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Chapter 15 – Long term Chapter 15 – Long term Unemployment Unemployment
How is unemployment measured?
What is the “natural rate of unemployment”?
Why are there always some people unemployed?
How is unemployment affected by unions and minimum wage laws?
What is the theory of efficiency wages, and how does it help explain unemployment?
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I. Measuring unemployment
Bureau of Labor Statistics (BLS) divides population into 3 groups:
Employed:
Unemployed:
Not in the labor force:
The labor force
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labor force participation rate
= 100 x
Labor force participation rate: % of the adult population that is in the labor force
Unemployment rate (“u-rate”): % of the labor force that is unemployed
u-rate = 100 x
Adult population in the US in June 2008
# of employed = 145.9 million, # of unemployed = 8.5 million,
not in labor force = 79.2 million
Labor force =
U-rate =
Population =
LF participation rate =
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Labor Market Statistics for Whites & Blacks, June 2008
Adults (20 yrs & older)
u-rate LF part. rate
White, male 4.5% 76.1%
White, female 4.2 60.4
Black, male 9.3 71.5
Black, female 7.4 64.3
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Labor Market Statistics for Whites & Blacks, June 2008
Teens (16-19 yrs)
u-rate LF part. rate
White 16.6 43.9
Black 29.6 27.9
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Labor Market Statistics for Other Groups, June 2008
All ages
u-rate LF part. rate
Asian 4.5 67.4
Hispanic 7.7 69.0
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Labor Market Statistics by Education Level,
June 2008
Adults (25 yrs & older)
u-rate LF part. rate
less than h.s. 8.7% 45.9%
h.s. diploma 5.1 62.8
some college or assoc degree
4.2 71.9
bachelor’s degree or more
2.3 78.1
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20
30
40
50
60
70
80
90
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
LF Participation Rates by Sex, 1950-2007
Men
Women
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Limitation of the u-rate:
Q: In each case, what happens to the u-rate and does it give an accurate impression of what’s happening in the labor market?
A. Sue lost her job and begins looking for a new one.
B. Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work.
C. Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field.
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A. Sue lost her job and begins looking for a new one.
u-rate
A u-rate gives the impression that the labor market is
B.Jon has been out of work since last year, becomes discouraged, stops looking for work.
workers would like to work but
U-rate
A u-rate gives the impression that the labor market is
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C. Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one.
U-rate . Labor market is
The u-rate is not a perfect indicator
• It excludes
• It does not distinguish between • It does not reveal whether
• Reporting errors
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The Duration of UnemploymentMost spells of unemployment are Typically 1/3 of the unemployed
and 2/3 have been unemployed Only 20% have been unemployed
Yet, most observed unemployment The small group of long-term unemployed persons has
fairly little turnover, so it accounts for
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2. Reasons for unemployment - Cyclical and Natural Rate
There’s always some unemployment, though the u-rate fluctuates from year to year.
Natural rate of unemployment
Cyclical unemployment
0
2
4
6
8
10
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1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
U.S. Unemployment, 1960-2007
Natural rate of unemployment
Unemployment rate
pe
rce
nta
ge
of l
ab
or fo
rce
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Reasons for a positive natural rate of unemployment
Even when the economy is doing well, there is always some unemployment, because,
Frictional unemployment
short-term for most workers
Structural unemployment
usually longer-term
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Reasons for Frictional unemployment: Workers have different
Job search is the process of
Sectoral shifts are changes in the
Such shifts displace some workers,
The economy is always changing, so
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Public Policy and frictional unemployment
Govt employment agencies
Public training programs
Unemployment insurance (UI) and its effect:
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Reasons for Structural Unemployment
Structural unemployment occurs when
W
LD
S
WE
W1
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i. Minimum-Wage Laws
The min. wage may the equilibrium
The group most affected by minimum wage laws
ii. Unions
a worker association that bargains with employers over
Unions use their market power to
The typical union worker earns
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Effects of Unionization – negatives and positives When unions raise the wage above
“Insiders” – workers who remain employed
“Outsiders” – workers who lose their jobs
Some outsiders go to non-unionized labor markets
Unions counter the market power of
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iii. Efficiency Wages
The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to
1. improve worker’s
2. reduce worker’s
3. improve worker’s
4. improve worker’s
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Reasons for a positive natural rate of unemployment: A Summary
The natural rate of unemployment consists of frictional unemployment
It takes time to search for the right jobs Occurs even if there are enough jobs to go around
structural unemployment When wage is above eq’m, not enough jobs Due to min. wages, labor unions, efficiency wages