Macro Chapter 26

Another reason why wages might be above the market-clearing level is that some firms may want to pay their workers more than the going wage. Why would they do this? There are two related reasons:

-First, paying a higher wage will make workers less likely to quit, saving the expense of advertising for, interviewing, and training new people. -Second, workers are more likely to fear losing their jobs and might work harder to keep the jobs they have.

In the official definition of unemployment, we want to count only those people who are "available for work" and "making specific efforts to find employment." That means we don't count as unemployed the following categories of people:

-Full-time students. -Parents who are staying home to look after their children. -People who cannot work because of a disability. -People who have inherited wealth and choose to live off that wealth rather than work. -Retirees. (Some countries define the "working-age population" as 16 to 64, but the BLS does not impose an upper age limit.)

People are unemployed for many reasons....

-Job seekers may be holding out for high salaries. -Job seekers may lack relevant skills. -Sometimes job seekers have the right skills and appropriate ambitions but still can't land a job in the current market.

labor-force participation rate

the number of people in the labor force divided by the working-age population: Labor-force participation rate=Labor force/Working-age population×100

unemployment rate

the percentage of the labor force that is unemployed. Number of unemployed people divided by the labor force: Number of unemployed/Labor force times 100.

Labor is bought and sold in a market, just like other goods and services. There is demand for labor (from firms wanting to hire workers), a supply of labor (from individuals looking for jobs), and a price (called the wage). In most markets, we expect....

the price 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.

Cyclinical Unemployment

unemployment caused by these short-term economic fluctuations. Because GDP growth tends to go in cycles, speeding up and slowing down in a regular pattern, we call the related unemployment cyclical, too.

frictional unemployment

unemployment caused by workers who are changing their location, job, or career. When people search for new jobs, it takes time to search for openings, submit applications, interview, move to a new city, and so on. Some amount of frictional unemployment is unavoidable—it's a natural and healthy part of life in a dynamic economy. Jobs in one company open up while others close, and ambitious workers leave their jobs to seek out better positions.

structural unemployment

unemployment that results from a mismatch between the skills workers can offer and the skills that are in demand. Consumer preferences are constantly shifting, and new technologies are being invented all the time. As a result, skills that are in demand today may not be in demand next year.

A minimum wage is...

the lowest wage that a firm is legally allowed to pay its workers.

The effect of unemployment insurance on unemployment is ambiguous:

-On one hand, if unemployment insurance is generous, then people might not look as hard for work. People may be more likely to take their time and wait for a better job, rather than accepting the first job offered. This suggests that unemployment insurance could increase the equilibrium level of unemployment. -On the other hand, 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. Having employers and employees "better matched" may mean that fewer people leave their jobs, which may reduce the level of frictional unemployment.

United States counts people as being unemployed only if they meet three criteria:

-They didn't work at all in the prior week. -They were available to work if they had been offered a job. -They were making efforts to look for a job.

(Frictional unemployment), How long it takes to make a job transition can depend on a lot of factors. These include things like:

-how well-informed workers are about job openings, -how picky workers are about waiting to find the job that is the best possible match, and -what resources workers can draw on to support them while they search.

The working-age population is the civilian, noninstitutional population aged....

16 and over. This category means all adults except those who are in the armed forces (such as soldiers) or who are inmates in an institution (such as prisons or mental facilities).

natural rate of unemployment

All economies experience some level of unemployment, regardless of how well or badly the economy is doing in the short term. It's the normal level of unemployment that persists in an economy in the long run. Also called, equilibrium rate of unemployment. Three contributors lead to the natural rate of unemployment: frictional, structural, and real-wage (classical) unemployment.

Real wage unemployment

Also known as classical unemployment, unemployment that results from wages being higher than the market-clearing level. Anything that acts like a price floor in the labor market will create surplus labor, which we call unemployment. Explanations include minimum wage laws, bargaining by unions, and strategic choices by employers to pay wages above the equilibrium rate.

At the equilibrium wage, quantity demanded equals quantity supplied:

Everyone who wants to work at prevailing wages and has the required skills is able to find a job.

