Principles of Macroeconomics Chapter 11 Unemployment & Labor Force Participation PDF

Principles of Macroeconomics Chapter 11 Unemployment and Labor Force Participation 1 Introduction 2 Unemployment Rate 3 Civilian Labor Force 4 Employment Level 5 No...

Principles of Macroeconomics Chapter 11 Unemployment and Labor Force Participation 1 Introduction 2 Unemployment Rate 3 Civilian Labor Force 4 Employment Level 5 Not in Labor Force 6 Labor Force Participation Rate 7 Labor Force Participation-Female 8 Labor Force Participation-Male 9  Monthly Job Losses (in millions) 6500 Total Job Separations 6000 5500 5000 4500 4000 3500 3000 0 1 1 2 2 3 3 3 4 4 5 5 5 6 6 7 7 8 8 8 9 9 0 0 0 1 1 2 2 3 3 3 4 4 5 5 5 6 6 7 7 1 /0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/0 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10 3 8 10  Job Separations and Hires (in millions) 6500 6000 5500 5000 4500 4000 3500 3000 00 01 01 02 02 03 03 03 04 04 05 05 05 06 06 07 07 08 08 /08 /09 /09 /10 /10 /10 /11 /11 /12 /12 /13 /13 /13 /14 /14 /15 /15 /15 /16 /16 /17 /17 1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1/ /1Total 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10 3 8 1 6 11 separations 4/ 9/ 2/ 7/ 12/ 5/ 10/ 3/ 8/ 1/ 6/ 11/ 4/ 9/ 2/ 7/ 12/ 5/ 10/ 3/ 8/ 11  Objectives  Employment, Unemployment and Labor Force Dynamics.  How are each of these measured?  What are the causes of unemployment? How institutions impact the decision of some individuals to work or choose not to work. 12  Why do we care?  Unemployment implies some factors of production are idle and there is lost output,  At the individual level unemployment lead 1. Loss of human capital 2. Income for unemployed 3. Mental health problems 4. Social and family problems (divorce) 13  Why this differences in trend?  Move from Manufacturing economy to Services economy due to technological change.  Manufacturing used to hire mostly low skilled men workers.  But due to better technology, they are able to produce more with less labor force.  And many of the labor force they hire is high skilled engineers, software developers, and so on. 14  The difference in trend continued..  Due to the rise in service sectors, female labor force participation went up.  Females have also increased their education and skills more than their male counterparts.  And services sector like healthcare, education are hiring more employees than ever before. 15 Employment, Unemployment, and Labor Force Participation in the U.S. Population 16  How do we define Labor Force?  Labor Force: All people who are either actively looking for work or are working in an economy (EMPLOYED+UNEMPLOYED).  The following groups are not included. People who give up looking for a job, full-time students, Disabled people , People under age 16, People serving in the armed forces, and Institutionalized people. 17 LABOR FORCE 18  Definition Labor force participation rate: The percentage of adults in the labor force. It tells us what percentage of adults want to work. Unemployed workers: Adults who do not have a job but who are looking for work. Unemployment rate: The percentage of the labor force without a job. 19  Unemployment  Someone is unemployed only if he or she is willing and able to work but cannot find a job.  To be counted as unemployed, a person must be: 16 years or older not institutionalized (e.g., not in prison) a civilian, and looking for work. 20  Labor Force Participation Unemployed  Employed Labor force LFPR   100 Adult population Adult population  In the United States (circa 2014), there are 155.4 million members of the labor force and 247.4 million adult, noninstitutionalized civilians.  In 2014, the labor force participation rate was: LFPR= 155.4 million x 100 = 62.8% 247.4 million 21  Determinants of Labor Force Participation  Labor force participation is affected by life cycle effects and demographics.  Labor Force Participation is also affected by Incentives.  Advances in technology such as birth control pills, washing machines, appliances that freed up women to join the labor force. 22  Labor Force Participation Rate  Life Cycle Effects affect labor force participation rate. 23 Life Cycle Effects and Demographics  A country that has larger fraction of prime working age population will likely have high labor force participation rate. Why?  Because people below 19 years old are likely full-time students.  People above the age of 65 are likely to retire. 24  Incentives affect labor force participation rate  The choice to work can be influenced by taxes on workers and benefits paid to nonworkers.  Let’s look at how different retirement system affects labor force participation rate across countries. 25 Labor Force Participation Rate for 55- 64 age category 26 Differences in labor force participation across countries  In the diagram in the previous slide, only 1/3rd of Belgians in the age category 55-64 were in the labor force. Contrast that with 2/3rd of Americans in the labor force?  Why this difference?  There are some cultural differences for sure(hard working Japanese) but most of the difference is driven by incentives to work. 27 How Incentives Affect The choice to Retire?  Benefits to non-workers are much higher in countries like Belgium compared to the US.  Taxes are also higher for workers in Belgium.  So say you are in your 60s living in Belgium and deciding whether to work or retire.  Let’s analyze the costs and benefits. 28  If you choose to continue working:  First, you are losing out on the benefits b/c you do not qualify for government pension if you are working. Cost 1  Second, you are also being taxed at a high rate. Cost2  You are also missing out on leisure. Cost 3  Your total cost of working = Cost1 + Cost2 + Cost3  After taking into account all of these costs, it might very well be the case that the benefits of not working are larger than the benefits of working.  Work is penalized and non-work is rewarded.  Thus, you can see how incentives inherent in the tax system can affect labor force participation choice. 29  Tyler Cowen and Alex Tabarrok Modern Principles: Macroeconomics, Third Edition / Modern Principles of Economics, Third Edition Copyright © 2015 by Worth Publishers  Advances in Technology  In 1950s and 1960s, the advent of technologies such as washing machines that freed up time that could instead be utilized in the labor force.  