Topic4 Unemployment

8/11/2019 Topic4 Unemployment

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Labor market andUnemployment



o n e n s

Labor market and its structure. Models oflabor market

Measuring & Identifying Unemployment

Causes of unemployment Types of unemployment. Frictional vs.

Structural. The Natural rate of unemployment

Costs of unemployment. Law of Okun

Government regulation of labor market



Labor market

Labor market means the relationship betweendemand for labor force and supply of labor force

which determine the equilibrium wage rate and

provide the full employment of labor force.

Labor market is the most important market at macrolevel:

Determining the level of employment of LF

Influencing on the well-being of population (W) Influencing on the consumption (AD)

Determining the cost of production



Specific features of labor market:

SPECIFIC CONDITIONS OF FUNCTIONING

(labor contracts, working conditions)

COMPLICATED STRUCTURE (a lot of

segments) THE MOST REGULATED (minimum wages,

duration of working day)

A LOT OF DETERMINANTS ( demographic,social, physiological, economic)

A LOT OF PARTICIPANTS (trade-unions,

government, business firms, households, foreign

sector)



Demand for Labor is the sum of Demand for Labor

services from all industries at a given price in a given

period of time

Determinants

Wage rate

Demand for goods, produced by Labor services (demand

for labor is derived demand) Prices and amount of available resources – substitutes of

Labor (Capinal)

Prices and amount of complements of Labor (Capital,

Land) Labor productivity and Marginal Product of Labor

Government regulation

Trade – union regulation

Psychological factor



Supply of Labor is the sum of Supply of Labor

services of all workers at a possible price in a

given period of time Determinants

Wage rate

Quantity of labor force (demografic factors:therate of birth, the rate of death, migration)

Opportunity cost of employment

Physical and intellectual capabilities of Labor

force

Availability of other income excluding wages

Social factor



Classical model of Labor market Classical model of Labor market

Main characteristic features:

- Perfect competition- P, ω – flexible

Ld=f (MPL)

Ls =f (w/p) is the most important component

Equilibrium achieves automatically

In the long-run the full employment of LF

Equilibrium is stable.

In the short run changes in w/p are restoringequilibrium

Unemployment is voluntary



Condition of equilibrium:

Ld = f (MPL) equal to Ls = f (W/P).

Classical model of labor market

L

S

D

L*

P

W

*

P

W



Main characteristic features:

Imperfect competition (trade unions, G,Monopolies)

P, w – were seen to be “sticky”

LD = f (effective demand or C + I ) is the mostimportant component

LS = f (L , w nominal), doesn’t depend on the

price level

Equilibrium doesn’t achieve automatically

In the short-run involuntary unemployment in

conditions of stability

Keynesian model of Labor market



Keynesian model of labor marketW/Pe is the equilibrium wages;

Le is the equilibrium number of labor force

W/Pr is the effective wages, determining by effective demand forlabor

Ls is the number of labor force

Ld is the effective demand for labor force

Ls – Ld means the number of involuntary unemployed people

L

SLDL

L D L E LS

E

W/P

W/P R

W/P E



Labor market as a flow

Population labor force categories Each adult is placed into one of three

categories:

Employed Unemployed

Not in the labour force

■ The labour force is the totalnumber of workers, including both theemployed and the unemployed.





Population labor force categories

To be counted as employed a person must have

either a full time job or a part-time job. To be counted as unemployed a person must be

available for work and must be in one of three

categories:

without work but has made specific efforts to find

a job within the previous 2/4 weeks;

waiting to be called back to a job from which he

or she has been laid off; waiting to start a new job within 30 days



Moldova(III Quarter 2013)

Labor Force-1328,2th. Employed -1276,8 th. or 6,1%

Unemployed – 51,4 th. Or 3,9% Not in Labor force( 15 years old and)

- 55,5% from adult population,

including: Discouraged – 14,9 th.

Migrants - 364,2th.



