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Rob GodbyUniversity of Wyoming

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■ “Job loss means lower livingstandards in the present, anxietyabout the future, and reduced self-esteem.”

■ Unemployment in the is usuallydivided into two categories:1 . The Natural Rate of Unemployment

-Frictional Unemployment-Wait Unemployment

2 . The Cyclical Rate of Unemployment

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■ Natural Rate of Unemployment (trend)represents persistent joblessness thatdoes not go away on its own even in thelong run. Refers to the amount ofunemployment that the economy normallyexperiences.

■ Cyclical Unemployment (variation fromtrend) refers to the year-to-yearfluctuations in unemployment around itsnatural rate. Deals with short-termfluctuations associated with the ups anddowns of the business cycle.

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■ How is unemployment measured◆ is it accurate

■ Why does unemployment exist atall?

■ What affects “duration” ofunemployment?◆ What affects it by group?

■ Are there policies that can reduceit?

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■ The Monthly Unemployment Rate iscalculated by:◆ The BLS surveying 60,000 randomly

selected households and categorizingeach adult (i.e. >16 years old) as:

1 . Currently employed (have a payingjob- full or part-time).

2 . Unemployed but actively seeking ajob.

3 . Not in the labor force (i.e. neither ofabove).

������������ �������■ A person is employed if he or she

has spent most of the previous weekworking at a paid job.

■ A person is unemployed if he or sheis:◆ on temporary layoff

◆ is looking for a job◆ is waiting for the start of a new job

■ A person in neither category is not inthe labor force.

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■ The Labor Force is the number ofemployed persons plus the numberof unemployed.

■ The Unemployment Rate is:

u = U/(E+U)✦ “u” is the unemployment rate

✦ “U” is the number ofunemployed persons

✦ “E+U” is the labor force

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■ The Labor-Force Participation Rateillustrates the fraction of thepopulation that has chosen toparticipate in the labor market.

■ The Labor-Force Participation Rateis:

PR = (E+U) / Population

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■ For the population as a whole,consider the probability, s, of beingseparated from a job.◆ Number of people who lose a job in

a given period = s x E.

■ Likewise, for the unemployed as awhole there is a probability offinding a job, f.◆ Number of people who lose a job in

a given period = f x U.

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■ In a steady state, ∆U = 0, thussE = fU

■ Since E = L-U

fU = s(L-U)■ divide both sides by L

fU/L = s(1-U/L) = s-sU/LU/L(s+f) = s

u = U/L = s/(s+f)■ Natural rate of U depends on s and f.

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■ If s = 0.01 (jobs last 100 months onaverage.

■ If 20% of unemployed find a jobeach month (f = 0.2)

U/L = s/(s+f) = 0.01/(0.01+0.2) =0.0476

■ Natural rate of U is about 4.8%.

��� ��������������■ Policy aimed at reducing the

Natural Rate of U must reduce s orincrease f.

■ For Frictional U:◆ must improve economy’s ability to

match the right person to the rightjob.

◆ Reduces turnover (s) andincreases matches (f).

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■ Search unemployment is inevitablebecause the economy is alwayschanging. Situations that cause thistype of unemployment include:◆ New entrants into the job market◆ Re-entrants into the labor force

◆ Relocations◆ Layoffs due to competition in the

economy

◆ Job quitters

������������� �������■ This is the term used to refer to

unemployed who have difficulty findingjobs due to a lack of job skills orsectoral shifts in the economy.◆ i.e. -unskilled or uneducated workers.

In a modern economy, they mayexperience very long periods ofunemployment.

◆ Examples: fishermen, assembly-lineand textile workers.

◆ This has been used to explainpersistent U in the EU.

■ Government-run employmentagencies:◆ Better information about job

vacancies and potential workers inorder to match workers and jobsmore quickly (reduces search costs).

■ Public training programs:◆ Aim to ease the transition of workers

from declining to growing industriesand to help disadvantaged groupsescape poverty (more people can domore jobs).

