Unemployment 3.5. Full Employment – not necessarily no one not working, all the people willing and able to work have jobs at the going rate. There will.

Unemployment

3.5

• Full Employment – not necessarily no one not working, all the people willing and able to work have jobs at the going rate.

• There will always be people “in between” jobs.

• Full employment downs not mean “everyone has a job” but the total demand of labor equals the demand.

A Supply and Demand Model for Labor.

•In a smoothly functioning market, the equilibrium wage and quantity of labor would be set by market forces.

Classical Unemployment.

In a Classical (idealized) market for labor, the only thing that can cause true unemployment is something that interferes with the adjustments of free markets, such as a legal minimum wage.

Underemployment

• Many individuals who are officially unemployed will in fact be working part time or in odd jobs.

• Traditionally these include:– Women – Handy man (part time)– Developing countries also have higher

unemployment because families tend to do many of the jobs and they have a growing population and lack skills.

• Unemployment rate is expressed as the number of unemployed as a percentage of the labor force.

• Some problems with measuring unemployment.– Disabilities or long term illness – Discouraged workers (close to retirement but just

give up looking)

• The main tool used to figure out the employment rate involves counting the people who have registered at unemployment agencies and those receiving unemployment benefits.

• There may be some unemployed not accounted for.– Job training programs, young people, people not

part of the formal economy.

Solution

• International Labor Organization – Unemployed people are – people with out a job

(work less than one hour a week), have actively sought employment in the pars four weeks and are able to start a new job within two weeks.

Costs of Unemployment

• After reading the article “No-one in our house works” explain what you think could possibly the costs of unemployment?

Costs of Unemployment • Idle factors of production = loss of output.– In the long run this will lead to, lower tax base,

increase of transfer payments for social and unemployment benefits. This may case the government to raise taxes.

– This will lead to opportunity costs – less money for roads, colleges etc.

– High unemployment will also make it more difficult for people just entering the market

– It will also lead to a diminishing of skills.

Social costs

• In many cultures the stigma of being unemployed is a social stigma

• People many times identify themselves with their jobs.

• The lack of productivity of unemployed many times is not just restricted to their lack of job, but many times reaches other areas of their lives.

• There is also a correlation between unemployment rates and crime, domestic violence, drug and alcohol use, family issues and an overall much more unhealthy population.

Causes for Unemployment Labor market

•The aggregate demand curve slopes downwards because at a lower real wage level producers are more willing to take on more labors—i e producers demand for workers increases•As the wage level increases firms attempt to reduce the amount of labors that they use, perhaps by using more capital-intensive production methods.

Natural Unemployment

• When the labor market is in equilibrium, the number of job vacancies in the economy is the same as the number of people looking for work.

Types of Unemployment

• Structural Unemployment– Mismatch of available labor skills and the demand

of the economy.

• How does this happen?– Change in technology, declining industries, and

movement of jobs.

• The result is that there can be long run unemployment for a large number of people.

Types of Structural Unemployment

• Regional unemployment – The main industry in the region closes or

permanently loses jobs (Michigan and the car industry)

• Structural unemployment (very similar) specific sector of the industry goes into a along and many times permanent decline (black and white TVs)

Technological Unemployment

• New technologies either make certain skills obsolete or at least require less people than previously were needed to complete the task.

• (digital cameras huge loss in unemployment for film and developing companies/stores)

Frictional

• Workers who lose a job will usually start to look for a new job.– Frictional (Searching) usually is short term.

• How long it takes for the workers to find a new job usually depends on a few factors. – Workers skills/education, needs of the labor

market.

Seasonal

• Fruit pickers, ski instructors, resort workers, etc.

• The fact is that this type of employment is only needed during certain “seasons”

• Not really much can be done about this.

Cyclical / demand-deficient

• This type of disequilibrium unemployment is associated with the cyclical downturns in the economy.

• As an economy moves into a period of slower growth (or negative growth in the case of a recession), aggregate demand tends to fall as consumers spend less on goods and services see Figure 20.4(a).

• This is likely to lead to a fall in the demand for labor, as firms cut back on production.

• Figure 20.4(b).

• Assume that the economy is initially operating at a high level of activity at Y1 in Figure 20.4(a).

• There is aggregate demand for labor at ADL in 20.4(b) so the equilibrium wage will be W1, for Qe workers.

• The labor market is in equilibrium

• If the economy slows down, aggregate demand is likely to fall as shown in Figure 20.4(a).

• To reduce their output, firms will reduce their demand for labor from ADL to ADLI as shown in Figure 20.4(b).

• If labor markets functioned perfectly, then the average real wage would fall to W1.

• However, this is not the case, and we say that wages are “sticky downwards”. This means that while workers’ wages can easily increase, it is less likely that real wages will fall.

• There are several reasons for this wage “stickiness”. First of all, firms realize that paying lower real wages is likely to lead to discontent and reduced motivation among workers.

• This may result in lower worker productivity and is undesirable.

• Secondly, firms may not be able to reduce wages due to labor contracts and trade union power.

Real – wage unemployment • This type of unemployment

may be referred to as classical unemployment as it represents the view of classical (and neo-classical) economists that argue that some unemployment is caused by trade unions and government minimum wages interfering with the labor market

• Trade unions negotiate wages that are higher than the equilibrium and a minimum wage is set above the equilibrium.

• As a result of the higher enforced wage (W1), the aggregate supply of labor is greater than the aggregate demand for labor, and unemployment of a-b is created.

Dealing with Unemployment

• Interventionist – the goal is for full unemployment using both fiscal and monetary policies.

• Demand management – markets are not perfect and so increase government spending looser monetary polices will increase aggregate demand.

• Supply side – governments can intervene on the supply side by – Job training (government or employer run)– Job/ information centers – grants/ subsidies to employers hiring youth or

long term unemployed. – Regional incentives– Entrepreneurial incentives (R/D or start up)– Export aid to small companies.

Market Solutions

• Most of the market solutions encourage the government to not get involved and allow the natural clearing of the market to take its course. They would tend to encourage polices such as – Lower social benefits– Lower income tax– Increase labor flexibility

Sources

• http://www.eoearth.org/image/Supply_and_Demand_Model_for_Labor_graph.gif

• Dorton, Jocelyn Blink & Ian. Economics Course Companion. Oxford : Oxford University Press , 2007. Ian, Jocelyn Blink &. (n.d.).