rate includes frictional unemployment and structural unemployment.Frictional unemployment occurs when workers take time to search for the right jobs.Structural unemployment occurs when above-equilibrium wages result in a surplus of labor.Three reasons for above-equilibrium wages include minimum wage laws,unions,and efficiency wages.4141UNEMPLOYMENT
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