Birth Control Pills: Low cost, reliable convenient method of controlling fertility. Pill reduced the cost of obtaining a professional degree. More education High Labor Force participation Women Working: What’s the Pill Got to Do With31I t?  Unemployment  In April 2014, there were 9.8 million people unemployed in the U.S. and 145.7 employed.  Together, the employed and the unemployed make up the labor force of 155.5 million.  The unemployment rate was: Unemployed Unemployed Unemployme nt rate (%)   100 Unemployed  Employed Labor force 9.8 million 9.8 Unemployme nt rate   100 6.3% 9.8 m  145.7m 155.5 32  Self-Check If 2 million people are unemployed and 8 million are employed, the unemployment rate is: a. 2%. b. 20%. c. 25%. 33  Unemployment  Unemployment, especially if it is long-term, can be financially and psychologically devastating.  Unemployment also means that the economy is underperforming.  The unemployment rate is the single best indicator of how well the labor market is working, but it is incomplete.  The unemployment rate does not include discouraged or underemployed workers. 34  Duration of Unemployment in the US (Normal Times) Most unemployment is short duration 35 Comparison to the Great Recession 36  Definition Discouraged workers: Workers who have given up looking for work but who would still like a job. 37  Discouraged Workers  Discouraged workers are difficult to measure because the concept is not well-defined.  One definition is workers who want and are available for work, and who have looked for a job sometime in the last year but not in the last month because they believe that no jobs were available for them.  Using this definition, the number of discouraged workers is small relative to the number of unemployed workers. 38  Discouraged Workers The Unemployment Rate With and Without Discouraged Workers 39  Underemployment  The unemployment rate also doesn’t measure the quality of the jobs or how well workers are matched to their jobs.  A taxi driver with a PhD in chemistry is counted as fully employed; so is a part-time worker.  Defining and measuring partial employment is difficult.  In July 2017, the underemployment rate in US was 12.5 percent. 40  Definition Underemployment rate: A Bureau of Labor Statistics measure that includes part-time workers who would rather have a full-time position and people who would like to work but have given up looking for a job. 41  Types of Unemployment Three main types of unemployment  Frictional Unemployment  Structural Unemployment  Cyclical Unemployment 42  Definition Frictional Unemployment: Short-term unemployment caused by the ordinary difficulties of matching employee to employer. 43  Frictional Unemployment  Finding a job that you want at a wage that you will accept and that the employer will pay takes time. This leads to frictional unemployment.  Scarcity of information is one of the causes of frictional unemployment. 44  Definition Structural Unemployment Persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs. 45  Structural Unemployment Factors that can increase structural unemployment:  Large, long-lasting shocks that require the economy to restructure. – Oil shocks, shifts from manufacturing to services, globalization, and technology shocks.  Labor regulations. – Unemployment benefits, minimum wages, powerful unions, and employment protection laws. 46  Structural Unemployment  Structural unemployment has significant costs: Loss of economic output. The unemployed suffer higher levels of stress, and lower rates of measured happiness.  Factors that can reduce structural unemployment: Active labor market policies. – Job retraining, job-search assistance, work tests, and early employment bonuses. 47  Structural Unemployment  Innovation and competition drive progress, which creates new jobs and destroys old jobs: “creative destruction.” 48  Creative Destruction  Innovations, new ideas and new products imply that competition among firms will result in some companies growing in size and other companies shrinking or going out of business.  Growing Retailers: Albertsons, Nike, Amazon, Dollar Tree  Declining: Toys R US, Sears, JC Penney, Radio Shack.  Demand for some products or occupations decline and some will increase Occupations with declining demand: Switchboard operator, textile worker, mail carrier, semiconductor processor, travel agent. Occupations with increasing demand: Home health aide, physical therapist, web developers, computer programmers, data analysts. 49  Definition Cyclical Unemployment Unemployment correlated with the business cycle. 50 Cyclical Unemployment 51  Cyclical Unemployment  Unemployment increases dramatically during a recession because: When GDP is falling, firms often lay off workers, which increases unemployment. 52  Definition Natural Unemployment Rate: The rate of structural plus frictional unemployment. 53  Natural Unemployment Rate  The underlying rates of frictional and structural unemployment change only slowly through time as major, long-lasting features of the economy change.  Cyclical unemployment can increase or decrease dramatically over a matter of months.  The natural rate changes only slowly through time and the actual rate of unemployment varies around the natural rate. 54 Natural Unemployment Rate 55  Minimum Wage  The minimum wage is also more likely to create unemployment among young workers because they are more likely to work at min. wage.  In 2014 in France, 23% of workers under the age of 25 were unemployed, while in the United States 13% of these workers were unemployed. 56 Minimum Wage 57  Definition Union: An association of workers that bargains collectively with employers over wages, benefits, and working conditions. 58  Unions  Unions can provide value for workers and employers  Excessively strong unions have an effect similar to minimum wages. 59  Definition Employment At-Will Doctrine: States that an employee may quit and an employer may fire an employee at any time and for any reason. There are many exceptions to the at-will doctrine, but it is the most basic U.S. employment law. 60  Employment Protection Laws  Employment protection laws have the following effects: Creates valuable insurance for workers with full-time jobs. Makes labor markets less flexible and dynamic. Increases the duration of unemployment. Increases unemployment rates among young or otherwise “riskier” workers. 61 Employment Protection Laws 62