Labor Economics Chapter 12 Unemployment PDF

 Chapter 12 Unemployment McGraw-Hill/Irwin Labor Economics, 4th edition Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  13 - 3...

 Chapter 12 Unemployment McGraw-Hill/Irwin Labor Economics, 4th edition Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  13 - 3 The Rate of Unemployment *Labor force = the employed +the unemployed *The unemployment rate is the percentage of the people in the labor force who are unemployed. *The steady-state rate of unemployment depends on the transition probabilities among employment, unemployment, and the nonmarket sector. *The unemployment rate increases in recessions and decreases in expansions. Unemployment Number of people unemployed X 100 = rate number of people unemployed + employed  13 - 4 Flows Between Employment and Unemployment Job Losers (  E) Employed (E workers) Unemployed (U Workers) Job Finders (h  U) Suppose a person is either working or unemployed. At any point in time, some workers lose their jobs and unemployed workers find jobs. If the probability of losing a job equals , there are   E job losers. If the probability of finding a job equals h, there are h  U job finders.  13 - 5 Unemployed Persons by Reason for Unemployment, 1967-2005 60 Job losers 50 40 Job leavers Percent 30 20 Reentrants 10 New entrants 0 1960 1970 1980 1990 2000 2010 Y e ar There are four ways in which a person can become unemployed: Job Losers: Some workers lose their jobs due to layoffs or plant closures. This type of unemployment is considered the most common. Job Leavers: Some workers leave their jobs voluntarily, often to search for better opportunities or a career change. They may end up unemployed if they leave without securing a new job. Reentrants: These are job seekers returning to the labor market after a period of absence, whether due to personal, educational, or other reasons that kept them out of the labor force for some time. New Entrants: This group includes people who are new to the labor market, such as recent high school or college graduates who are looking for work for the first time.  13 - 6 Unemployment Duration Although most spells of unemployment do not last very long, most weeks of unemployment can be attributed to workers who are in very long spells.  13 - 7 Unemployed Persons by Duration of Unemployment, 1948-2002 70 60 Less than 5 w eeks 50 Percent 40 5-14 w eeks 30 More than 26 w eeks 20 10 15-26 w eeks 0 1940 1950 1960 1970 1980 1990 2000 2010 Year Figure shows that more unemployed people are experiencing long-term unemployment. Even before the Great Recession, the percentage of unemployed people without work for over 26 weeks had been rising, from about 5– 10% in the 1950s to 18% by 2007. The recession caused a sharp increase, with 43.3% of unemployed individuals in long-term unemployment by 2010, and levels remained high at 37.6% in 2013. This trend suggests that unemployment is no longer just a short-term issue. Additionally, the unemployment rate includes only those actively looking for work, not “discouraged workers” who stopped searching.  13 - 8 Trends in Alternative Measures of the Unemployment Rate 12 Official + marginally attached workers + part- time workers available for full-time work 10 Unemployment Rate 8 6 Official unemployment rate 4 Official + marginally attached workers 2 0 1994 1996 1998 2000 2002 2004 2006 Year  13 - 9 Types of Unemployment Frictional Unemployment: Even a well-functioning competitive economy experiences frictional unemployment because some workers will unavoidably be “in between” jobs. Structural Unemployment: Structural unemployment arises when there is an imbalance between the supply of workers and the demand for workers. Technological Unemployment: A kind of structural unemployment may take place in an economy because of technological improvement. such unemployment may be described as technological unemployment.  13 - 10 Types of Unemployment Casual Unemployment In industries such as building construction catering or agriculture where workers are employed on a day -to-day basis, there are chances of casual unemployment occurring due to short-term contract. Seasonal Unemployment There are some industries and occupations such as agriculture, the catering trade in holiday resorts, some agro- based industries activities such as sugar mills and rice mills etc. i n w h i c h production activities are seasonal in nature.  13 - 11 Types of Unemployment Cyclical Unemployment Capitalist biased, advanced countries are subject to trade cycles. Trade cycles, especially during recession and depression phase cause cyclical unemployment in these countries. Since cyclical phase cannot be Permanente, cyclical unemployment remains only as a short-term phenomenon. Chronic Unemployment When unemployment tends to be a long t e r m f e a t u r e o f c o u n t r y , it is called “Chronic Unemployment”. Lack of developed resources and their utilization.  13 - 12 Job Search The asking wage makes the worker indifferent between continuing his search activities and accepting the job offer at hand. An increase in the benefits from search raises the asking wage and lengthens the duration of the unemployment spell An increase in search costs reduces the asking wage and shortens the duration of the unemployment spell.  13 - 13 The asking wage is the threshold wage that determines if the unemployed worker accepts or rejects incoming job offers. There is a clear link between a worker’s asking wage and the length of the unemployment spell the worker will experience. Workers who have low asking wages will find acceptable jobs very quickly and the unemployment spell will be short. Workers with high asking wages will take a long time to find an acceptable job and the unemployment spell will be very long.  13 - 14 Unemployment Insurance Unemployment insurance lengthens the duration of unemployment spells and increases the probability that workers are laid off temporarily.  