Chapter 18 - Unemployment: causes and consequences. The main contents of this chapter include all of the following: Types of unemployment, wage rigidity, voluntary unemployment, imperfect information, unemployment insurance.
Chapter 18 Unemployment: Causes and Consequences Created by: Erica Morrill, M.Ed Fanshawe College © 2002 McGraw-Hill Ryerson Ltd Chapter 18-1 Chapter Focus Types of unemployment Wage rigidity Voluntary unemployment Imperfect information Unemployment insurance © 2002 McGrawHill Ryerson Ltd Chapter 182 Types of Unemployment Frictional Structural Demand-Deficient Seasonal Involuntary (associated with wage rigidity) © 2002 McGrawHill Ryerson Ltd Chapter 183 Search Unemployment Imperfect information on both sides of the labour market Undertaking a job search has costs and benefits determine if it is worthwhile to initiate the job search determine when to discontinue © 2002 McGrawHill Ryerson Ltd Chapter 184 Optimal Job Search Marginal expected benefit equals marginal expected cost Diminishing returns Duration - less likely a better offer will be received “Stopping Rule”- minimum acceptable wage © 2002 McGrawHill Ryerson Ltd Chapter 185 Figure 18.1 Optimal Job Search C Present value of total costs and expected total benefits Present value of MC and expected MB B Se MC Search duration MB Se Search duration © 2002 McGrawHill Ryerson Ltd Chapter 186 Wage Distributions Under Imperfect and Perfect Information Figure 18.2 Imperfect Information Number of Jobs Number of Jobs WA Wage rate Full Information We Wage rate © 2002 McGrawHill Ryerson Ltd Chapter 187 Factors Determining Optimal Search Wage offers and duration of job Increase in benefits/decrease in costs Dissemination of information Vacancies/offers Value of leisure/# of other searchers Social and labour market policies Aggregate economic conditions © 2002 McGrawHill Ryerson Ltd Chapter 188 Implicit Contracts Firms and workers are already engaged in employment relationship Explains responses to changes in production demand rigid wages layoffs/rehires Reflects risk-sharing © 2002 McGrawHill Ryerson Ltd Chapter 189 Implicit Contract Theory Employees purchase income insurance from the employer The employer can then deal with: moral hazard adverse selection Chapter 18 © 2002 McGrawHill Ryerson Ltd 10 Figure 18.3 a Real Wage Implicit Contracts W S Wa Da= MPPN X Pa W b= k Db= MPPN X Pb Nb No Employment N Wages and Employment with Market-Clearing Chapter 18 © 2002 McGrawHill Ryerson Ltd 11 Figure 18.3 b Real Wage W Wa W* k Implicit Contracts S Da= MPPN X Pa Db= MPPN X Pb Nb Nb* N Employment N o Wages and Employment with Implicit Contracts Chapter 18 © 2002 McGrawHill Ryerson Ltd 12 Efficiency Wages: Implications for Unemployment Effect of wages on incentives and productivity Above market wages are used to enhance productivity S-shaped function Chapter 18 © 2002 McGrawHill Ryerson Ltd 13 Efficiency Wages: Implications for Unemployment Unemployment and rigid wages can coexist Firms refuse to cut wages because of the adverse work incentives Wage curve Higher unemployment leads to a greater penalty for shirking thus firms not have to pay higher wages Chapter 18 © 2002 McGrawHill Ryerson Ltd 14 Insider-Outsider Theory Wage setting is determined by bargaining Costly for the firm to replace workers Workers have bargaining power to raise wages even with excess labour supply Explains the existence of high unemployment and real-wage growth Chapter 18 © 2002 McGrawHill Ryerson Ltd 15 Sectoral Shifts and Unemployment Sectors of the economy are growing at different rates Unemployment occurs as labour reallocates from the slower sectors to the fast growing sectors Chapter 18 © 2002 McGrawHill Ryerson Ltd 16 Rationale for Unemployment Insurance Moral hazard and adverse selection reduce the profitability of selling insurance Private sector may not provide the socially optimal amount of unemployment insurance Therefore, governments introduced unemployment insurance as part of social policy Chapter 18 © 2002 McGrawHill Ryerson Ltd 17 Effects of Unemployment Insurance Incident and duration of employment Layoffs Employment instability Labour supply Interregional mobility Chapter 18 © 2002 McGrawHill Ryerson Ltd 18 Incident and Duration of Employment Lower cost of job search increasing the duration of the unemployed search Ineligible workers are motivated to accept employment quickly to then qualify for benefits Chapter 18 © 2002 McGrawHill Ryerson Ltd 19 Layoffs UI lowers the cost of adjusting to fluctuations in demand layoffs Without relative to other methods UI employers who rely on layoffs would have to pay a compensating wage to attract employees Chapter 18 © 2002 McGrawHill Ryerson Ltd 20 Employment Instability UI may encourage the use of layoffs as opposed to reductions in hours of work This bias can be offset by: experience-rated UI programs UI assisted work sharing programs Chapter 18 © 2002 McGrawHill Ryerson Ltd 21 Labour Supply UI impacts labour force participation Higher UI causes some to reduce weeks worked to the minimum required others to increase weeks worked in order to qualify Labour force participation rises because no one leaves but new workers enter Measure unemployment increases Chapter 18 © 2002 McGrawHill Ryerson Ltd 22 Interregional Mobility Regional extended benefits discourage interregional mobility by providing benefits for longer periods in regions with high unemployment Chapter 18 © 2002 McGrawHill Ryerson Ltd 23 End of Chapter Eighteen Chapter 18 © 2002 McGrawHill Ryerson Ltd 24 ... Demand-Deficient Seasonal Involuntary (associated with wage rigidity) © 2002 McGrawHill Ryerson Ltd Chapter 18 3 Search Unemployment Imperfect information on both sides of the labour market. .. selection Chapter 18 © 2002 McGrawHill Ryerson Ltd 10 Figure 18. 3 a Real Wage Implicit Contracts W S Wa Da= MPPN X Pa W b= k Db= MPPN X Pb Nb No Employment N Wages and Employment with Market- Clearing... bias can be offset by: experience-rated UI programs UI assisted work sharing programs Chapter 18 © 2002 McGrawHill Ryerson Ltd 21 Labour Supply UI impacts labour force participation Higher