Chapter 27 - Unemployment and the demand for labor. In this chapter you will learn: How economists measure employment and unemployment? How minimum wage rates and unionization can cause unemployment? Why there is a natural rate of unemployment? Why there is a cyclical component of unemployment?
Chapter 27 Unemployment and the Demand for Labor © 2014 by McGraw-Hill Education What will you learn in this chapter? • How economists measure employment and unemployment • How minimum wage rates and unionization can cause unemployment • Why there is a natural rate of unemployment • Why there is a cyclical component of unemployment • What factors may stop wages from falling to the equilibrium level • What challenges are associated with unemployment insurance © 2014 by McGraw-Hill Education Defining and Measuring Unemployment • Unemployment is a situation where someone wants to work but cannot find a job in the current market – People who not have jobs and are not interested in obtaining one are not counted as unemployed • The Bureau of Labor Statistics (BLS) defines unemployment as people who: Didn’t work at all in the previous week Were available to work if they had been offered a job Were making efforts to look for a job © 2014 by McGraw-Hill Education Measuring unemployment • The labor force refers to the people who are in the working-age population and are either employed or unemployed – The working-age population is the civilian, noninstitutional population over 16 years old • The unemployment rate is the number of employed people divided by the number of people in the labor force: Unemployment rate = where Number of unemployed × 100 Labor force Labor force = Number of Employed and Unemployed © 2014 by McGraw-Hill Education Active Learning: Categorizing employment Categorize each of the following individuals as employed, unemployed, or not in the labor force A student who also works 15 hours per week A full-time student A stay-at-home dad that does not work elsewhere An individual that was laid off a year ago and is waiting until things get better to look for a job A 15-year-old working full-time in the summer A CPA working full-time at a financial firm A military officer serving overseas A retired school teacher A recent law school graduate who is looking for a job © 2014 by McGraw-Hill Education Measuring unemployment • Given the categories of employment, employment statistics can be calculated • For the United States: – Unemployment rate in December 2006: , , , , × 100 = 4.4% – Unemployment rate in December 2011: , , , Month , Working-age population × 100 = 8.5% Labor force Employed Unemployed (non-institutionalized) December 2006 230,108,000 152,732,000 145,970,000 6,762,000 December 2011 240,584,000 153,887,000 140,790,000 13,097,000 © 2014 by McGraw-Hill Education Measuring unemployment The unemployment rate varies by gender and age Unemployment rate by age Unemployment rate by sex Unemployment rate (%) 20 Unemployment rate (%) 20 18 18 16 16 14 14 12 12 10 10 4 2 25-34 35-44 45-54 55+ Men Women 16-24 2003 2005 2007 Year 2009 2011 2003 2005 2007 Year 2009 2011 © 2014 by McGraw-Hill Education Measuring unemployment The unemployment rate also varies by race and education level Unemployment rate by race Unemployment rate by education level Unemployment rate (%) 20 Unemployment rate (%) 20 18 18 16 16 14 African American 12 10 Latino 12 Less than high school 10 High school Some college White Asian 6 14 Bachelor’s or higher 2003 2005 2007 Year 2009 2011 2003 2005 2007 Year 2009 2011 © 2014 by McGraw-Hill Education Measuring unemployment • The state of the economy is also understood by looking at the labor-force participation rate (LFPR): LFPR= Labor force ì 100 Workingage population ã The LFPR indicates what fraction of the population wants to be working, regardless of whether or not they actually have a job – It is common for the LFPR to fall during a recession © 2014 by McGraw-Hill Education Measuring unemployment • During the most recent U.S recession, 2.4% of the working-age population stopped participating in the labor force – It is likely that at least some of these people would have been unemployed if they had stayed in the labor force – Thus, the unemployment rate may understate the effect of the recession Employment in the United States, 2006 and 2011 Month Unemployment rate (%) Labor-force participation rate (%) December 2006 4.4 66.4 December 2011 8.5 64.0 +4.1 -2.4 Change © 2014 by McGraw-Hill Education 10 Active Learning: Unemployment and LFPR rates Use the following information to calculate the unemployment and labor-force participation rates Employed Unemployed Not in Labor Force 139.9 million 14.3 million 81.7 million © 2014 by McGraw-Hill Education 11 Beyond the unemployment rate • There two main limitations of the unemployment rate • It does not give a good indication of how many people are: – Discouraged workers: People who have looked for