Chapter 10: Unemployment

Approximately what percent of U.S. workers are directly affected by the minimum wage?

1

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged that they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed?

10

In the United States, unionized workers are paid about _____ percent more than similar nonunion workers.

15

Using the numbers in the preceding question, what is the size of Ectenia's labor force?

70

When a firm pays an efficiency wage, it may

Find that its workers quit less frequently.

According to the theory of efficiency wages,

Firms may find it profitable to pay above-equilibrium wages.

The main policy goal of unemployment insurance is to reduce the

Income uncertainty that workers face

In a competitive labor market, an increase in the minimum wage results in a(n) __________ in the quantity of labor supplied and a(n) __________ in the quantity of labor demanded.

Increase, decrease

Strike

Nonviolent refusal to continue to work until a problem is resolved.

Cyclical Unemployment

The deviation of unemployment from its natural rate

Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates

Unemployment Rate

The percentage of the labor force that is unemployed

Labor-Force Participation Rate

The percentage of the total adult population of the United States that is in the labor force

Job Search

The process of matching workers with appropriate jobs

Labor Force

The sum of the employed and the unemployed

Structural Unemployment

Unemployment results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Efficiency Wages

Wages that employers set above the equilibrium wage rate as an incentive for better employee performance

Consider two states that adopt different laws concerning labor unions. The following graph shows the labor market in a state in the North. Initially, the market-clearing wage there is $8.00 per hour. Suppose that the legislature in this northern state passes laws that make it easy for workers to join a union. Through collective bargaining, the union negotiates a wage of $10.00 per hour. At the union wage________ union workers will be employed. The following graph shows the labor market in a state in the South. The legislature in this state passes strong "right-to-work" laws that make it very difficult for unions to organize workers, so the wage is always equal to the market-clearing value. Except for this difference in legislation, the two states are very similar. The initial position of the graph corresponds to the initial labor market condition in the southern state before the labor union negotiated the new, higher wage for workers in the northern state. Suppose that after the wage goes up in the northern state, some workers in the northern state lose their jobs and decide to move to the southern state. Adjust the graph to show what happens to employment and wages in the southern state. Which of the following groups are worse off as a result of the union action in the northern state? Check all that apply. The original workers in the southern state Workers who find new jobs in the southern state Workers in the northern state employed at the union wage Employers in the northern state

600,000 You can read from the labor demand curve that, at a wage of $10.00, firms demand 600,000 workers, despite the fact that 1,000,000 workers are willing to supply labor. Thus, 600,000 workers find employment at this wage rate. Supply moves to the right The only group that benefits from the union-negotiated wage of $10.00 is the union workers in the northern state who retain their jobs after the wage increase. Because the quantity of workers willing to supply labor is greater than the quantity of labor firms are willing to hire at the union wage, some workers in the northern state will lose their jobs. As some of these workers move to the southern state to find jobs, this puts downward pressure on southern wages, making both the original southern workers and the workers who came from the North worse off. The employers in the northern state are also made worse off as they now have to pay higher wages and have fewer employees.

Unemployment Insurance

A government program that partially protects workers' incomes when they become unemployed

Frictional Unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Union

A worker association that bargains with employers over wages, benefits, and working conditions

Suppose the world price of cotton falls substantially. The demand for labor among cotton-producing firms in Texas will _______. The demand for labor among textile-producing firms in South Carolina, for which cotton is an input, will _______. The temporary unemployment resulting from such sectoral shifts in the economy is best described as ________unemployment. Suppose the government wants to reduce this type of unemployment. Which of the following policies would help achieve this goal? Check all that apply. Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks Establishing government-run employment agencies to connect unemployed workers to job vacancies Increasing the benefits offered to unemployed workers through the government's unemployment insurance program

