Unemployment

Unemployment

Full Employment?

When we talked about producing on our PPC, we said the only way to be on it was to not

waste or underutilize any factors of production.

However, as we know, there are always some people not working. It’s better to think of full

employment as the level of unemployment that exists when the economy is producing

it’s potential output, aka the “natural rate of unemployment”

Unemployment defined…

According to Tragakes, unemployment is “the number of unemployed people, defined as all people above a particular age (not children) who are not working and who are actively

looking for a job.

Underemployment

Tragakes again…. “the number of underemployed people, defined as all people above a certain age (not children) who have

part-time jobs when they would prefer to have full-time jobs; or have jobs that do not make full use of their skills and education

More on Underemployment

How does the reality of an engineer working as a dishwasher represent a waste of

resources?

When we have unemployment and/or underemployment, what does that tell us about our position in the PPC universe?

Unemployment Rate

In order to talk about the unemployment rate, we have to first establish the idea of the

labour force.

What do you remember about the labour force?

Labour Force

The labour force is defined as the number of employed people plus the number of

unemployed people.

Lots of people are not included in the labour force, such as…..

Not in the labour force

Measuring Unemployment

We can refer to the unemployed as a number of adults who are not working but are actively

seeking work……or more commonly…..

As a percentage calculated as follows:

Unemployment rate=# of unemployed/labour force X 100

Difficulties Measuring Unemployment

What’s the trouble?

Unemployment statistics may be underestimated for several reasons

including….

People who have given up looking for work (discouraged workers) are not part of the

labour force

Underemployed people count as employed. Even if you worked only one hour, you’re

considered employed

More trouble

Unemployment rates may be overestimated because if someone is working in the

underground economy but “looking for work” at the same time, he counts as unemployed

even though he is supporting himself.

Costs of Unemployment

So what’s the big deal? People who aren’t working are lucky right?


One cost of unemployment is the loss of real GDP. Less people working means less output which can have a severe negative multiplier

effect on the economy.

As we know, operating beneath our PPC is not a happy situation


Try living a satisfying life without a regular paycheck. Even if you get unemployment

benefits, they are unlikely to provide you with a decent living.

And when they run out, you’re in big trouble.


Unemployed people represent loss of potential revenue received by government.

The government would rather have you work and pay taxes than for it to pay you

unemployment benefits


Social problems typically escalate with the unemployment rate. Fighting these social problems can be costly for government…


Unemployment usually targets specific groups of people. Minorities, uneducated

people, the young, people without job skills, and women have inordinately high rates of

unemployment. This can lead to many disaffected people in society


The longer you are unemployed, the more difficult it becomes to re-enter the workforce. Employers assume your skills have eroded,

you are behind in terms of new technology, or there must be something wrong or someone

else would have hired you.

Non-Economic Costs of Unemployment

In addition to the economic costs of unemployment, there are non-economic costs

as well, including:

Psychological stress which can lead to health problems

Social problems may escalate, such as criminal activity and violence

Types of Unemployment

There are several types of unemployment. Let’s begin with those that occur even at “full

employment” or the “natural rate of unemployment”

Do you remember which types of unemployment fall in this category?

Structural Unemployment

Structural Unemployment refers to unemployment that occurs when there is a mismatch between labour skills demanded

and supplied.

It may also result due to a mismatch of where workers are and where jobs are located

Structural Unemployment may occur when….

Causes of Structural Unemployment

Technology changes may lead to structural unemployment. When ATMs appeared, bank tellers became expendable, while computer

people became more in demand.

If those bank tellers don’t learn new skills, they may become structurally unemployed for

a long time


Changes in consumer demand patterns may lead to structural unemployment. If

consumers switch their purchasing from one industry to another, workers need to quickly learn new skills to work in the new industry.

If they don’t, a trip to the unemployment office is needed…


If one area of a country, or a foreign country has a booming economy while another is failing, people in the failing region may

become structurally unemployed unless they choose to relocate with their company.

This happened in the U.S. “Rust Belt” as factories were unable to compete with

foreign companies.

Dangers of Structural Unemployment

Tends to be long-termInflicts costs on individuals and society

Often targets older workers, forcing them into early retirement

How to deal with Structural Unemployment

Structural Unemployment will exist in a modern economy but can be lowered…..Do you remember the supply-side market and

interventionist policies?

Market Oriented Measures

The free market can fix anything! Let’s:

Eliminate minimum wageDestroy labour unions

Lower unemployment benefitsReduce job security for workers

Lower peronal income taxes

That’ll get people back to work! Maybe…

Interventionist Measures

OK, we’ll let the government:Set up training programs

Provide grants or low interest loans for education

Provide on the job training and job infoProvide grants to firms who train workersOffer wage subsidies to firms that hire the

unemployedHelp workers relocate

Help depressed economic areas

Frictional Unemployment

This occurs when people are between jobs due to being laid off, their company has gone out of business, they are waiting to begin a new job or they are looking for a better job

It’s usually short-term and doesn’t signify a lack of marketable skills, so it’s not so serious

Incomplete Information

Frictional Unemployment often occurs due to miscommunications between workers and

firms. Because it can take time for workers and

firms to find each other, frictional unemployment always exists to some extent.

How to deal with Frictional Unemployment

More job centres, employment agencies and other ways for workers and firms to find each

other.

The market oriented policies discussed before apply here as well, under the

assumption that people will spend less time out of the work force if there is money to be

made….

Seasonal Unemployment

Seasonal Unemployment occurs when the demand for labour changes on a seasonal

basis.

There are many examples of jobs that are required in certain times of the year, but not

needed in others, such as…



Like Frictional and Structural Unemployment, this is a fact of life and

therefore part of the natural rate of unemployment.

Can it be lowered? Perhaps with improved information during off season and the usual market-oriented ideas…..but it will never be

eliminated completely..

Last Words

The natural rate of unemployment includes the three we have just discussed.

If we can lower the natural rate of unemployment, we can increase potential

GDP, shift LRAS or the Keynesian AS to the right, and move closer to our PPC. All of this

makes for a happy economist……

Documents

Unemployment