Chapter 3: Combating Unemployment

• Chapter 3 discusses how to combat unemployment

Indicators of Employment and Unemployment

• The shadow of unemployment includes employed individuals not counted as unemployed by the INSEE (National Institute of Statistics and Economic Studies) and who do not meet the BIT (International Labor Office) criteria
• Unemployment definition has limitations, underestimating joblessness by not capturing all situations
• Underemployed individuals work part-time by choice or want to work but cannot find employment
• There are two methods of measuring unemployment: BIT/INSEE criteria and France Travail (FT) criteria
• The BIT/INSEE criteria include not working during the reference week, being available to work within 15 days, and actively seeking employment the previous month
• France Travail categories include:
  • Category A: Unemployed during the reference week and actively seeking work
  • Category B: Working less than 78 hours in a month and seeking employment
  • Category C: Part-time employment (more than 78 hours/month) and seeking employment
• Combining both measurement methods provides a more comprehensive view of unemployment figures and situations
• Employment rate = (number of employed active individuals/active population) x 100 Unemployment rate = (number of unemployed individuals/active population) x 100

Unemployment Rate Examples

• In France, in 2018, the employment rate was 65.4%, while the unemployment rate was 9.1%
• Between 1976 and 2018, unemployment in France increased 3.4 times due to exponential population growth and a slowdown in available job growth

Unemployment Duration

• Short-term unemployment is less than 1 year
• Long-term unemployment is between 1 and 2 years
• Very long-term unemployment is greater than 2 years

Types of Unemployment

• Cyclical/Keynesian unemployment is non-permanent and caused by insufficient demand, which requires creating demand (outlets) as a solution
• Structural/neoclassical unemployment is permanent, resulting from high labor costs affecting company profitability, which requires lowering production costs
• The Keynesian approach involves demand theory, where companies want to avoid unsold inventory, which has a macro-economic effect, with short-term choices requiring state intervention in the capitalist system
• Salary is determined by a collective agreement by arbitrage between employers and labor unions, and also determines the minimum wage (SMIC)
• The wage rate is a function of marginal productivity conditions
• Nominal/apparent salary, posted on the pay slip
• The requirement for work originates from employers and depends on effective/anticipated demand
• The supply of labor originates from employees and depends on economic factors (income, purchasing power) and socio-demographic (end of training age, return to work)

Economic Growth and Unemployment

• The unemployment rate moves inversely to economic growth with a time lag
• A negative supply shock causes an increase in the costs of a company, which leads to austerity measures (layoffs, increasing cyclical unemployment)
• Certain worker categories are more affected, like young people with low skills and limited human capital
• Sequence 2 explores the structural causes of unemployment
• In neoclassical theory, the labor market operates based on supply and demand laws, according to the principles of perfect competition (CPP)
• Individuals should be rational and minimize their costs
• Real wage is the price of labor formed by the interaction of labor supply and labor demand, which helps balance the two
• Heterogeneity in the labor factor includes qualifications and productivity
• Matching unemployment is a situation where the supply of labor does not match the labor demand emanating from companies

Institutional Effects on Structural Unemployment

• The state's role is social protection via allocations/compensation
• Unemployment benefits can create moral hazard, decreasing the urgency to actively seek employment
• In the Keynesian approach, compensating unemployed individuals to find quality employment improves the matching of supply and demand
• Employment protection policies make layoffs too regulated which hinders hiring
• Labor law impedes the creative destruction process, because redeployment of workers does not occur smoothly
• However, labor law can encourage firms to implement training strategies to avoid layoffs by improving human capital productivity
• Protections are favorable to all, but impacts Insiders (CDI) and Outsiders (CDD/newcomers/trainees) differently:
  • Insiders being stable/experienced/older, protected by labor laws/unions, with minimum wage/SMIC increases being advantageous to them
  • Outsiders being precarious, disfavored by unions on arrival, with minimum wage/SMIC increases being disadvantageous
• Unionization rate = % of unionized individuals Coverage rate = number of individuals covered by union measures
• Employers are “price makers" to fix salary to make sure the marginal cost of labor is less than marginal productivity, with:
  • Marginal cost of labor: additional cost associated with additional unit of good/service
  • Marginal productivity: added efficiency by supplementary unit

Labor Costs

• Labor cost = net salary + employee contributions + employer contributions
• Apparition unemployment explained by Beverly curve, which explains correlation between unemployment and vacancy
• Spatial and qualification mismatches are sources of structural unemployment, and account for 60% of difficult recruiting in 2015
• Spatial/geographic mismatch is the location of the job versus the candidate's place of residence
• Qualification mismatch is the difference in qualifications, soft skills/know-how between the candidate and company
• Frictions (delays) in the process of matching unemployed individuals and employers include time to a new job and time to hire, where compensation elongates
• Information asymmetry is a source of structural unemployment because employers don't know candidate skills

Asymmetric Information

• Ex-ante information: candidates only show positive characteristics
• Ex-post information: bad characteristics are shown after hiring
• Asymmetries may lead to adverse selection (choosing capital that won't create intended profit), where companies offer higher-than-equilibrium wages (efficiency wages)
  • Neoclassical approach: Work more to earn more
  • Post-Keynesian approach: Pay more to get workers
• If companies always chose the wage strategy, but the need for workers decreases, structural unemployment results
• Sequence 4 outlines macro-economic policies

Supporting Overall Demand

• For Keynes, activity needs state intervention by budgetary stimulus:
  • Monetary policy involves the central bank lowering interest rates to encourage company and household borrowing and boost demand
  • Fiscal policy involves tax cuts for firms and households, and increased social benefits to encourage investment
  • Revenue policy involves increasing the minimum wage to modify behavior and encourage greater demand

Economic Context

• Increased demand increases production and lowers cyclical unemployment while increasing distributed and virtual demand
• Only Keynesian stimulus is futile if the unemployment is structural
• Agents eco anticipate taxes, and companies cannot satisfy demand (due to un-coordination, and closed economy)
• Expansionist budgetary policies in the U.S. from 2018-2019 (direct tax cut) lowered the unemployment rate and stimulated econ growth
• The neoclassical approach to lowering labor costs includes increasing hiring, production, and GDP
• Lower labor costs are effective with low salaries due to high unemployment
• A 1% fall in labor costs leads to a 1.7% increase in manufacturing
• Tax credit for competitiveness and employment (CICE), until 2019 awarded tax advantage for firms hiring low-salary workers

Reducing Labour Costs

• Reducing labor costs can be bad, due to rising public debt and risk of rising capital, and switching factors
• Sequence 6 discusses training and flexibility policies
• Flexibility is the mobility of production factors, free circulation, and self-adjustment wages according to supply and demand
• Unions do not favor flexibility
• In a flexible labor market
  • Unemployment rises sharply but decreases rapidly, thus is similar to CPP, a rigid model
  • There are advantages and disadvantages
  • Zero hours contracts in UK tie workers without providing reliable hours for income for precarity and career
• Training policies correlate those with more training with more access to employment
• Trained staff are productive and match companies' expectations
• Balance between flexibility and security with a flexicurity system is another method, with the model of the Danish Gold Triangle
  • High external quality flexibility exists
  • Continued support with unemployment
  • Continued training