Topic 7: Unemployment
Econ 2410-008
Introduction/Motivation
• We studied how productivity impacts economic well-being.
• An even more obvious determinant of well-being is unemployment.
• A country that keeps its workers employed will probably have a higher standard of living than one that does not.
Introduction/Motivation
• Two components of unemployment: Long run—normal trend in unemployment (over
many years) Short run—cyclical trend around the long run
trend.
Before we delve into why unemployment happens, we need to lead with a few definitions
Identifying Unemployment
• BLS collects data on unemployment– Releases data every month– Data is collected from a regular survey of
60,000 household call the Current Population Survey (CPS)
• BLS website:http://www.bls.gov/
Labor Market Definitions
• BLS categorizes each adult (age 16+) into three categories
1. Employed
2. Unemployed
3. Not in Labor Force
Employed
• People are considered employed if they:– did any work for pay or profit during the
survey week– did non-pay work at a family business (such
as a farm or family owned store)– have a job but were not at work for some
reason (vacation, sick leave, temporary lay off with guarantee return).
– Part Time and temporary work count
Unemployed
• People are classified as unemployed if they meet the following criteria:
1. Did no work during the survey week2. Have no job to which they plan on returning3. Have ACTIVELY sought employment in the
last 4 weeks4. Are currently available for work
Not In Labor Force
• People are classified as “not in the labor force” if they are:– in the armed forces– institutionalized (prison or medical facility)– not working and have not sought work in the
last 4 weeks (retired, permanently disabled, etc.)
Current Labor Market Condition
• Data available at:
http://www.bls.gov/news.release/empsit.t01.htm
Septemember 2012
88,710
12,088
142,974
Current Labor Forcein millions
Not in Labor Force Unemployed Employed
Various Calculations
• Labor Force
• Unemployment Rate
• Labor Force Participation Rate
• Calculate using BLS table
Long Term Trends
Year
Percent
How accurate is the data?
• What do we really want to know from this data:– Seems pretty simple, just tell us the percentage
of people in the US who want to work but can’t find work.
– Does the BLS’s data do this?
– We have to pay special attention to a few issues
Issues with mobility
• Movement in and out of the labor force.– People enter and exit the labor force
periodically throughout their lives due to a number of reasons
• Pregnancy/child rearing• Going back to school full time• Leaving retirement to work.
– Over HALF of unemployment spells end with people exiting the labor market.
Issues
• Unemployment statistics may be difficult to interpret:– How hard is a person really looking for work?– What about work “under the table?”– What about people that just give up on finding
work?
Discouraged Workers• Unemployed individuals who simply give
up on actively seeking a job.
• This is something that you may have heard thrown around by politicians.
• Would an increase in discouraged workers, holding all else equal, increase or decrease the unemployment rate?
Other Measures
• Because of possible problems with using the unemployment rate to measure labor market health, the BLS calculates a number of other measures
• http://www.bls.gov/news.release/empsit.t15.htm
Duration of Unemployment
• Whether unemployment is typically short term or long term effects how large of a problem it really is.
• Economists have spent much time investigating and have come to the consensus that:– Most spells of unemployment are short, and most
unemployment observed at any given time is long-term.
Duration of Unemployment
• Might seem odd at first, but if most unemployed individuals find work within a few weeks, then they are not likely to be picked up by the monthly survey compared to those that are long term unemployed.
• Simple four person example
Why is there unemployment?
• Let’s transition from making observations about unemployment and data to investigating why unemployment exists.
• Theoretical model of the labor market using supply and demand.
Reality vs. Theory
• The labor market never truly clears since some portion is always unemployed.
• Why?
• Two types of unemployment:1. Frictional2. Structural
The Frictional and Structural of it all
• Frictional Unemployment– Job Search
• Structural Unemployment– Minimum Wage Laws– Unions and Collective Bargaining– Efficiency Wages
Frictional Unemployment• Job Search
– Process by which workers find appropriate jobs
– Results in unemployment because of the time it takes to find a desirable job match
– Movements in the market for goods and services often lead to frictional unemployment
• Google and Yahoo example– Sectoral shifts
Policy’s Impact on Frictional
• Unemployment insurance– Program design to offer laid off workers partial
protection against job loss. – Currently available for up to 99 weeks
• Unintentional Consequences– How does this change the incentives for
unemployed individuals to find jobs?– Results of empirical research.
Structural Unemployment
1. Minimum Wage Laws
2. Unions and Collective Bargaining
3. Efficiency wages
Minimum Wage Laws
• Review what we already know about this.
• Who is most often affected by minimum wage laws?
• Does the minimum wage affect overall wage levels in the economy?
Unions and collective bargaining
• Union—an associate of workers that bargain with employers over wages, benefits and working conditions.
• In the past, Unions played a significant role in the US labor market.
• Now, only 11.4% of the US work force (as of 2010) is unionized
Unions and collective bargaining
• A union is a type of cartel– Cartel—group of sellers joining together to
assert joint market power.• Unions conduct collective bargaining with
employers.
• Union workers earn about 10%-20% more than similar non-union workers.
Unions’ Impact on the Labor Market
• How does this increase in wages over similar workers affect certain areas of the labor market?
• Would this result in a surplus or shortage of people wanting union jobs?
Regulation of Unions
• Unions are regulated by the National Labor Relations Board (NLRB)
• Unions are always a political hot topic.– See the controversy in WI over the governor’s
attempts to remove collective bargaining rights from state employees.
– Any opinions on this?
The Good, The Bad, and The Ugly
• Are unions good or bad for the economy?– Up for debate and no clear consensus from
researchers• Bad
– They are a cartel that inflates wages above what the market would dictate
– Leads to inefficient and inequitable outcomes• Good
– Necessary antidote to firms’ market powers– Forces firms to respond to worker complaints
Theory of Efficiency Wages
• Efficiency Wages—wages that employers choose to pay above the prevailing market wage or equilibrium wage.
• Expressed as early as Alfred Marshall in 1920
• If firms choose to do this, what happens to the labor market?
Why Efficiency Wages?
• Avoid Shirking– Shirking—doing less work than what was
agreed upon. – It is very hard for employers to detect shirking.– Managers may increase wages to increase
the cost of job loss– Incentivizes workers to perform better without
having to increase management oversight.
Why Efficiency Wages?
• Adverse Selection— “bad” results that occur due to asymmetric information– Asymmetric information refers to information
not being fully shared between both sides of the market.
– Low wages may attract low skill, low output workers and firms have no way of screening these people out
Why Efficiency Wages?
• Adverse Selection– Managers may choose to offer higher wages
to increase the quality of the applicant pool and bring in higher quality workers
– Increasing the size and quality of the applicant pool decreases the chances of hiring a shirker or low quality worker.
– Applicable to the education debate?
Why Efficiency Wages?
• Sociological Theories:– Popularized by George Akerlof (2001 Nobel
Prize Winner)– Higher wages increase worker morale– Higher morale increases productivity.
– A happy workforce is a productive work force.