Employed

Unemployed

Not in labor force

Employed

Unemployed

Not in labor force

Entrant

s(primar

y entry)

Retir

ees

Reetr ans

Inflow / outflow approach of the labor market



Unemployment is the state in whichindividuals available to work are without

job and are currently seeking a job.

Today it is one of the most pressing

problems of modern economies



Unemployment rate in differentcountries:

EU – 12 (January 2014) Germany – 5,2 Bosnia -27,2(2011) France – 10,8

Bulgaria – 12,9 Austria – 4,8

Estonia -10,8 Japan – 3,9

Latvia – 12 USA – 6,7 January2014

Slovakia -14 Moldova – 3,9

Greece – 28 (2013) (III quarter2013)

Italy - 12,7



Measuring Unemployment There are also different ways national statistical agencies

measure unemployment. These differences may limit thevalidity of international comparisons of unemployment data.

The unemployment rate is calculated as the percentage of the

labour force that is unemployed.

Labor force = Number of employed and number ofunemployed people: L = E + U

Unemployment rate =Number of unemployed/ Labour force

X lOO% or

u = U/ (E+U) X 100% The labour force participation rate is the percentage of the

adult population that is in the labour force:

Adult population /Labour force X 100%



Does the unemployment rate measure whatwe want it to?

It is difficult to distinguish between a person who isunemployed and a person who is not in the labourforce.

Discouraged workers , people, who would like towork but have given up looking for jobs after anunsuccessful search, don’t show up in unemploymentstatistics.

Other people may claim to be unemployed in order toreceive financial assistance, even though they aren’tlooking for work.



How long are the unemployed withoutwork?

Most spells of unemployment are short.

Most unemployment observed at any given

time is long-term. Most of the economy’s unemployment

problem is attributable to relatively fewworkers who are jobless for long periods of

time.



Causes of unemployment

Classical school: high wage rate

Marxist school: high organic structure of capital in

conditions of scientific-technical progress Neoclassical school: refuse to work at lower wages;

Lower MP of Labor

Keynesian school: Lower effective demand (C+I)

Modern theories:

a) high minimum wages, unemployment compensations

b) monopolism (monopson) on Labor market

c) trade – union regulation

d) technological progress



Why Are There Always Some People

Unemployed? In an ideal labour market, wages would adjust to

balance the supply and demand for labour, ensuringthat all workers would be fully employed

Frictional Unemployment means the situation thanindividuals will take time to find and secure anothersuitable job.

In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.

It is the voluntary short-run unemployment (causes:imperfect information, disincentives)

The problem of frictional unemployment can be solved

with the perfect information about job vacancies. However,imperfect information may aggravate the problem offrictional unemployment.

The more developed an economy is, higher is the probability of getting a job faster and lower is the

probability of frictional unemployment.



Job Search

the process by which workers findappropriate jobs given their tastes and skills.

results from the fact that it takes time forqualified individuals to be matched with

appropriate jobs. This unemployment is different from the

other types of unemployment.

It is not caused by a wage rate higher thanequilibrium.

It is caused by the time spent searching forthe “right” job.



Structural Unemployment is the result of technologicalchanges, when the structure of working places is notcorresponding with the structure of labor force (causes:economic change, globalization, capital replacement)

Structural unemployment arises when the

qualification of a person is not sufficient to meet

his job responsibilities.

Structural unemployment is often thought to

explain longer spells of unemployment.

Why is there Structural Unemployment?

Higher the mobility of labor across different jobs,lower will be the structural unemployment.

depends on the changes in the structure of anindustry.



Seasonal Unemployment

There are certain kinds of unemployment that tendto concentrate in a particular time of the year.

Seasonal unemployment is most common inindustries like tourism, hotel, in the agriculture.

Cyclical Unemployment characterizes thevariations in the levels of unemployment over the

business cycle (causes: recession, economic crisis)

Cyclical unemployment refers to the year-to-year

fluctuations in unemployment around its natural

rate.

