Principles of Macroeconomics: Canadian Edition

Overview-ch 9Overview-ch 9

Measuring unemploymentMeasuring unemployment Is unemployment measured Is unemployment measured

correctly?correctly? Why is there unemployment?Why is there unemployment? Public Policies and job searchPublic Policies and job search

Principles of Macroeconomics: Canadian Edition

Identifying UnemploymentIdentifying Unemployment

““A job loss means a lower living A job loss means a lower living standard in the present, anxiety about standard in the present, anxiety about the future, and reduced self-esteem.”the future, and reduced self-esteem.”

The problem of unemployment is usually The problem of unemployment is usually divided into two categories:divided into two categories:

1 . The Natural Rate of Unemployment . The Natural Rate of Unemployment

2 . The Cyclical Rate of Unemployment. The Cyclical Rate of Unemployment

Principles of Macroeconomics: Canadian Edition

Identifying UnemploymentIdentifying Unemployment Natural Rate of Unemployment Natural Rate of Unemployment represents represents

persistent joblessness that does not go away persistent joblessness that does not go away on its own even in the long-run. Refers to the on its own even in the long-run. Refers to the amount of unemployment that the economy amount of unemployment that the economy normally experiences.normally experiences.

Cyclical Unemployment Cyclical Unemployment refers to the year-to-refers to the year-to-year fluctuations in unemployment around its year fluctuations in unemployment around its natural rate. Deals with short-term fluctuations natural rate. Deals with short-term fluctuations associated with the ups and downs of the associated with the ups and downs of the business cycle.business cycle.

IDENTIFYING UNEMPLOYMENTIDENTIFYING UNEMPLOYMENT

Describing UnemploymentDescribing Unemployment

– Three Basic Questions:Three Basic Questions:How does government measure the How does government measure the

economy’s rate of unemployment?economy’s rate of unemployment?What problems arise in interpreting the What problems arise in interpreting the

unemployment data?unemployment data?How long are the unemployed typically How long are the unemployed typically

without work?without work?

Principles of Macroeconomics: Canadian Edition

Measuring UnemploymentMeasuring Unemployment

Monthly Unemployment Rate Monthly Unemployment Rate is is calculated by: Statistics Canada calculated by: Statistics Canada surveying nearly 60,000 randomly surveying nearly 60,000 randomly selected households and categorizing selected households and categorizing each adult (i.e. each adult (i.e. >>15 years old) as:15 years old) as:1 . . Currently employed (have a paying job).Currently employed (have a paying job).2 . Unemployed but actively seeking a job.. Unemployed but actively seeking a job.3 . Not in the labour force (i.e. neither of . Not in the labour force (i.e. neither of

above).above).

MEASURING UNEMPLOYMENTMEASURING UNEMPLOYMENT

Statistics Canada considers a person an adult if Statistics Canada considers a person an adult if he or she 15 years or older.he or she 15 years or older.

A person is considered employed if he or she has A person is considered employed if he or she has spent most of the previous week working at a paid spent most of the previous week working at a paid job.job.

A person is unemployed if he or she is on A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting temporary layoff, is looking for a job, or is waiting for the start date of a new job.for the start date of a new job.

A person who fits neither of these categories, such A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is as a full-time student, homemaker, or retiree, is not in the labour force.not in the labour force.

Measuring UnemploymentMeasuring Unemployment TheThe Labour ForceLabour Force is the number of employed is the number of employed persons persons plusplus the number of unemployed. LF= the number of unemployed. LF= E+UE+U

TheThe Unemployment Rate Unemployment Rate is:is:

u = U/(LF)u = U/(LF) ““u” is the unemployment rateu” is the unemployment rate ““U” is the number unemployed U” is the number unemployed ““E” is the number employedE” is the number employed “ “E+U” is the labour forceE+U” is the labour force

Measuring UnemploymentMeasuring Unemployment

TheThe Labour-Force Participation Rate Labour-Force Participation Rate illustrates the fraction of the population illustrates the fraction of the population (15+)that has chosen to participate in the (15+)that has chosen to participate in the labour market.labour market.

