Chapter 15 – Long term Unemployment

1. Chapter 15 – Long term Unemployment • How is unemployment measured? • What is the “natural rate of unemployment”? • Why are there always some people unemployed? • How is unemployment affected by unions and minimum wage laws? • What is the theory of efficiency wages, and how does it help explain unemployment? 0

2. I. Measuring unemployment Bureau of Labor Statistics (BLS) divides population into 3 groups: Employed: Unemployed: Not in the labor force: The labor force 0

3. = 100 x u-rate = 100 x labor force participation rate 0 Unemployment rate (“u-rate”): % of the labor force that is unemployed Labor force participation rate: % of the adult population that is in the labor force

4. Adult population in the US in June 2008 # of employed = 145.9 million, # of unemployed = 8.5 million, not in labor force = 79.2 million Labor force = U-rate = Population = LF participation rate = 3

5. Labor Market Statistics for Whites & Blacks, June 2008 0

6. Labor Market Statistics for Whites & Blacks, June 2008 0

7. Labor Market Statistics for Other Groups, June 2008 0

8. Labor Market Statistics by Education Level, June 2008 0

9. LF Participation Rates by Sex, 1950-2007 0 Men Women

10. Limitation of the u-rate: Q: In each case, what happens to the u-rate and does it give an accurate impression of what’s happening in the labor market? A. Sue lost her job and begins looking for a new one. B. Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work. C. Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field. 9

11. A. Sue lost her job and begins looking for a new one. u-rate A u-rate gives the impression that the labor market is • Jon has been out of work since last year, becomes discouraged, stops looking for work. workers • would like to work but U-rate A u-rate gives the impression that the labor market is 10

12. C. Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one. U-rate . Labor market is The u-rate is not a perfect indicator • It excludes • It does not distinguish between • It does not reveal whether • Reporting errors 11

13. The Duration of Unemployment Most spells of unemployment are Typically 1/3 of the unemployed and 2/3 have been unemployed Only 20% have been unemployed Yet, most observed unemployment The small group of long-term unemployed persons has fairly little turnover, so it accounts for 0

14. 2. Reasons for unemployment - Cyclical and Natural Rate There’s always some unemployment, though the u-rate fluctuates from year to year. Natural rate of unemployment Cyclical unemployment 0

15. U.S. Unemployment, 1960-2007 12 Unemployment rate 10 8 6 Natural rate of unemployment 4 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0 percentage of labor force

16. Reasons for a positive natural rate of unemployment Even when the economy is doing well, there is always some unemployment, because, Frictional unemployment short-term for most workers Structural unemployment usually longer-term 0

17. Reasons for Frictional unemployment: Workers have different Job search is the process of Sectoral shifts are changes in the Such shifts displace some workers, The economy is always changing, so 0

18. Public Policy and frictional unemployment Govt employment agencies Public training programs Unemployment insurance (UI) and its effect: 0

19. Reasons for Structural Unemployment Structural unemployment occurs when W S W1 WE D L 0

20. i. Minimum-Wage Laws The min. wage may the equilibrium The group most affected by minimum wage laws ii. Unions a worker association that bargains with employers over Unions use their market power to The typical union worker earns 0

21. Effects of Unionization – negatives and positives When unions raise the wage above “Insiders” – workers who remain employed “Outsiders” – workers who lose their jobs Some outsiders go to non-unionized labor markets Unions counter the market power of 0

22. iii. Efficiency Wages The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to 1. improve worker’s 2. reduce worker’s 3. improve worker’s 4. improve worker’s 0

23. Reasons for a positive natural rate of unemployment: A Summary The natural rate of unemployment consists of frictional unemployment It takes time to search for the right jobs Occurs even if there are enough jobs to go around structural unemployment When wage is above eq’m, not enough jobs Due to min. wages, labor unions, efficiency wages 0