It is associated with short-term ups and downs of

the business cycle.



The Natural rate of unemployment

Natural rate of unemployment (NAIRU) meansthe unemployment rate in conditions of full

employment of labor force and economic stability.

The economy’s natural rate of unemployment

refers to the amount of unemployment that theeconomy normally experiences.

u* = u f r + u str,

Today, U*≈

6% - 8% u - u* = u cycl ical



The Natural rate of unemployment

The NAIRU (u*) means the full employment oflabor force that determine the potential GDP (Y*)

Mathematically the equation of the NAIRU can be

expressed as:

f x U = s x E, or U/(U+E) = s/(f+s), where f is the job funding or the part of unemployed

that is funding the job vacation monthly

s is the job separation or the part of workers thatis remaining without the job monthly

U is the number of unemployed

E is the number of employed

Benefits arising from unemployment



Benefits arising from unemployment

a small amount of frictional unemployment allowsemployers to find the employees most suited to the

jobs offered;

frictional unemployment allows workers to find

the jobs that better fit their tastes, talents andneeds;

hard working; unemployment thus promote labor

productivity and profitability;

additional labor force;

limiting the abuse of the environment;





Okun’s law

Law states that for every 2% GDP falls relative to

potential GDP, unemployment rises 1% relative tonatural rate of unemployment. When the economy

operates at productive capacity, it will experience

the Natural rate of unemployment:

Y-Y*/ Y*= - β(U – U*)

U* – Natural rate of unemployment (NAIRU)

U – real unemployment rate β – Okun’s coefficient characterizes the change in

Real GDP over Potential GDP ( β ≈ 2-3)



G t l ti f L b k t



Government regulation of Labor market:

the totality of economic, administrative, juridical and

organizational means Major goals:

to determine the full employment of labor force (active

Governmental policy)

to minimize the negative consequences ofunemployment (passive Governmental policy)

Active Governmental policy:

Training program

Support of small business

Stimulative Fiscal policy

Stimulative Monetary policy



Passive Governmental policy:

Labor exchange

minimum wage Law

Unemployment insurance(unemployment benefits program)



Minimum wages USA - $7,25 per hour Australia $6.37 per hour, or $622.20 per week

Austria- 1,000 per month

Belgium - $1,925per month, $11.69 per hour for workers

21 years of age and over

Canada- ranges from $9.95 to C$11.00 per hour

France - €1,445.38 per month, €9.53 per hour Greece - €683.76 per month in 12 payments

Japan - ranges from $8.17 to $10.6 per hour

Luxembourg - €1,921.03 per month, €11.1042 per hour

for unskilled workers Moldova -1400 Moldovan lei in the private sector; 900 lei

per month in the public sector

Spain- €752.85 per month in 12 payments, €645.30 per

month in 14 payments

http://en.wikipedia.org/wiki/Australia


http://en.wikipedia.org/wiki/Canadian_dollar

http://en.wikipedia.org/wiki/Greece

http://en.wikipedia.org/wiki/Luxembourg

http://en.wikipedia.org/wiki/Moldovan_leu

http://en.wikipedia.org/wiki/Moldovan_leu

http://en.wikipedia.org/wiki/Luxembourg


http://en.wikipedia.org/wiki/Canadian_dollar









Unemployment insurance



Unemployment insurance

Unemployment insurance is a government

program that partially protects workers’ incomeswhen they become unemployed.

Offers workers partial protection against job

losses.

Offers partial payment of former wages for a

limited time to those who are laid off.

Unemployment insurance increases the amount of

search unemployment. It reduces the search efforts of the unemployed.

It may improve the chances of workers being

matched with the right jobs.



Laid-off Danes who have worked 52 weeks over theprevious 3 years are eligible to receive 90% of theiraverage earnings for up to 4 years.

Unemployed job seekers in Norway and Finland arealmost as well off.

In Norway the unemployed receive 87.6% of theirprevious salaries for 500 days.