TheThe Labour-Force Participation Rate Labour-Force Participation Rate is:is:

LFPR = (LF) / Population(LFPR = (LF) / Population(>>15)15)

Where LF= E+UWhere LF= E+U

groupsgroups

ODD # groups begin this weekODD # groups begin this week Assignments on my web pageAssignments on my web page Reading week impact on schedule.Reading week impact on schedule. Chapter 5, 6 and 7 notes are upChapter 5, 6 and 7 notes are up

Deferred December exam (med cert. and other Deferred December exam (med cert. and other valid reasons-NOT a grade-raiser) The exam for valid reasons-NOT a grade-raiser) The exam for ECON1000 will be held Friday 4th February, at ECON1000 will be held Friday 4th February, at 1.00pm. in Azrieli Theatre AT101.1.00pm. in Azrieli Theatre AT101.Bring IDBring ID

DATA—2005 u=6.7%DATA—2005 u=6.7%u= U/LFu= U/LF

US unemployment rateUS unemployment rate

Canadian unemploymentCanadian unemployment

Is Unemployment Measured Is Unemployment Measured Correctly?Correctly?

In some cases, it is hard to distinguish In some cases, it is hard to distinguish between a person who is unemployed and a between a person who is unemployed and a person who is not in the labour force.person who is not in the labour force.

It is suggested that the “unemployment rate It is suggested that the “unemployment rate is inaccurately low” because it doesn’t is inaccurately low” because it doesn’t reflect:reflect:– UnderemployedUnderemployed– Discouraged workersDiscouraged workers

UnderemployedUnderemployed are those who are working are those who are working part-time when they really want full-time part-time when they really want full-time work.work.

Discouraged Workers Discouraged Workers are those who have are those who have given up looking for work and report that given up looking for work and report that they are no longer in the labour force, they are no longer in the labour force, when in fact, they would be willing to work when in fact, they would be willing to work if offered a suitable, stable job.if offered a suitable, stable job.

Is Unemployment Measured Correctly?Is Unemployment Measured Correctly?

Duration of UnemploymentDuration of Unemployment Most of the economy’s unemployment problem Most of the economy’s unemployment problem

is attributable to unemployed workers who are is attributable to unemployed workers who are jobless for long periods of time.jobless for long periods of time.

The rate of unemployment is the product of the The rate of unemployment is the product of the number of jobless and their average duration of number of jobless and their average duration of joblessness. joblessness. – The average duration of unemployment (>14 The average duration of unemployment (>14

weeks) increased over time from 35% in 1977 to weeks) increased over time from 35% in 1977 to 47% in 1996 and declined after that.47% in 1996 and declined after that.

MEASURINGMEASURING

Unemployment rateUnemployment rate (“u-rate”): (“u-rate”): % of the labour force that is unemployed% of the labour force that is unemployed

u-rate= U/LF * 100

LFPR = LF/POP *100

LFPRLFPR

UNEMPLOYMENT AND NATURAL UNEMPLOYMENT AND NATURAL RATERATE

Why is there unemployment?Why is there unemployment? In an ideal labour market, wages would In an ideal labour market, wages would

adjust to balance the supply of labour and adjust to balance the supply of labour and the demand of labour, ensuring all workers the demand of labour, ensuring all workers full employment. full employment.

Four reasons why the ideal is missed:Four reasons why the ideal is missed:

– Minimum-wage lawsMinimum-wage laws

– UnionsUnions

– Efficiency wagesEfficiency wages

– Job searchJob search

Why is there unemployment? Why is there unemployment? Minimum-Wage LawsMinimum-Wage Laws

When a minimum-wage law forces the When a minimum-wage law forces the wage to remain above the level that wage to remain above the level that balances supply and demand, it balances supply and demand, it creates a creates a surplus of laboursurplus of labour..

Why is there unemployment? Why is there unemployment? Minimum-Wage LawsMinimum-Wage LawsPrice of

labour

Quantity oflabour

Demand

PM

QSQD

Surplus orUnemployment

Supply

Why is there unemployment? Why is there unemployment? Unions and Collective BargainingUnions and Collective Bargaining

A A unionunion is a worker association that is a worker association that bargains with employers over wages and bargains with employers over wages and working conditions. working conditions. – A union is a type of cartelA union is a type of cartel..

The process by which unions and firms The process by which unions and firms agree on the terms of employment is called agree on the terms of employment is called collective bargainingcollective bargaining..

Why is there unemployment? Why is there unemployment? Unions and Collective BargainingUnions and Collective Bargaining A A strikestrike will be organized if the union and the firm will be organized if the union and the firm cannot reach an agreement.cannot reach an agreement.– A strike makes some workers better off and other A strike makes some workers better off and other

workers worse off: (1) Striking workers worse off in workers worse off: (1) Striking workers worse off in the short-run. (2) Rehired workers better off in the the short-run. (2) Rehired workers better off in the long-run.long-run.

By acting as a cartel with ability to strike or otherwise By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually result impose high costs on employers, unions usually result in above equilibrium wages for their members.in above equilibrium wages for their members.