Talking in percentage points makes a change easier to conceptualize:

If you hear that the unemployment rate increased by "0.6 percentage point," for example, it means that 6 people out of every 1,000 in the labor force have lost their jobs.

U1= Long term unemployed, U2= Job losers and temporary workers, and U3=

Just unemployed

The government's definition of unemployment attempts to capture all of these situations. The Bureau of Labor Statistics, the government agency in charge of collecting employment statistics, defines unemployment in this way:

Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week 3.

efficiency wages

The idea of deliberately setting wages above the market rate in order to increase productivity.

unemployment is...

a lagging economic indicator

wage stickiness

actual wage exceeds equilibrium wage during recessions.

labor unions

are groups of employees who join together to bargain with their employer(s) over salaries and working conditions.

labor force

consists of people in the working-age population who are either currently working ("employed") or who would like to work and are actively trying to find a job ("unemployed"). That is, Labor Force= Employed+Unemployed.

Studies show that being unemployed is correlated with higher rates of.....

depression and lower assessments of self-worth. Unemployment is an economic problem with potentially serious social and psychological consequences.

Some unemployment may be unavoidable, but too much of it can have serious consequences, both for the...

economy as a whole and on a personal level. One consequence of unemployment is that some of the productive potential of the economy—the time and skills of the unemployed—is not being put to use.

During recessions we usually see the labor-force participation rate fall. Some people who are unemployed eventually...

give up looking for work. Once these people stop actively looking for work, they are no longer considered part of the labor force. Other people may drop out of the labor force in a recession because they choose to go back to school, or take early retirement, or become homemakers instead of looking for work.

The unemployment rate describes what is going on in the national economy as a whole but doesn't tell us much about who is affected. In general, the unemployment rate varies greatly by educational status, gender, age, and race. On average, younger people have...

higher unemployment rates than older people, and people with less education are more likely to be unemployed than people with more education.

If you hear that an economy's unemployment rate increased by "13 percent," you have no way of knowing...

how bad the change really is. Maybe the increase was from 1 percent unemployment to 1.13 percent, which would be considered a small change. Or maybe unemployment went from 10 percent to 11.3 percent, which would be considered a more substantial change.

unemployment insurance

money that is paid by the government to people who are unemployed. There are usually certain conditions that determine eligibility—such as actively looking for work and reporting work-related activities.

unemployment

occurs when someone wants to work but cannot find a job.

The BLS collects data on the first kind of underemployment (working fewer hours than you would like), but unfortunately not....

on the second kind (working in a job for which you are overqualified).

discouraged workers

people who have looked for work in the past year but have given up looking because of the condition of the labor market. Thinking about discouraged workers gives a broader view of who is affected by a recession. Not part of labor force.

Underemployed

people who have part-time jobs but would like to work full time. For example, a law-school grad who can't get a job in law and reluctantly takes work as a barista at Starbucks.

Taxes on wage income are important as well. We would expect, all else equal, that lower taxes would...

reduce unemployment. The reasoning is that lower taxes give people more incentive to find a job, knowing they will keep more of the income they earn from the job.

labor demand curve

shows the relationship between the total quantity of labor demanded by all the 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.

labor supply curve

shows the relationship between the total quantity of labor supplied in the economy and the wage rate. As the wage increases, more workers will want to work.

The main source of information on unemployment in the United States is a household survey that asks people if they are working and how much they are earning. This survey, performed by the Bureau of Labor Statistics, is called....

the Current Population Survey. Every month, employees of the BLS survey about 60,000 households. It's not exact—it would be prohibitively expensive to survey every single U.S. household every month—but the sample size is big enough to give a reliable estimate for the economy as a whole. (Year round survey)

Opponents of minimum wage legislation look at graphs which suggest that if the minimum wage is higher than the equilibrium wage, then we would expect....

unemployment to result. Of course, if the minimum wage is set at a level below the equilibrium wage, it will have no effect; this is called a nonbinding minimum wage.

We would expect that policies to protect workers would lead to greater...

unemployment. Because employers would be reluctant to hire people if they know that it will be difficult to get rid of them.