Unemployment Economics PDF

4. Unemployment 1. Employment and Unemployment a) Defining the Labour Market 38𝑚 32𝑚 𝑁 = 𝐿 + 𝑁𝐿 21𝑚 20𝑚...

4. Unemployment 1. Employment and Unemployment a) Defining the Labour Market 38𝑚 32𝑚 𝑁 = 𝐿 + 𝑁𝐿 21𝑚 20𝑚 𝐿= 𝐸 + 𝑈 16.5𝑚 𝐸= 𝐸 + 𝐸 𝐸 = 𝐸 + 𝐸 https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410028703 to be considered "unemployed" one must: (1) currently not be employed (2) available for work (3) actively looking for work ECON 102 Page 1 b) The Unemployment Rate (1) Unemployment rate over time 𝑈 𝑈 𝑢 = ⎯⎯= ⎯⎯⎯⎯⎯⎯ 𝐿 𝑈+𝐸 ► Highly procyclical ► downward trend since early 1980s (2) Alternative Measures of Unemployment ECON 102 Page 2 (3) Unemployment by Individual Characteristics ECON 102 Page 3  c) The Employment Rate 𝐸 share of working-age 𝑒 = ⎯⎯ population currently 𝑁 employed d) The Participation Rate 𝐿 𝑝 = ⎯⎯ 𝑁 ► Increase in participation rate since 1980s due to women entering the labour force ► Decrease in participation rate since 2010 due to baby- boomers retiring ► Dips during recessions due to discouraged workers ECON 102 Page 4 ECON 102 Page 5  2. The Determinants of Unemployment a) Defining Unemployment Unemployment = Natural Unemployment + Cyclical Unemployment 𝑢 = 𝑢 + (𝑢 − 𝑢 ) b) Cyclical Unemployment (Short Run) Boom Recession demand is high demand is low firms increase production firms decrease production firms demand more labour firms demand less labour ECON 102 Page 6  labour supply 𝑊 𝑊∗ labour demand 𝐿∗ 𝐿 C) The Natural Rate of Unemployment (Long Run) The Natural Rate of Unemployment is the unemployment that arises from structural and frictional factors, void of cyclical components. It is the long-run trend of the unemployment rate. Note: The natural rate of unemployment is neither natural nor desirable! Natural Unemployment = Frictional Unemployment + Structural Unemployment ECON 102 Page 7  (1) Frictional Unemployment "In-between" jobs unemployment find job 𝑈 𝐸 lose job firms go bankrupt, new firms enter the market workers retire, new workers enter the market  It takes time to find employer-employee matches □ time and cost of acquiring information □ skill matching □ geographical matching ECON 102 Page 8 (2) Structural Unemployment labour supply 𝑊 labour surplus 𝑊 labour demand 𝐿 ′ 𝐿 𝐿  A wage higher than the market clearing level creates a labour surplus ○ extensive margin ⇒ unemployment ○ intensive margin ⇒ underemployment □ Efficiency Wage □ Union Wage Setting □ Employment Protection □ Minimum Wage ECON 102 Page 9 c) Hysteresis ► Interaction between cyclical and natural unemployment Long periods of high cyclical unemployment can increase the natural rate of unemployment □ Skill loss □ Loss of social capital □ Negative signal for potential employers ECON 102 Page 10