Edition

Effects of unionsEffects of unions

At wages set above equilibrium:At wages set above equilibrium:

– a very large number of qualified workers are a very large number of qualified workers are willing to accept the jobswilling to accept the jobs

– there are very few jobs and seldom any job there are very few jobs and seldom any job openings for aspiring workersopenings for aspiring workers

– workers tend to hold out accepting other jobs workers tend to hold out accepting other jobs in hopes of one day landing the high-paying in hopes of one day landing the high-paying union jobunion job

Why is there unemployment? Why is there unemployment? The Theory of Efficiency WageThe Theory of Efficiency Wage

Theory is that some firms can operate more Theory is that some firms can operate more efficiently if wages are efficiently if wages are aboveabove the equilibrium the equilibrium level. level.

Even in the presence of an excess of labour, Even in the presence of an excess of labour, firms may be more profitable by keeping firms may be more profitable by keeping wages higher than equilibrium.wages higher than equilibrium.

Unemployment caused by this theory is similar Unemployment caused by this theory is similar to that caused by the minimum-wage laws and to that caused by the minimum-wage laws and unions.unions.

Why is there unemployment? Why is there unemployment? The Theory of Efficiency WageThe Theory of Efficiency Wage

Higher than equilibrium wages are set to promote Higher than equilibrium wages are set to promote the following goals of the firm:the following goals of the firm:– Worker HealthWorker Health: : Better paid workers eat better and Better paid workers eat better and

thus are more productive.thus are more productive.

– Worker TurnoverWorker Turnover: : A higher paid worker is less likely A higher paid worker is less likely to look for another job.to look for another job.

– Worker EffortWorker Effort: : Higher wages motivate workers to Higher wages motivate workers to put forward their best effort.put forward their best effort.

– Worker QualityWorker Quality: : Higher wages attract a better pool of Higher wages attract a better pool of workers to apply for jobs.workers to apply for jobs.

Why is there unemployment? Why is there unemployment? Job Search UnemploymentJob Search Unemployment

Search unemployment results from the fact that it Search unemployment results from the fact that it takes time for qualified individuals to be matched with takes time for qualified individuals to be matched with available jobs.available jobs.

This unemployment is different from the previous This unemployment is different from the previous three types. It is not caused by a wage rate higher three types. It is not caused by a wage rate higher than equilibrium. It is caused by the time spent in than equilibrium. It is caused by the time spent in searching or waiting for the “right” job.searching or waiting for the “right” job.

Search results from Search results from quits, layoffs, entry, re-entry.quits, layoffs, entry, re-entry.

Situations of Job Search Situations of Job Search UnemploymentUnemployment Search unemployment is inevitable Search unemployment is inevitable

because the economy is always because the economy is always changing. Situations that cause this type changing. Situations that cause this type of unemployment include:of unemployment include:

– New entrants into the job marketNew entrants into the job market

– Re-entrants into the labour forceRe-entrants into the labour force

– RelocationsRelocations

– Job quittersJob quitters

Public Policy and Job SearchPublic Policy and Job Search Government programs try to facilitate the job Government programs try to facilitate the job

search process in the following ways:search process in the following ways:– Government-run employment agenciesGovernment-run employment agencies– Government-run training programsGovernment-run training programs– Employment Insurance programsEmployment Insurance programs

These programs can either increase or These programs can either increase or decrease the time it takes the unemployed to decrease the time it takes the unemployed to find new jobs.find new jobs.

Government-run employment agenciesGovernment-run employment agencies: : – Gives out information about job vacancies in order Gives out information about job vacancies in order

to match workers and jobs more quickly.to match workers and jobs more quickly.

Government-run training programsGovernment-run training programs::– Aim to ease the transition of workers from Aim to ease the transition of workers from

declining to growing industries and to help declining to growing industries and to help disadvantaged groups escape poverty.disadvantaged groups escape poverty.

Public Policy and Job SearchPublic Policy and Job Search

Unemployment InsuranceUnemployment Insurance::

–Increases the amount of search Increases the amount of search unemployment without intending to.unemployment without intending to.

–Offers workers partial protection Offers workers partial protection against job loss.against job loss.

–Partial payment of former wages for Partial payment of former wages for a limited time period.a limited time period.

Public Policy and Job SearchPublic Policy and Job Search

ConclusionConclusion

Since unemployment can impose unusual Since unemployment can impose unusual hardships on individuals and families, it is an hardships on individuals and families, it is an important concern of policy-makers. important concern of policy-makers.

Public policies toward labour markets have Public policies toward labour markets have had conflicting and sometimes contradictory had conflicting and sometimes contradictory effects. >>>Some policies may create U.effects. >>>Some policies may create U.