3.5 Unemployment

Unemployment Full Employment

Equilibrium on the aggregate labor market

What rate is generally considered to be full-employment in America?

Underemployment People cannot find full-time work.

Unemployment Rate Formula: Unemployed/Labor Force =

%

2006 Figures Around 5%

90 Vietnam5.50 90 Denmark5.50 90 Romania5.50 91 Lithuania5.30 92 Australia5.20 93 United States5.10 93 Austria5.10 94 Burma5.00 95 Luxembourg4.90 96 Brunei4.80 97 United Kingdom4.70 98 Saint Kitts and Nevis4.50 99 Japan4.30 100 Taiwan4.20 100 Ireland4.20 100 Norway4.20 100 China

Colombia

10.20 60 Spain10.10 61 Turks and Caicos Islands10.00 Turkey10.00 61 Greenland10.00 61 Egypt10.00 61 France10.00 62 India9.90 62 Brazil9.90 63 Saint Pierre and Miquelon9.80 63 Slovenia9.80 64 Ecuador

Weaknesses of Unemployment Measures Definitional Problems

Accounting Problems

Solution: Standardized Measure International Labour Organization (ILO)

• Used by Organisation of Economic Cooperation and Development (OECD)

• www.oecd.org

Costs of Unemployment Loss of output Lost tax base Increased Transfer Payments

Opportunity costs • (roads vs. unemployment benefits)

Tax Increases Barriers to entry Deskilling of workforce

Social Costs Dignity vs. Dependence Self-image Crime, Drug Abuse, Physical abuse Health

Depression Stress Mental Health

Types of Unemployment Structural(mismatch between skills and

demand of economy) Regional

• Industries specific to a region Sectoral

• Segments suffer temporary or permanent decline Technological

• Technology replaces workers

Frictional Short term/ during job search

Seasonal

Natural Rate of Unemployment Some people voluntarily reject the

real wage rate (equilibrium) There is always some

unemployment Pg. 418

Cyclical/Demand Deficient U Keynesian Unemployment Business Cycle affects Unemployment Involuntary unemployment Pg. 419

ADL shifts left• Distance

• ADL1 to ADL2

Why don’t wages clear? How are AD and ADL correlated?

• See pg. 420

Downward Sticky Supply Curve Pg. 420 Same effect as minimum wage

Real Wage Unemployment Classical View Disequilibrium Unemployment

Unemploy exceeds natural rate Doesn’t clear to real wage (equil) Voluntary + Involuntary Unemployment

Diagrams pg. 421 Why doesn’t in clear?

Minimum wage legislation Unions Social Benefits (no incentive to accept lower

wages).

Measures to Deal With Unemployment Interventionist

Increase demand for labor through fiscal and monetary stimulation of AD

Demand Management (Keynes)• Increase ADL by increasing AD in economy• Shift in ADL right = Full employment• Diagram 422

Supply Side Intervention Govt. intervention in factor markets to

enhance: Attractiveness of labor Availability of labor (ie. Supply of labor) Secondary affect = increased DL

How? Training and education incentives Increase

• Skills• Job mobility

• Decrease search costs for employers and labor

Market Solutions pg. 423-425 Removing market imperfections

Decrease union power Lower minimum wage Lower taxes on labor

Decreasing Natural Rate of Unemployment Shift ASL right How?

• Incentives to work• Lower social benefits• Lower income taxes• Increase labor flexibility• Retraining and Eduction

• Reduce time between jobs

Critics of market policies

Social Inequality Marginal Tax decreases don’t affect

ASL Voluntary is often involuntary