Module 13 The Causes & Categories of Unemployment

Module 13 Essential Questions

1. What are the three different types of unemployment and their causes?

2. What are the factors that determine the natural rate of unemployment?

Job Creation and Job Destruction The job market is constantly fluctuating Jobs are constantly being created and

destroyed1. Has the unemployment rate ever reached

0%?

2. What is the lowest UR has ever been?

3. Why?

Job Creation and Job Destruction The job market is constantly fluctuating Jobs are constantly being created and

destroyed1. Has the unemployment rate ever reached

0%?

2. What is the lowest UR has ever been? In July of 2007: 2.7% unemployment

(considered low) but…. July 2007: 4.5 million job separations (people

either were fired or quit)3. Why? Structural changes to the economy

Stop. Collaborate & Think!With a partner: find the answers to the these questions:

1. Since 2000 what new industries have emerged in the USA?

2. Since 2000 what industries have seen a decline in business or have gone under completely?

3. What are some local businesses that have emerged? Disappeared?

1. Frictional Unemployment1. Unemployment is caused by:

2. Why?

3. New workers are always…..4. Ex. A college student graduates but doesn’t

start a job for a month. 5. Ex. A truck driver is quits her job for one

company because she thinks there is a better driving route with a _____________.

6. Regarded as somewhat desirable, WHY?

1. Frictional Unemployment1. Unemployment is caused by the worker

taking time to find another job after losing a job

2. Why? Matching skills to the occupation, wages, benefits

3. New workers are always entering the job market

4. Ex. A college student graduates but doesn’t start a job for a month.

5. Ex. A truck driver is quits her job for one company because she thinks there is a better driving route with a competitor.

6. Regarded as somewhat desirable, WHY? indicates that there is job mobility & people

are better workers when the jobs match their skills

2. Structural Unemployment1. Structural unemployment is….

2. It happens because….

3. Examples of structural unemployment:

4. What examples can you think of?

What is happening in this cartoon?

2. Structural Unemployment1. Structural unemployment is….more people

seeking jobs in a labor market than there are jobs available at the current wage rate

2. It happens because…due to changes in the structural demand for labor; e.g., when certain skills become obsolete or geographic distribution of jobs changes.

3. Examples of structural unemployment: Bottle-making machines replaced glass

blowers. Airline mergers displaced many airline

workers in 1980s. Foreign competition has led to downsizing

in U.S. industry and loss of jobs. Military cutbacks led to displacement of

workers in military-related industries.

1. What examples can you think of?

What is happening in this cartoon?

What Causes Structural Unemployment? Ex: Loggers and sawmill workers lost

jobs when environmental restrictions and quotas were placed on cutting down tress from forests.

1. Minimum wages: are a p_______ f_______, so in some industries (ie, fast food) there may always be structural unemployment because there may always be a s________ of labor.

2. Labor unions: A labor union will negotiate with employers on behalf of the workers. The goal is usually to raise the wages a_________m________e________________. As a result, there may be some structural unemployment.

What Causes Structural Unemployment? Ex: Loggers and sawmill workers lost

jobs when environmental restrictions and quotas were placed on cutting down tress from forests.

1. Minimum wages: are a price floor, so in some industries (ie, fast food) there may always be structural unemployment because there may always be a surplus of labor.

2. Labor unions: A labor union will negotiate with employers on behalf of the workers. The goal is usually to raise the wages above market equilibrium. As a result, there may be some structural unemployment.

What Causes Structural Unemployment? 3. Efficiency Wages: Firms may choose to pay

efficiency wages—wages that employers set a______the e______________w_______ rate as an i____________ for their workers to deliver better performance.

If the efficiency wage creates a s_________ of workers, it has created s__________ unemployment.

4. Side Effects of Public Policy: Most economically advanced countries provide benefits to laid - off workers as a way to tide them over until they find a new job. › The drawback: it reduces the i____________ to

quickly find a new job, › Keeps more people searching for l_________,

the benefits increase s______________ and f______________ unemployment.

The alternative to unemployment benefits is to provide n___________ and let workers, and their families, fend for themselves. Most nations are willing to have support these families so that they are not financially ruined in the event of a recession.

What Causes Structural Unemployment? 3. Efficiency Wages: Firms may choose to pay

efficiency wages—wages that employers set above the equilibrium wage rate as an incentive for their workers to deliver better performance.

If the efficiency wage creates a surplus of workers, it has created structural unemployment.

4. Side Effects of Public Policy: Most economically advanced countries provide benefits to laid - off workers as a way to tide them over until they find a new job. › The drawback: it reduces the incentive to quickly

find a new job, › Keeps more people searching for longer, the

benefits increase structural and frictional unemployment.

The alternative to unemployment benefits is to provide nothing and let workers, and their families, fend for themselves. Most nations are willing to have support these families so that they are not financially ruined in the event of a recession.

Unemployment Duration

Effect of Minimum Wage on the Labor Market

Unlike We (wages at equilibrium), where the number of workers willing to work equals the number of jobs available, at Wf, more workers are willing to supply their labor than there are employers willing to hire them. This surplus (Qd < Qs) represents structural unemployment.

3. Cyclical Unemployment1. When the economy goes

through the b_____________c_______, jobs are created and destroyed, and this can add to, or subtract from, the n__________r____.

2. Cyclical unemployment : the d_____________ of the actual rate of unemployment from the natural rate, or it is the share of unemployment that arises from the b____________ c______.

3. Cyclical Unemployment1. When the economy goes

through the business cycle, jobs are created and destroyed, and this can add to, or subtract from, the natural rate.

2. Cyclical unemployment : the deviation of the actual rate of unemployment from the natural rate, or it is the share of unemployment that arises from the business cycle.

The Natural Rate of Unemployment1. Frictional unemployment is inevitable and many factors create

some structural unemployment. So a certain amount of unemployment is n__________, or “natural” and actual unemployment fluctuates around this normal level.

2. Natural rate of unemployment:

3. Natural unemployment = F_________________u_______________ + S____________ u________________

4. Actual unemployment = N_____________u_______________+ C____________ u__________________.

But the natural rate can also rise and fall.

The Natural Rate of Unemployment1. Frictional unemployment is inevitable and many factors create

some structural unemployment. So a certain amount of unemployment is normal, or “natural” and actual unemployment fluctuates around this normal level.

2. Natural rate of unemployment: the normal unemployment rate around which the actual unemployment rate fluctuates.

3. Natural unemployment = Frictional unemployment + Structural unemployment

4. Actual unemployment = Natural unemployment + Cyclical unemployment

But the natural rate can also rise and fall.

Natural Rate of Unemployment

Changes in the Natural Rate of UnemploymentCongressional Budget Office conducts budget and economic analyses for Congress. CBO believes that the U.S. natural rate of unemployment was 5.3% in 1950, rose to 6.3% by the end of the 1970s, but has fallen to 4.8% today.

1. Changes in Labor Force Characteristics

Older people are more likely to be employed. As the US workforce has gradually aged (baby boomers), this has contributed to a declining natural rate of unemployment.

2. Changes in Labor Market Institutions Decline of the labor union: this decline has weakened their ability to raise wages, so structural unemployment has been reduced.

Better technology: job searches are conducted on-line & has lessened the time a worker is in between jobs, lessening the frictional unemployment.

3. Changes in Government Policies The government offers subsidies (called tax credits) to employers to hire workers who are currently unemployed. Programs to retrain workers with obsolete skills can also lessen the natural rate of unemployment. (corporate educators/trainers)

Module 13 Review p. 132 – 133

Strive for a 5 Module 13

Read Module 14 p. 134 - 139