Unemployment and Labor Force Participation Chapter 10 © 2010 WORTH PUBLISHERS MODERN PRINCIPLES:...

Unemployment and Labor Force ParticipationChapter 10

© 2010 WORTH PUBLISHERS MODERN PRINCIPLES: MACROECONOMICS COWEN AND TABARROK

IntroductionIntroduction

• A Recurring Story in American History–Many jobs have disappeared- and been

replaced by new jobs….

Chapter OutlineChapter Outline

• Defining Unemployment• Frictional Unemployment• Structural Unemployment• Cyclical Unemployment• Labor Force Participation• Takeaway• See the Invisible Hand Blog (click)

for more examples

http://blogs.worthpublishers.com/seetheinvisiblehand/category/unemployment/

http://blogs.worthpublishers.com/seetheinvisiblehand/category/unemployment/

Click here for the current U.S. unemployment rate

http://www.bls.gov/eag/eag.us.htm

Defining UnemploymentDefining Unemployment

• Measuring Unemployment– A person is counted as unemployed if

they…• Are 16 years of age or older.• Are not institutionalized (e.g., not in prison).• Are not in the military.• Are looking for work.

– The unemployment rateunemployment rate is the % of the labor force without a job

100

100

eLabor forcUnemployed

Employed Unemployed

Unemployed(%) rate ntUnemployme


• Unemployed worker:Unemployed worker: an adult who does not have a job but is looking for work.

• Labor force: Labor force: all workers, employed plus unemployed

• Labor force participation rate: Labor force participation rate: the percentage of adults in the labor force

Try it!Try it!

7

In your country, there are 24 million people in the labor force. 21.5 million people are employed. What is the unemployment rate in your country?

a)10.4% b)2.5% c)89.6% d)21.5%

Try it!Try it!

8

In your country, there are 24 million people in the labor force. 21.5 million people are employed. What is the unemployment rate in your country?

a)a)10.4% 10.4% b)2.5% c)89.6% d)21.5%


• How Good an Indicator Is the Unemployment Rate?– Does not account for discouraged workers.• discouraged workers discouraged workers : workers that have given up looking for work who would still like to have a job.• account for 0.3% of the labor force.• For long recessions the number of discouraged workers will be higher.– Implication: In recessions that last a long time,

the unemployment rate is not as good an indicator.


• How Good an Indicator Is the Unemployment Rate? – Doesn’t measure the quality of jobs or how

well people are matched to their jobs.• Examples:– An overqualified worker, or one with a

part-time job (who wants to work full-time) is counted as fully employed.

– Economists also look at other indicators:• Labor force participation rate• Number of full-time jobs• Average wages


• There are three types of unemployment:– Frictional– Structural– Cyclical

• Frictional unemployment:Frictional unemployment: Short-term unemployment caused by difficulties of matching employee to employer.– Scarcity of information creates

frictional unemployment.• Matching people to jobs takes time….

Frictional UnemploymentFrictional Unemployment

• Usually doesn’t last very long.– 2005: 35% of unemployment lasted less

than 5 weeks.

• Is a large share of total unemployment because: – the U.S. economy is dynamic.• “Creative Destruction”-Joseph Schumpeter.

– progress is about creating new jobs and destroying old jobs.

– it takes time to adjust to innovation and the job creation/destruction that ensues:

Frictional UnemploymentFrictional Unemployment

Structural UnemploymentStructural Unemployment• Structural Unemployment:Structural Unemployment: Persistent, long-

term unemployment caused by long-lasting shocks or permanent changes in the economy.– Causes:• Large shocks that take a long time for the economy to restructure.– Oil shocks: fuel alternatives take time to create. – New information technologies: create new

industries and cause the disappearance of others.

– Globalization: decline of manufacturing and the rise of the service economy.

Structural UnemploymentStructural Unemployment

• Structural unemployment, if it lasts long enough, brings significant human costs.– At some point unemployment can become

chronic.• The longer a worker is out of work, his or her skills atrophy.• Hiring managers are wary of hiring workers who have been unemployed for a long time. –Who would you rather hire: a worker looking to switch jobs or a worker who has been unemployed for five years?

• Result: Unemployment can become a trap.