work in the past year but have given up because of labor market conditions – Underemployed workers: People who are either working less than they would like or in jobs below their skill level © 2014 by McGraw-Hill Education 12 Beyond the unemployment rate To provide a better picture of the labor market, the BLS calculates the following six measures of unemployment Category of unemployment Rate in December 2006 (%) Rate in December 2011 (%) U1: Long-time unemployed (more than 15 weeks) 1.4 U2: Job losers + those who completed temporary work 2.1 4.9 U3: Unemployed 4.4 8.5 5.0 U4: Unemployed + discouraged workers 4.6 9.1 U5: Unemployed, discouraged Workers + marginally attached workers 5.2 10.0 U6: Unemployed, discouraged workers, marginally attached workers + underemployed 7.9 15.2 © 2014 by McGraw-Hill Education 13 Where the data come from? • The main source of information on unemployment in the U.S is a household survey called the Current Population Survey (CPS), conducted by the BLS • The BLS surveys approximately 60,000 U.S households per month • The CPS asks people if they are working and how much they are earning, among many other questions © 2014 by McGraw-Hill Education 14 Equilibrium in the labor market • The existence of any amount of unemployment is a bit of a puzzle • Labor is bought and sold in a market, just like other goods and services – There is a demand for labor (from firms wanting to hire workers) – There is a supply of labor (from individuals looking for jobs) – There is a price (called the wage) • In most markets, the price is expected to adjust until the market reaches equilibrium, a point at which the quantity supplied equals the quantity demanded • The existence of unemployment suggests that this simplest of models can’t fully explain what goes on in the labor market © 2014 by McGraw-Hill Education 15 Equilibrium in the labor market A simple labor market model can be used to help understand a few aspects of unemployment Firms and the labor market Wage Labor demand Units of labor • The labor demand curve shows the relationship between the total quantity of labor demanded by all firms in the economy and the wage rate • All things being equal, firms will want to hire more labor when wages are lower and less labor when wages are higher © 2014 by McGraw-Hill Education 16 Equilibrium in the labor market • The supply of labor comes from people who are able to work and who choose to participate in the labor market – Not everyone who could potentially work wants to work Workers and the labor market Wage Labor supply • The labor supply curve shows the relationship between the total labor supplied in the economy and the wage rate • Other things being equal, people will be willing to supply more labor at higher wage rates, and less labor at lower wage rates Units of labor © 2014 by McGraw-Hill Education 17 Equilibrium in the labor market • The labor demand and labor supply curves describe the national labor market • The intersection of the curves identifies the market equilibrium The labor market in equilibrium Wage Labor supply W* • At equilibrium, there is a stable wage (price) and amount of labor bought and sold • The equilibrium does not explain unemployment Labor demand L* © 2014 by McGraw-Hill Education Labor 18 The labor market with unemployment Unemployment occurs when the wage rate is higher than the equilibrium wage The labor market with unemployment Wage Labor supply Unemployment W1 • Workers are willing to provide more labor than firms are willing to hire • The labor market has a surplus of workers W* Labor demand L D L* L S Labor © 2014 by McGraw-Hill Education 19 Categories of unemployment • To understand the causes of unemployment, it’s helpful to separate out two categories of unemployment • First, the natural rate of unemployment is the normal level of unemployment that persists in an economy in the long run • There are three contributors to the natural rate of unemployment: Frictional unemployment Structural unemployment Real-wage or classical unemployment © 2014 by McGraw-Hill Education 20 Categories of unemployment • Frictional unemployment is caused by workers who are changing location, job, or career – It is a natural and healthy part of life in a dynamic economy • Structural unemployment is caused by a mismatch between the skills workers can offer and the skills in demand • Real-wage or classical unemployment results from wages being higher than the marketclearing level © 2014 by McGraw-Hill Education 21 Cyclical unemployment • Second, cyclical unemployment is caused by short-term economic fluctuations • Economists use the term business cycles to describe the pattern of short-term ups and downs • Wages are “sticky” in the real world, meaning that they are slow to respond to shifts in the economy – This results in actual wages that are above the market-clearing level © 2014 by McGraw-Hill Education 22 Cyclical unemployment