Topic 7: Unemployment

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.