Duration of U.S. Duration of U.S. UnemploymentUnemployment

Most unemployment is short duration


Labor Regulations and Structural Unemployment– In the U.S. unemployment increases with a

shock, then declines.– In Europe unemployment has increased with

shocks but has not declined.


• Unemployment rates in the U.S. and Europe differ because of differences in labor regulations.

1. Unemployment benefits are more generous in Europe.

2. Unemployment benefits last longer in Europe.

3. Minimum wages are higher in Europe and unions are stronger.• The higher the minimum wage is above the

market wage, the greater unemployment will be.

• Unions have the same effect.


• Union: Union: an association of workers that bargains collectively with employers over wages, benefits, and working conditions.– Unions take many forms: some act to

increase wages simply by restricting entry into a profession with licensing requirements.


• Median Wage: Median Wage: the wage such that ½ of all workers earn wages below the median and ½ of all workers earn wages above the median.–Minimum wages in Europe are higher than the

U.S. (France= 40% higher)– European minimum wages are also higher

relative to their median wage than the U.S.– Result: minimum wage creates more

unemployment in Europe than it does in the U.S.–Minimum wage in Europe affects more workers than

U.S. minimum wage does.

Structural UnemploymentStructural UnemploymentEffect of Minimum Wage on Unemployment

Wage

QuantityOf Labor

Demandfor labor

Supply of Labor

Minimumwage

Marketwage

Marketemployment

Employmentwith minimumwage

Unemployment

Result:Minimum wage causes unemployment

Labor suppliedwith minimumwage

Structural UnemploymentStructural UnemploymentPotential Effect of Unions on Unemployment

Wage

QuantityOf Labor

Demandfor labor

Supply of Labor

Unionwage

Marketwage

Marketemployment

Employmentwith Union

Unemployment

Result:Certain types of unions can cause unemployment

Labor suppliedwith union wage


Employment Protection Laws• The U.S. uses the employment at-will

doctrine.• employment at-will doctrine: employment at-will doctrine: an

employee may quit and an employer may fire for any reason.

• many exceptions: race, religion, sex, sexual orientation, national origin, age, or handicap status.

• most basic U.S. employment law.


• World Bank “rigidity of employment index”• summarizes hiring and firing costs• the higher the index, the greater the

costs

SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND

SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND

26

Can you spot the differences?

Unemployed teens (outsiders) want France to adopt At-Will employment to make it easier for firms to hire, and riot in 2005. Then France proposed the changes, and employed teens (insiders) rioted against the changes in 2006.

France capitulated.Bottom line: it’s not easy to change employment

law.


• In summary, European labor regulations: • create valuable insurance for

workers with a full-time job.• make labor markets less flexible

and dynamic.• increase the duration of

unemployment.• increase unemployment rates

among young, minority, or otherwise “riskier” workers.

Is miminum wage a force for good or a force for bad? Yes.


Labor Regulations to Reduce Structural Unemployment– Europe has begun to change its labor

laws.• Reducing unemployment benefits• Adopting active labor market policiesactive labor market policies:

work tests, job search assistance and job retraining programs focus on getting unemployed workers back to work.

• Allowing exceptions to collective bargaining agreements.


Factors that Affect Structural Unemployment– Large, long-lasting shocks like:

• Oil shocks• Shift from manufacturing to services• Globalization and global competition• Fundamental technology (computers/Internet)

– Labor regulations• Unemployment benefits• Minimum wages• Powerful unions• Employment protection laws

Cyclical UnemploymentCyclical Unemployment

Cyclical Unemployment: Cyclical Unemployment: unemployment correlated with the business cycle

• Lower growth is usually correlated with higher unemployment for two reasons:1.When GDP falls, firms lay off workers.2.Idle labor and capital → economic growth

is not being maximized → ↓ ability of the economy to create more jobs.


Unemployment increases during a recession


Faster growth in Real GDP decreases unemployment


What causes cyclical unemployment?–Non “Keynesians”: Caused by real

shocks that require a reallocation of resources.• Cyclical unemployment is just another

example of frictional and structural unemployment.

– “Keynesians”: Caused by deficiencies in aggregate demand.• For now: consider it a mismatch between

the aggregate level of wages and the level of prices.


• The Natural Unemployment Rate:Natural Unemployment Rate: Structural plus frictional unemployment.

