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Module 13: Causes and Categories of Unemployment
Transcript of Module 13: Causes and Categories of Unemployment
The Causes and Categories
of Unemployment The first thing to understand is that even in the best of times, jobs are constantly being created and destroyed. The Natural Rate of Unemployment Job Creation and Job Destruction There are many reasons for job loss... Structural Change in the Economy new technology
consumer's tastes change Poor management performance or bad luck at individual companies speculation
outside forces This "churning" is inevitable in today's modern economy and is also one source of *frictional unemployment* (one of the main reasons why there can be considerable amounts of unemployment even when jobs are abundant) Frictional Unemployment Skilled workers rarely take the first available job when laid off. They take their time to find a job that takes advantage of their skills and pays accordingly. Workers that voluntarily leave their jobs typically do so for personal reasons such as relocation, dissatisfaction, and better job prospects elsewhere. Workers who spend time looking for employment are engaged in *job search*. *Frictional unemployment* is unemployment due to the time workers spend in job search. A certain amount of frictional employment is inevitable: -Constant process of job creation and job destruction -new workers are always entering the labor market A limited amount of frictional unemployment is harmless and may even be a good thing. -the economy is more productive if workers take time to find jobs that are well matched to their skills -workers who are unemployed for a brief period while searching for the right job don't experience great hardships -exist even when the number of jobs being offered equals the number of people seeking jobs Structural Unemployment Results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate Wage Rate Quantity of Labor Labor Supply Labor Demand E Minimum Wage Structural Unemployment W F W E Q E Q D Q S The supply and demand model (PPC) tells us that the price of a good, service, or factor of production tends to move toward an equilibrium level that matches the quantity supplied with the quantity demanded. The same is true , in general, of labor markets. *Even at the equilibrium wage rate, WE, there will be some frictional unemployment Several factors can lead to a wage rate in excess of WE Minimum Wages Government mandated floor on the price of labor -Minimum wage is well above the wage equilibrium, leading to a persistent surplus of labor in the market LS Minimum Wage LD governments impose them to ensure that people who work can earn enough income to afford at least a minimally comfortable lifestyle
eliminates working opportunities for those that may be willing to work for lower than the binding minimum wage
Most economists agree that a sufficiently high minimum wage DOES lead to structural unemployment Labor Unions actions of labor unions can have effects similar to those of minimum wages, leading to structural employment Unions use "collective bargaining" (power in numbers) to win higher wages, benefits, and pensions. Skilled workers in a union earn more than a worker with the same skills that are not in a union. This increases the wages in the same way that minimum wage does, leading to structural unemployment (constant surplus of workers) Efficiency Wages wages that employers set above the equilibrium wage rate as an incentive for their workers to deliver better performance employees are more likely to work harder to ensure they aren't fired, which would cause them to lose their higher wages the result is a pool of workers who want jobs but can't find them Side Effects of Public Policy (Such as unemployment benefits) are meant to assist laid off workers while they are engaged in job search (expire after 26 weeks) Reduces the incentive to quickly find work; by keeping people searching for work longer,the benefits increase structural and frictional unemployment The Natural Rate of Unemployment because some frictional unemployment is inevitable and many economies also suffer from structural unemployment, a certain amount of unemployment is normal, or "natural" - Actual unemployment floats around this level Natural Rate of Unemployment: rate of unemployment that arises from the effects of frictional plus structural unemployment
Cyclical Unemployment: deviation of the actual rate of unemployment from the natural rate; the difference between actual and natural rates of unemployment Cyclical Unemployment is the share of unemployment that arises from the business cycle
Public policy cannot keep the unemployment rate persistently below the natural rate without leading to accelerated inflation REMEMBER:
The natural rate of unemployment change over time
& it can be affected by public policy Natural Unemployment =
Frictional Unemployment +
Structural Unemployment Actual Unemployment =
Natural Unemployment +
Cyclical Unemployment Changes in the Natural Rate of Unemployment Natural rate is estimated both to make forecasts and to conduct policy analysis Almost all of these estimates show that natural rate rises and falls over time. Changes in Labor Force Characteristics In general, unemployment rates tend to be lower for experienced than for inexperienced workers
Experienced workers tend to stay in a given job longer than inexperienced
Because older workers are breadwinners, they are more likely to find and keep jobs Events such as the Baby Boomers entering the workforce in 1970 can change the characteristics of the workforce, and therefore the Natural Rate of Unemployment Changes in the Labor Market Institutions Unions that negotiate wages above the equilibrium level can be a source of structural unemployment
However, temporary employment agencies reduce frictional employment by linking the unemployed directly to jobs
Technology changes, coupled with labor market institutions can also affect the natural rate of employment
Technological changes increases the need for skilled workers/ reduces unskilled workers
Wages should increase for skilled workers, but if it cannot be reduced for unskilled workers- structural unemployment increases Changes in Government Policies High minimum wage leads to structural unemployment
Generous unemployment benefits increase both structural and frictional unemployment
Some government policies, such as job-training and employment subsidies, reduce the natural rate of unemployment Carolina Sink