In Finland they receive 85.1% of their previoussalaries for one year.

In Sweden, Israel, Japan and Germany, theunemployed can claim benefits worth between 66%and 90% of their last salaries.

In the U.S., benefits in some states are as low 27%

of income for average earners.

M E t i th S di i

http://www.forbes.com/2008/06/27/unemployment-benefits-world-forbeslife-cx_mw_0627worldunemployment_slide_11.html?thisSpeed=30000
















Many European countries, the Scandinavian ones

in particular, have voluntary unemployment

insurance – albeit government-subsidized – and low

unemployment rates. Denmark’s unemployment stands at 3.1%

Norway has 2.5% unemployment.

Of course, neither of these countries is rapidlygrowing. Denmark is chugging along at 1.1% and

even with its booming oil wealth.

Norway is growing at 3.1%, making

unemployment and payments a secondary concernto the European economy.



Most countries phase out benefits at 6 months,

though some, like Switzerland, provide full

benefits for up to 260 days.

In countries like Denmark, for example, the fees

paid by workers to unemployment funds are about

$700 per year, though all workers pay an 8% tax

to the government to cover social programs, oneof which is unemployment payments.

In the USA, unemployment insurance is paid for

through federal taxes of 0.8% and state taxes of

5.4% on employer’s taxable payroll; some states’

tax is levied as high as 10%, though, and Alaska,

New Jersey and Pennsylvania require workers to

pay tax also.



Based on reports from the OECD,countries with low employee turnover

rates, as the result of heavy labormarket regulation, often with highbenefits, are the most difficultworkforces for reentry ( Effect ofHysteresis).

But in the end, the best markets for theunemployed are those with available

jobs.



Minimum wage laws

When the minimum wage is set above the

level that balances supply and demand, itcreates unemployment.

Minimum wage laws raise the quantity oflabour supplied and reduce the quantity

demanded. Efficiency Wages

Efficiency wages are above-equilibrium

wages paid by firms in order to increaseworker productivity.

The theory of efficiency wages states thatfirms operate more efficiently if wages are

above the equilibrium level.

Efficiency Wages



Efficiency Wages

A firm may prefer higher than equilibrium wages

for the following reasons: Worker Health: Better paid workers eat a better

diet and thus are more productive.

Worker Turnover: A higher paid worker is less

likely to look for another job.

Worker Effort: Higher wages motivate workers

to put forward their best effort.

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



Monthly average wage $PPP



Monthly average wage $PPP

69 India $295

65 Moldova $438

57 China $656 56 Ukraine $686

54 Bulgaria $750

47 Romania $954

46 Belarus $959

39 Lithuania $1,109

37 Russian Federation $1,215

21 Greece $2,300 20 Spain $2,352

13 Germany $2,720

12 Canada $2,724

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/Moldova

http://en.wikipedia.org/wiki/China

http://en.wikipedia.org/wiki/Ukraine

http://en.wikipedia.org/wiki/Bulgaria

http://en.wikipedia.org/wiki/Romania

http://en.wikipedia.org/wiki/Belarus

http://en.wikipedia.org/wiki/Lithuania

http://en.wikipedia.org/wiki/Russia


http://en.wikipedia.org/wiki/Spain

http://en.wikipedia.org/wiki/Germany

http://en.wikipedia.org/wiki/Canada

http://en.wikipedia.org/wiki/Canada

http://en.wikipedia.org/wiki/Germany

http://en.wikipedia.org/wiki/Spain


http://en.wikipedia.org/wiki/Russia

http://en.wikipedia.org/wiki/Lithuania

http://en.wikipedia.org/wiki/Belarus

http://en.wikipedia.org/wiki/Romania

http://en.wikipedia.org/wiki/Bulgaria

http://en.wikipedia.org/wiki/Ukraine

http://en.wikipedia.org/wiki/China

http://en.wikipedia.org/wiki/Moldova

http://en.wikipedia.org/wiki/India



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Topic4 Unemployment