Lecture Labour market economics: Chapter 18 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

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