Note: Total unemployment changes much quicker than the natural unemployment rate.

Labor Force ParticipationLabor Force Participation

Measuring the labor force participation rate– The % of the adult (16+) non-

institutionalized civilian population who are working or actively looking for work.

Example, U.S. 2009:

100

100

population AdulteLabor forc

population AdultEmployedUnemployed

%5.6510009.23504.154

million million

Labor ForceParticipationRate

Labor ForceParticipationRate


What determines the labor force participation rate?

1. Lifecycle Effects and Demographics

Baby Boomers: Baby Boomers: people born during the high birth-rate years, 1946-1964

Implication: As the U.S. labor force ages, the participation rate will fall


Labor force participation varies significantly across countries.Males, age 55-64, 1998 data from OECD Statistics


2. Differences in Incentives– Taxes and Benefits

• Taxes discourage work and benefits encourage non-work.–Many countries penalize workers who work

past the normal early retirement age.»Netherlands in the 1990s: Working past

the age of 60 meant losing one year of government retirement benefits.

»Result: Individual working past age 60 after paying payroll taxes made less money than a worker who retired.


Labor force participation declines with higher taxes.Males, age 55-64, 2005 data from OECD Statistics


2. Differences in Incentives– Incentives and the rise in female labor

force participation:• 1948 -2008: number of women aged 25-54 in

the paid labor force increased from 35% to 75%.

• What caused this?– Cultural factors

» Rise of feminism» Growing acceptance of equality

– Move from a manufacturing to a service economy.

Female Labor Force Female Labor Force ParticipationParticipation

Female Labor Force Female Labor Force Participation, ProfessionsParticipation, Professions


• Differences in Incentives– How “the pill” increased female labor

force participation:• lowered the:– cost of earning a professional degree.–uncertainty about the consequences of sex.

• Result: the pill lowered the costs and increased the incentive of women to invest in a long-term education.

Key ConceptsKey Concepts

Try it!Try it!

45

Which of the following individuals can be counted as unemployed?

a)Darren, a ten-year-old childb)Nazma, a stay-at-home momc)Moesha, a full-time college

studentd)None of the answers is correct.

Try it!Try it!

46

Which of the following individuals can be counted as unemployed?

a)Darren, a ten-year-old childb)Nazma, a stay-at-home momc)Moesha, a full-time college

student

d)d)None of the answers is correct.None of the answers is correct.

Try it!Try it!

47

According to the accompanying labor data, the unemployment rate is _________ and the labor force participation rate is __________.a)7%; 60.4% b)0.7%; 99.3% c)5.6%; 69.4% d)7.5%; 75%

Adult population 200 millionLabor force 150 millionEmployed persons 138.75

millionDiscouraged workers

10.5 million

Try it!Try it!

48

According to the accompanying labor data, the unemployment rate is _________ and the labor force participation rate is __________.a)7%; 60.4% b)0.7%; 99.3% c)5.6%; 69.4% d)d)7.5%; 75%7.5%; 75%

Adult population 200 millionLabor force 150 millionEmployed persons 138.75

millionDiscouraged workers

10.5 million

Try it!Try it!

49

According to the Bureau of Labor Statistics, unemployment includes :

I. discouraged workers.II. workers who are overqualified for their

work.III. workers who have a part-time job but

want a full-time job.

a)I and II onlyb)II and III onlyc)I, II, and III onlyd)None of the answers are correct.

Try it!Try it!

50

According to the Bureau of Labor Statistics, unemployment includes :

I. discouraged workers.II. workers who are overqualified for their

work.III. workers who have a part-time job but

want a full-time job.

a)I and II onlyb)II and III onlyc)I, II, and III onlyd)d)None of the answers are correct.None of the answers are correct.

Try it!Try it!

51

Jasmine has recently moved to Florida because she loves the warm climate there. Because she is new to the area, she will need to spend a few weeks looking for a new job. This is an example of:a)frictional unemployment.b)cyclical unemployment.c)structural unemployment.d)underemployment.

Try it!Try it!

52

Jasmine has recently moved to Florida because she loves the warm climate there. Because she is new to the area, she will need to spend a few weeks looking for a new job. This is an example of:

a)a)frictional unemployment.frictional unemployment.b)cyclical unemployment.c)structural unemployment.d)underemployment.

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