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■ Unemployment insurance:◆ Partial payment of former wages for

a limited time period only to those“who were laid off...”

◆ Increases the amount of searchunemployment without intending to.

◆ Reduces “costs” of joblessness.✦ May reduce incentive to find job (f

decreases).◆ This has been used to explain persistent

unemployment in the EU, in combinationwith structural U.

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■ What if wages do not adjust toclear markets?

■ Wage too high:◆ the result is a surplus of labour or

wait unemployment (lower f)

■ What institutions or economycharacteristics cause waitunemployment?

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■ When a minimum-wage law forcesthe wage to remain above the levelthat balances supply and demand,it creates a surplus of labor.

■ In market for unskilled labour, aminimum wage may lead topersistent wait unemployment.

■ This reduces the rate of findingnew jobs (f).

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■ Research has shown that minimumwage laws may be too low forunskilled workers because of firm’smonopsony power.◆ In New Jersey the minimum wage was

increased while in Pennsylvania it wasnot.

◆ Unemployment rate fell in NJ- supportthat firms were exploiting monopsonypower.

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■ A union is a worker associationthat bargains with employers overwages and working conditions.

◆ A union is a type of cartel.■ Unions benefit insiders (higher

wages) but not the outsiders (waitunemployment).

■ Unions may explain some of thedifferences in Unemploymentacross countries.

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■ Wages are higher than market clearingwage (increasing f) to promote the followinggoals of the firm:

◆ Worker Health: Better paid workers eatbetter and thus are more productive.

◆ Worker Turnover: A higher paid workeris less likely to look for another job.

◆ Worker Effort: Higher wages motivateworkers to put forward their best effort.

◆ Worker Quality: Higher wages attract abetter pool of workers to apply for jobs.

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■ It is hard to distinguish between aperson who is unemployed and aperson who is not in the laborforce.

■ It is suggested that the“unemployment rate is inaccuratelylow” because it doesn’t reflect:◆ Underemployed◆ Discouraged workers

■ The “underemployed” are thosewho are working part time whenthey really want full-time work.

■ Discouraged Workers are thosewho have given up looking for workand report that they are no longerin the labor force, when in fact, theywould be willing to work if offered asuitable, stable job (they shouldactually count as unemployed).

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■ Discouraged workers reducemeasured unemployment becausethey are not included when actuallythey should be. In the calculation, Ushould increase, increasing thenumerator proportionately more thanthe denominator.

u = U/(E+U)so should be bigger in the

presence of discouraged workers.

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■ Although we usually hear onlyabout the national unemploymentrate, unemployment rates andparticipation rates vary significantlyby gender, age and race.

■ This indicates possible structuraldifferences among groups◆ access to education

◆ discrimination◆ lack of connections?

DemographicGroup

UnemploymentRate % (1995)

Labor ForceParticipationRate % (1995)

Adults:Total 5.6 66.6

White, male 4.9 75.7White, female 4.8 59.0Black, male 10.6 69.0

Black, female 10.2 59.5Teenagers: (16-

19 yrs. old)Total 17.3 53.5

White, male 15.6 58.5White, female 13.4 55.5Black, male 37.1 40.1

Black, female 34.3 39.8

'�������������� �������■ The rate of unemployment is

determined by the number of joblessand the average duration ofjoblessness they experience.◆ The average duration of

unemployment is very short (< 10weeks) for 75% of the unemployed.

◆ 25% are unemployed for muchlonger.

■ Policy must target long-termunemployed without hurting themajority.

������■ Measured using a national survey.

■ (u)nemployment rate = U/(E+U) x 100■ to reduce natural U rate requires affecting separation

and finding rates for jobs.

■ Policy may be aimed at frictional U or wage rigiditiesthat cause wait U.

■ Unemployment rates differ by race, age and gender,indicating race and group specific problems.

■ Official u-rates may understate true problem due tounderemployment and discouraged workers.

■ Public policies may have conflicting and sometimescontradictory effects (UI or minimum wage laws).