© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko...

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko11

““Foundations of Foundations of Economics”Economics”

Unemployment


IntroductionIntroduction

What do we mean by unemployment?


Employed, Not Employed Employed, Not Employed and Unemployedand Unemployed

• Unemployment data– Statistics Canada– Labour Force Survey

• Monthly survey – 54,000 households



• Who is counted?– Non-institutional people 15 years of age or

older• Classifications

– Employed– Unemployed– Not in the labor force


Labor Market DecisionsLabor Market Decisions

Working-age Population

Seeksemployment

(in the labor force)

Does not seekemployment

(not in the labor force)

Acceptsemployment(employed)

Does not acceptemployment

(unemployed)



• Unemployed– In the non-institutional population.– age 15 or older.– Without employment during survey week.– Made efforts to find employment during the

last 4 weeks.– Be available for work.



• Deriving Unemployment Data– Total population– under age 15 or institutionalized= non-institutional population– Minus those not in labor force= labour force– employed= unemployed


Unemployment Rates Unemployment Rates and Employment Ratesand Employment Rates

• Unemployment Rate (UR) = # unemployed / labor force

• Employment-to-Population Ratio (ER) =# employed / non-institutional population

• Labor Force Participation Rate (PR) =Labor Force / non-institutional population

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko

Employment and Employment and UnemploymentUnemployment

–Figure 21.1 shows the labour force categories. In 2010:–Population: 34.1 million–Working-age population: 27.7 million–Labour force: 18.5 million–Employment: 17 million–Unemployment: 1.5 million

Copyright © 2013 Pearson Canada Inc., Toronto, Ontario



–Figure 21.2 shows the unemployment rate: 1960–2010.–The unemployment rate increases in a recession.




•Figure 21.3 shows the labour force participation rate and employment-to-population ratio both trend upward rapidly before 1990 and slowly after1990.



Labor Force Participation RateLabor Force Participation Rate


UnemploymentUnemployment


UnemploymentUnemployment

• Discouraged Workers– Individuals who have dropped out of the

labour force and are no longer looking for a job because they believe the job market has little to offer them.


Cost of UnemploymentCost of Unemployment

• Unemployment results in a large loss of GDP.

• Unemployment also results in hardship and lost self-respect for those who are unemployed.


Unemployment and Full Unemployment and Full EmploymentEmployment

–Unemployment can be classified into three types: Frictional unemployment Structural unemployment Cyclical unemployment




–Frictional Unemployment–Frictional unemployment is unemployment that arises from normal labour market turnover.–The creation and destruction of jobs requires that unemployed workers search for new jobs.–Increases in the number of people entering and reentering the labour force and increases in unemployment benefits raise frictional unemployment.–Frictional unemployment is a permanent and healthy phenomenon of a growing economy.




–Structural Unemployment–Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs.–Structural unemployment lasts longer than frictional unemployment.




–Cyclical Unemployment–Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak.–A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment.




•“Natural” Unemployment• Natural unemployment is the unemployment that arises from frictions and structural change when there is no cyclical unemployment.• Natural unemployment is all frictional and structural unemployment.

–The natural unemployment rate is natural unemployment as a percentage of labour force.




–Full employment is defines as the situation in which the unemployment rate equals the natural unemployment rate.–When the economy is at full employment, there is no cyclical unemployment or, equivalently, all unemployment is frictional and structural.




•Real GDP and Unemployment Over the Cycle–Potential GDP is the quantity of real GDP produced at full employment. –Potential GDP corresponds to the capacity of the economy to produce output on a sustained basis.–Real GDP minus potential GDP is the output gap.–Over the business cycle, the output gap fluctuates and the unemployment rate fluctuates around the natural unemployment rate.



Figure 21.5 shows the output gap and …

the fluctuations of unemployment around the natural rate.

When the output gap is negative, unemployment exceeds the natural unemployment rate.




Labor Market PoliciesLabor Market Policies

• What can the government do to lower unemployment?– Reduce economic fluctuations.– Job skills training.– Abolish unemployment compensation.– Improve quality of information on the

economy.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko...

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