Decrease Increase Frictional Frictional unemployment often results from changes in the demand for labor among firms. When the world price of cotton falls, cotton-producing firms will find it less profitable to produce cotton. As cotton-producing firms decrease production, the demand for labor with which to produce cotton decreases. Job opportunities in Texas contract. For textile-producing firms, the decrease in the world price of cotton decreases production costs. As textile-producing firms increase production, the demand for labor in South Carolina increases. Job opportunities in South Carolina expand. Workers laid off in one sector will take time to find new positions in an expanding sector. These types of sectoral shifts occur continuously in a dynamic economy, so there will always be some level of frictional unemployment. Establishing government-run employment agencies to connect unemployed workers to job vacancies Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks Unemployment benefits tend to reduce the job-search efforts of the unemployed. Workers receiving unemployment insurance generally take longer to find new work, contributing to frictional unemployment in the interim. Extending or increasing unemployment benefits will contribute to additional frictional unemployment. Note that unemployment insurance is not necessarily bad. Preventing some hardship associated with unemployment may be well worth the cost of some additional frictional unemployment. Reducing the average amount of time spent searching for a job would lower an economy's frictional unemployment and, by extension, its natural rate of unemployment. Job-search websites can connect unemployed workers to firms with job vacancies. A site that matches workers to vacancies more effectively would reduce the amount of time that workers spend looking for jobs and allow employers to fill vacancies more quickly. Government-run employment agencies connect unemployed workers to firms in need of additional labor. Employment bonuses given to unemployed workers who are receiving unemployment insurance benefits would give workers an incentive to find work more quickly. This would reduce frictional unemployment by decreasing the time the unemployed take to find work.

Discouraged Workers

Individuals who would like to work but have given up looking for a job

Why might some firms voluntarily pay workers a wage above the market equilibrium, even in the presence of surplus labor? Check all that apply. Paying higher wages tends to reduce the average experience level of a firm's workers. Paying higher wages encourages workers to be more productive. Paying higher wages can reduce a firm's training costs. Paying higher wages increases worker turnover.

Paying higher wages encourages workers to be more productive. Paying higher wages can reduce a firm's training costs. Paying above-market wages may be profitable if the higher wages increase the efficiency of the firm's workers (hence the term efficiency wages). Higher wages can enhance worker productivity in several ways. For example, healthier workers tend to be more productive than less healthy workers. Also, more highly paid workers typically eat more nutritiously then less well paid workers, particularly in less developed countries, where a nutritious diet may be hard to obtain at a market wage. Firms thus have an incentive to pay high wages to maintain a healthy and productive work force. Paying higher wages can also reduce worker turnover. Fewer workers will choose to explore other labor opportunities when a firm pays wages in excess of the prevailing market rate. Since new workers must be trained, the reduction in worker turnover can reduce the firm's training costs. By encouraging workers to stick around, the higher wages cause the experience level of the firm's workforce to rise, enhancing productivity. Higher wages also attract a more qualified pool of job applicants. If the firm were to pay prevailing market wages, more qualified workers might choose to steer clear of the firm in favor of other companies offering higher-paying positions for which they are qualified. Finally, higher wages may induce greater worker effort. In some firms, the costs of monitoring worker performance are quite high. Therefore, to deter shirking, a firm may decide to pay wages above the market equilibrium. The higher wages incentivize workers to work hard, since the loss of a job might mean being forced to settle for less-lucrative employment elsewhere.

In many European nations, unions

Play a much larger role than they do in the United States.

Collective Bargaining

Process by which a union representing a group of workers negotiates with management for a contract

One unintended consequence of unemployment insurance is that it reduces the

Search effort of the unemployed

The three people described in the following table are categorized as unemployed by the Bureau of Labor Statistics. Identify each person in the table as structurally, frictionally, or cyclically unemployed. Unemployment Type Structural Frictional Cyclical Rajiv recently lost his job as a waiter at a local restaurant. A recent increase in the minimum wage keeps local employers from adding more of the low-skill positions for which he qualifies, so he has been unable to find work. He continues to look for a job, but he's considering going back to school for vocational training. A recent recession has reduced the number of visitors to a local theme park. The park has had to lay off many of its employees, including Ana. Simone just graduated from college and is looking for a full-time position with an investment banking firm. The following table shows data on frictional, cyclical, structural, and total unemployment for an economy. Unemployment Type Rate (Percent) Frictional 3.2 Cyclical 0.0 Structural 1.1 Total Unemployment 4.3 True or False: This economy is not currently at its natural rate of unemployment.

Structural Cyclical Frictional Structural unemployment arises from a mismatch between the jobs available in some labor markets and the skills of workers. One cause of structural unemployment is institutional factors such as a minimum wage, which holds wages above the marginal productivity of less skilled workers, limiting their employment opportunities. Frictional unemployment occurs because job seekers and employers need time to find one another. Therefore, Simone is considered to be frictionally unemployed. This kind of unemployment is usually brief. Cyclical unemployment is the form of unemployment associated with business cycles. This kind of unemployment rises during recessions and falls during expansions. Because Ana lost her job due to the recession, she would generally be considered to be cyclically unemployed. False Total unemployment is the sum of frictional, structural, and cyclical unemployment. If there is no cyclical unemployment, the economy is at its natural rate of unemployment, equal to the sum of frictional and structural unemployment. In this case, because cyclical unemployment is 0.0%, the economy is at its natural rate of unemployment.