Cyclical unemployment in the United States is easily observed Percent …unemployment soon decreases 12 …unemployment soon rises… Annual unemployment rate 10 Annual per capita GDP growth rate 22 Usually, when the GDP/capita growth rate slows… 24 1980 © 2014 by McGraw-Hill Education …and when the growth rate of GDP/capita increases… 1990 2000 2010 23 Year Active Learning: Categorizing the type of unemployment Indicate whether each of the following situations describes frictional, structural, classical, or cyclical unemployment Mary is temporarily unemployed after she decides to move to NYC for better job prospects Montana increases its minimum wage, which makes it difficult for David to find work Few winter fires leaves many firefighters unemployed from November to April Advances in computer-aided architecture technology leaves Ann, a drafter, unemployed © 2014 by McGraw-Hill Education 24 Public policies and other influences on unemployment • Unemployment is an important indicator of the overall health of the economy, but addressing the issue is not always easy – There are many factors that may stop the wage rate from adjusting – Unemployment is a very personal issue for those who experience it • There are a few factors that may unintentionally cause unemployment by keeping the market wage higher than the equilibrium wage © 2014 by McGraw-Hill Education 25 Factors that may stop wage rates from falling • The government might prevent falling wages through minimum-wage legislation – A minimum wage is the lowest wage that a firm is legally allowed to pay its workers • Labor unions are groups of employees who bargain with their employer(s) over salaries and work conditions • Efficiency wages are deliberately set above the market rate to increase productivity © 2014 by McGraw-Hill Education 26 Unemployment insurance • Frictional and structural unemployment are part of the normal working of the economy – Most economists believe that some government policies can affect the level of these kinds of unemployment • Unemployment insurance is money paid by the government to people who are unemployed – Can affect how quickly people find jobs, which will affect the natural rate of unemployment • The effect of unemployment insurance is ambiguous because: – People might not look as hard for work if the payment is generous – If people don’t have to rush into taking the first job they’re offered, they are more likely to find the right job for them © 2014 by McGraw-Hill Education 27 Other factors: Taxes and worker rights • There are a couple other factors that influence unemployment • Taxes on wage income are important, as lower taxes would reduce unemployment, all else equal – The reasoning is that people have a higher incentive to find a job, knowing they will keep more of the income they earn from the job – The magnitude of the impact taxes have on job-search efforts, however, is inconclusive • The degree of difficulty for firing employees can also affect unemployment – Employers may be reluctant to hire people if they know that it will be difficult to get rid of them © 2014 by McGraw-Hill Education 28 Summary • To be considered unemployed, a person needs to meet three conditions: Be part of the working-age, civilian population Not have worked in the previous week Be actively looking for work • The unemployment and labor-force participation rates give an indication of employment and unemployment conditions in an economy • Like other markets, the labor market features labor demand and labor supply curves © 2014 by McGraw-Hill Education 29 Summary • The labor market reaches an equilibrium wage where the labor demand and labor supply curves intersect • A market wage above the equilibrium wage causes unemployment – Unemployment is a surplus of labor at the market wage • Frictional and structural unemployment cause economies to have long-run, natural levels of unemployment © 2014 by McGraw-Hill Education 30 10 Summary • Unemployment that responds to business cycles is called cyclical unemployment • There are three main reasons why wage rates might not adjust to the equilibrium: A minimum wage above the equilibrium wage Labor unions Efficiency wages • Setting proper unemployment insurance rates is challenging because it changes worker incentives © 2014 by McGraw-Hill Education 31 11 ... Equilibrium in the labor market A simple labor market model can be used to help understand a few aspects of unemployment Firms and the labor market Wage Labor demand Units of labor • The labor demand curve... Equilibrium in the labor market • The labor demand and labor supply curves describe the national labor market • The intersection of the curves identifies the market equilibrium The labor market... Equilibrium in the labor market • The existence of any amount of unemployment is a bit of a puzzle • Labor is bought and sold in a market, just like other goods and services – There is a demand for labor