Unemployment and the Labor Market

What is structural unemployment

Skills mismatch; long-term; chronic The unemployment resulting from wage rigidity and job rotation. Workers are unemployed not because the are actively searching for the jobs that best suit their individual skills but because there is a fundamental mismatch between the number of people who want to work and the number of jobs available

Discouraged workers

Some individuals calling themselves unemployed may not be seriously looking for jobs and perhaps should bear be viewed as out of the labor force. Their "unemployment" may not represent a social problem. These discouraged workers are counted as being out of the labor force and do not show up in unemployment statistics.

Transitions into and out of the labor force

The model of natural unemployment assumes that the labor force is fixed. In this case, the sole reason for unemployment is job Separation and the sole reason for leaving unemployment is job finding.

Natural rate of unemployment

The natural rate is the rate of unemployment toward which the economy gravities in the long run, given all the labor-market imperfections that impede workers from instantly finding jobs. Future umemployment rates are set at 5.5 percent

Natural Rate of Unemployment

The natural rate of unemployment is the steady-state rate of unemployment. It depends on the rate of job finding and job Separation American and European labor markets exhibit some significant differences. In recent years, Europe has experienced significantly more unemployment, shorter workweeks, more holidays, and earlier retirement, Europeans work fewer hours than Amerivans.

The rate of unemployment

U/L We assume that labor force L is fixed.

What is unemployment insurance

Unemployed workers can collect a fraction of their wages for a certain period after losing their job. In the US a worker receives 50 percent of former wage for 26 weeks Between 2009-2014 Congress extended the unemployment eligibility from 26 weeks to 99 weeks.

Unions and Collective Bargaining

Unions not only raise wages but also increase the bargaining power of labor on many other issues, such as hours of employment and working conditions.

Partially Experience Rate

When a firm lays off a worker, it is charged for only part of the worker's unemployment benefits, the remainder comes from the programs general revenue

Which of the following policies would reduce the natural rate of unemployment I. The economy?

(a) Establishing government run employment agencies to connect unemploymed workers to job vacancies. (b). An improvement to a widely used job-search website that allows it to match workers to job vacancies more efficiently. (c). Employment bonuses given to unemployed workers who are receiving unemployment insurance benefits as an incentive to find work more quickly

Why do we have minimum wage laws

*More binding for teenagers *tax credits are a better way to increase Income *Earned income credit deduction for poor workers * Earned income credit s does not raise labor costs to firms; rduces government tax revenue

Unemployment Rates

Are higher in nations with more generous unemployment insurance, as measured by the replacement rate - the percentage of previous wages that is replaced when a worker loses a job.

The Unemployment rate

Differs substantially among demographics. In particular, the unemployment rates for younger workers are much higher than for older workers.

What is a sectoral shift

Economists call a change in the composition of demand among industries, or region. There is always frictional unemployment

The Duration of Unemployment

If most unemployment is short-term, one might argue that it is frictional and perhaps unavoidable. Long-term unemployment cannot easily be attributed to the time it takes to match jobs and workers. Structural.

What is the Steady State

If the unemployment rate is neither rising nor falling that is, if the labor market is in a stready state- then the number of people finding jobs (fu) must equal the number of people losing jobs. fU = sE

Wage Rigidity

Is the failure of wages to adjust to a level at which labor supply equals labor demand

What is the Rate of Separation

It is the fraction of employed individuals who lose or leave their jobs each month. Demoted as S

What is the Rate of job finding?

It is the fraction of unemployed individuals who find jobs each month. Demoted as F

What are 3 causes of wage rigidity

Minimum wage Monopoly power of unions Efficiency wages

Unions and collective bargaining

Only 13 percent of US worker's have their wages set through collective bargaining He wages of unionized workers are determined not by the equilibrium of supply and demand but by bargaining between union leaders and firm management. The result is a reduction in the number of workers hired, a lower rate of job finding, and an increase in structural unemployment.

Unemployment Insurance

Raises the natural unemployment rate Inadvertently increase the amount of frictional unemployment

The unemployment rate

Rate of Job Separation + Rate of Job Finding

What is 100 percent Experience Rate

Requires a firm that lays off a worker to bear the Fil cost of that worker's unemployment benefits

Structural Unemployment

Results when the real wage remains above the level that equilibrates the labor supply and the labor demand. Minimum-wage legislation is one cause of wage rigidity. Unions and the threat of unionization are another. Finally, efficiency wage theories suggest that, for various reasons, firms may find it profitable to keep wages high despite an excess supply of labor.

Natural rate of unemployment

The average rate of unemployment around which the economy fluctuates.

Job Separation

The only way to change the natural rate of employment is - to change either job Separation of job Finding rate

Labor Force

The sum of the employed and the unemployed. L = E + U

Outsiders

The unemployed, the outsiders, bear part of the cost of higher wages because at a lower wage they might be hired.

What is frictional unemployment

The unemployment caused by the time it takes workers to search for a job. Short-term. "Job search"

Efficiency Wage Theories

These theories hold that high wages make workers more productive. One efficiency-wage theory, which is applied mostly to poor countries, holds that wages influence nutrition. Better-paid workers can afford a more nutritious diet, and healthier workers are more productive. Higher wages reduces labor turnover. Reduce Adverse selection- the tendency of people with more information ( in this case, workers who know their own outside opportunities) to self-select in a way that disadvantage people with less information (the firm). By paying above equilibrium wage, the firm may reduce adverse selection A higher wage improves worker effort. Economists recognize this possibility as an example of moral hazard - the tendency of people to behave inappropriately when their behavior is imperfectly monitored.

Real Wage Rigidity

When real wage is above the level that equilibrates supply and demand. The quantity of labor supplied exceeds the quantity demanded. Real wage rigidity reduces the rate of job finding and raises the level of unemployment. Real wage rigidity leads to job rotation

Labor Force

With a smaller labor force, the economy naturally produces a smaller output of goods and services, which in turn means a lower level of real GDP.