Consider a small economy composed of six people: Felix, Janet, Larry, Megan, Susan, and Raphael. Each person's employment status is described in the following table. Based on the criteria used by the Bureau of Labor Statistics (BLS), identify each person's status as employed, unemployed, "not in the labor force" (if not in the civilian labor force but still part of the adult population), or "not in the adult population" if not in the civilian adult population. Felix is a 43-year-old autoworker who was laid off from his job 6 months ago. He is frustrated with his inability to find a new full-time position. Last week, he took a part-time job but was given only 3 hours of work. Janet is a 35-year-old professional basketball player. She finished her last season as a player 3 weeks ago and is currently interviewing for a coaching position. Larry is a 75-year-old retired professor. He enjoys volunteering at the local public library. Susan is a 29-year-old who lost her job as an associate producer for a radio station. After spending a few weeks out of work and interviewing for several other positions, she gave up on her job search and decided to go back to grad school. She made that decision a few months ago. Raphael is a famous novelist. He is spending the summer at his lake house in upstate New York, doing a little writing each day but mostly spending his time gardening and reading. Megan is a 13-year-old student at East Valley Middle School. She babysits her younger brother and does other chores, so her parents give her an allowance of $30 per week. Labor Force Participation Rate = According to this formula, what is the labor force participation rate of this economy of six people? Unemployment Rate =

The BLS considers a person to be unemployed if he or she is in the adult population, did not work for pay in the previous week, and has actively looked for work during the preceding 4 weeks. By this definition, the BLS classifies Janet as unemployed. Anyone in the adult population who worked for pay in the last week, even if unsatisfied with his or her job, is considered employed. By this definition, the BLS classifies Felix and Raphael as employed. Because Larry and Susan are not actively seeking employment, they are not considered part of the labor force. Note that not being in the labor force is different from being unemployed. Once people leave the labor force, they are not counted when calculating the unemployment rate. Because Megan is under the age of 16, she is not considered part of the adult population. Labor Force Participation Rate= 100* Number In Labor Force/ Adult Population 60% The BLS defines the labor force participation rate as the fraction of the adult population that is in the labor force—that is, those who are employed or else unemployed and actively searching for work. By this definition, Felix, Janet, and Raphael are part of the labor force because they are either working or searching for a job. In contrast, because Larry and Susan are not actively seeking employment, they are not considered part of the labor force. And because Megan is under the age of 16, she is not considered part of the adult population, and is therefore not part of the labor force. Because the adult population in this small economy is five people, and because three of them are in the labor force, the labor force participation rate is 3/5=60% Unemployment Rate= 100* Number of Unemployed Workers/ Labor Force 33.33% The BLS defines the unemployment rate as the fraction of the labor force that is unemployed. Felix, Janet, and Raphael are part of the labor force because they are either working or searching for a job. The BLS considers a person to be unemployed if he or she is in the adult population, did not work for pay in the previous week, and has been actively seeking work during the preceding 4 weeks. By this definition, the BLS classifies Janet as unemployed. Since the size of the labor force in this small economy is three people, and since one of them is unemployed, the unemployment rate is computed as follows. Unemployment Rate = 100×1/3= 33.33%

Which of the following statements correctly describe discouraged workers? (If none of the choices apply, leave all of the checkboxes blank.) Check all that apply. They are counted as part of the labor force by the Bureau of Labor Statistics. They are full-time workers who would like to work only part-time. They have not looked for a job in 4 weeks (or longer), but they would like a job and are available for work. They have given up on looking for a job. The following table contains U.S. employment information from August 2018. Civilian Population (16 and over) 258,066,000 Employed (Persons) 155, 604, 000 Unemployed (Persons) 6,197,000 Discouraged (Persons) 434,000 The Bureau of Labor Statistics has several measures of joblessness in addition to the official unemployment rate. One alternative is the U-4 measure of labor underutilization, which is calculated as follows: U-4 = 100 * Unemployed + Discouraged/ Labor Force + Discouraged Fill in the following table by calculating the official unemployment rate and the U-4 measure of labor underutilization. Official Unemployment Rate (Percent) U-4 Measure of Labor Underutilization (Percent) The official unemployment rate and the U-4 measure of labor underutilization are two different measures of joblessness in the economy. If the Bureau of Labor Statistics were to include discouraged workers in the official unemployment rate, the reported unemployment rate would .