13 - 15 Efficiency-wage theories suggest that high wages make workers more productive. So, though a wage reduction would lower a firm’s wage bill, it would also lower worker productivity and the firm’s profits. The first efficiency-wage theory suggests that wages influence attrition. A second efficiency-wage theory contends that high wages reduce labor turnover. A third efficiency-wage theory holds that the average quality of a firm’s workforce depends on the wage it pays its employees. A fourth efficiency-wage theory holds that a high wage improves worker effort.  13 - 16 Efficiency Wages and Unemployment Efficiency wages arise when it is difficult to monitor workers’ output. The above-market efficiency wage generates involuntary unemployment  13 - 17 Determination of Efficiency Wage  13 - 18 Determination of Efficiency Wage If shirking is not a problem, the market clears at wage w* (where supply S equals demand D). If monitoring is expensive, the threat of unemployment can keep workers in line. If unemployment is high (point F), firms can attract workers who will not shirk at a very low wage. If unemployment is low (point G), firms must pay a very high wage to ensure that workers do not shirk. The efficiency wage wNS is given by the intersection of the no-shirking supply curve (NS) and the demand curve.  13 - 19 The discussion generates an upward-sloping no-shirking supply curve (labeled NS in Figure), which gives the number of nonshirking workers that firms can hire at each wage. The no- shirking supply curve states that when firms employ few workers out of the total E (point F), they can attract nonshirking workers at a low wage because a layoff leads to a long and costly unemployment spell. If firms hire a large number of workers (point G), they must pay higher wages to encourage workers not to shirk. The no-shirking supply curve, therefore, gives the number of workers that the market can attract at any given wage and who will not shirk.  13 - 20 Note that the no-shirking supply curve NS will never touch the perfectly inelastic supply curve at E workers and that the difference between the two curves gives the number of workers who are unemployed. If the market employs all the workers at a particular wage, a shirking worker who gets fired can walk across the street and get another job. In other words, there is no penalty for shirking. The key insight provided by the efficiency wage model is clear: Some unemployment is necessary to keep the employed workers in line  13 - 21 Implied Contracts The long-term nature of labor contracts (perhaps resulting from specific training) introduces opportunities for workers and firms to bargain over both wages and layoff probabilities. The bargaining leads to a contract that specifies both the wage and the number of hours of work for any given set of aggregate economic conditions. Because these contracts will exist even if the workers are not represented by a formal institution like a union, these labor market contracts are called implicit contracts Implicit contract theory argues that workers prefer employment contracts where incomes are relatively stable over the business cycle, even if such contracts imply reductions in hours of work during recessions.  13 - 22 The Phillips Curve In 1958, A. W. H. Phillips published a famous study documenting a negative correlation between the rate of inflation and the rate of unemployment in the United Kingdom from 1861 to 1957. The negative relationship between these two variables, illustrated in Figure is now known as the Phillips curve A downward-sloping Phillips curve can only exist in the short run. In the long run, there is no trade-off between inflation and unemployment.  13 - 23 The Phillips Curve Rate of Inflation The Phillips curve describes the negative correlation between the inflation rate and the unemployment rate. The curve implies that an economy faces a trade-off between 4 B inflation and unemployment. A 3 Unemployment Rate  13 - 24 Suppose, for instance, that the unemployment rate is 7 percent and that the inflation rate is 3 percent, as at point A in the figure. The Phillips curve implies that the government could pursue expansionary policies that would move the economy to point B, where the unemployment rate falls to 5 percent and the inflation rate rises to 4 percent. Depending on what the government perceives to be in the national interest, it might then be worthwhile to pursue fiscal and monetary policies that would lower the unemployment rate at the cost of a higher rate of inflation.  13 - 25 The natural rate of unemployment The natural rate of unemployment is the average rate of unemployment around which the economy fluctuates, and it is the rate of unemployment toward which the economy gravitates in the long run. Factors affecting in the natural rate of unemployment 1.Transition probabilities indicating the rate of job loss among workers, the rate of job finding among the unemployment, and the magnitude of the flows between the market and nonmarket sectors. 2.Demographic changes shifts the natural rate of the unemployment. 3.The steady rise in the participation rate of women in the labor force (As woman enter and reenter the labor market, it is inevitable that some unemployment arises). 4.Structural economic changes also affect the natural rate of the unemployment.