They have not looked for a job in 4 weeks (or longer), but they would like a job and are available for work. They have given up on looking for a job. Any jobless person who has not looked for work in the past 4 weeks is not in the labor force according to the Bureau of Labor Statistics (BLS). Some of these jobless people who are not in the labor force indicate that they'd like to have a job and are available for work. The BLS classifies such people as marginally attached workers. Discouraged workers are marginally attached workers who give a job-market-related reason for giving up on their job search. Typically, discouraged workers give up on their search because they feel that there are no current opportunities for them in the labor market. Official Unemployment Rate (Percent) 3.83 U-4 Measure of Labor Underutilization (Percent) 4.09 If the Bureau of Labor Statistics were to include discouraged workers in the official unemployment rate, the reported unemployment rate would increase . The unemployment rate is the number of unemployed persons divided by the labor force. The labor force is the sum of employed and unemployed workers; in this case, the labor force is (155,604,000+6,197,000)=161,801,000155,604,000+6,197,000=161,801,000. Therefore, the unemployment rate is 6,197,000161,801,000×100%=3.83%6,197,000161,801,000×100%=3.83%. The U-4 measure of labor underutilization adds discouraged workers to the ranks of the unemployed (and, thus, to the labor force): U-4U-4 = = 100×6,197,000+434,000161,801,000+434,000100×6,197,000+434,000161,801,000+434,000 = = 4.09% If discouraged workers were included in the official unemployment rate, the reported unemployment rate would rise. Similarly, excluding discouraged workers from the official measure of unemployment may mask the true extent of underemployment in the economy.

Consider the market for labor depicted by the demand and supply curves that follow. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Complete the following table with the quantity of labor supplied and demanded if the wage is set at $15.00. Then indicate whether this wage will result in a shortage or a surplus. Wage 15.00 Labor Demanded (Thousands of Workers) Labor Supplied (Thousands of Workers) Shortage or Surplus? Suppose a senator considers introducing a bill to legislate a minimum hourly wage of $15.00. Which of the following statements are true? Check all that apply. In the absence of price controls, a surplus puts downward pressure on wages until they fall to the equilibrium. In this labor market, a minimum wage of $11.50 would be binding. If the minimum wage is set at $15.00, the market will not reach equilibrium. Binding minimum wages cause structural unemployment.

Wage 15.00 Labor Demanded (Thousands of Workers) 450 Labor Supplied (Thousands of Workers) 750 Shortage or Surplus? Surplus Enter $15.00 into the box marked Wage to the right of the graph. At this wage, firms demand 450,000 workers, and 750,000 workers will want to work. Therefore, there is a surplus of 300,000 workers. In the absence of price controls, a surplus puts downward pressure on wages until they fall to the equilibrium. If the minimum wage is set at $15.00, the market will not reach equilibrium. Binding minimum wages cause structural unemployment. If the minimum wage is $15.00, employers will attract more workers than they are willing to hire. In the absence of price controls, this causes employers to lower the wage until the quantity of labor supplied is equal to the quantity they demand (this occurs at $12). That is, a surplus puts downward pressure on wages. If a minimum wage is set above the market equilibrium wage, however, the market cannot reach equilibrium; thus the minimum wage is considered binding. If the minimum wage were instead set at $11.50 and employers initially paid that wage, a shortage of workers willing to supply labor would put upward pressure on wages. Because there is no ceiling on wages, the market would be able to reach equilibrium; therefore, a minimum wage of $11.50 is not binding. A binding minimum wage will contribute to a persistent surplus of labor in this market, generating structural unemployment. Structural unemployment is unemployment that arises from a mismatch between the skills of the existing labor force and those required to perform available jobs. One source of structural unemployment is minimum wage legislation, which holds wages above the productivity levels of less skilled workers, who are thus ill-suited to existing jobs. In this scenario, the quantity of labor supplied will continue to exceed the quantity of labor demanded as long as the minimum wage remains above the market equilibrium wage. The resulting surplus of labor creates a pool of unemployed workers—people who would like to work at the prevailing minimum wage, but who cannot find a job.