Chapter 14: UNEMPLOYMENT

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Chapter 14 UNEMPLOYMENT

• AND ITS NATURAL RATE

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Problem of unemployment

• The long-run unemployment or the natural rate of
  unemployment is the amount of unemployment that
  the economy normally experiences
• The Short-run unemployment or cyclical
  unemployment refers to the year-to-year
  fluctuations in unemployment around its natural
  rate
• We focus on the natural rate of unemployment

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Outline

• Measurement of unemployment rate
• Interpretations of unemployment data
• Explain the determinants of natural rate of
  unemployment

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Measurement of unemployment

• Source is the Labour Force Survey
• Each surveyed household is classified as
• Employed
• Unemployed
• Not in the labour force
• Labour force employed unemployed
• Unemployment rate is the percentage of labour
  force that is unemployed

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Measurement of unemployment

• Labour-Force Participation Rate (LFPR) is the
  percentage of adult population that is in the
  labour force
• Unemployment rates Variation by region, by age,
  and by gender

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Measurement of unemployment
Participation rate
Source Statistics Canada, CANSIM, table 282-0002
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Labour Force Participation Rates by Gender
1976-2002

                                                
                    Source Statistics Canada,
CANSIM, table 282-0002
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Unemployment rates by gender, 1976-2001
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Unemployment rates for age group 15-24 years and
for all 15
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Unemployment Rates by Region
     Source Statistics Canada, CANSIM, table
282-0055
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Problems with the measurement of unemployment

• Movements into and out of labour force are common
• Behaviour of EI beneficiaries
• Discouraged workers
• Duration of unemployment
• Most spells of unemployment are short, and most
  unemployment at any given time is long-term
• Low LFPR

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Types of unemployment

• Natural rate of unemployment is the rate of
  unemployment to which the economy tends to return
  in the long-run
• Frictional unemployment results because of the
  time it takes workers to search for jobs that
  suit their skills and tastes
• Structural unemployment results because the
  number of jobs available in some labour markets
  is insufficient to provide a job to every worker
  who wants one

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Types of unemployment

• Natural rate of unemployment is the rate of
  unemployment to which the economy tends to return
  in the long-run
• Frictional unemployment results because of the
  time it takes workers to search for jobs that
  suit their skills and tastes
• Structural unemployment results because the
  number of jobs available in some labour markets
  is insufficient to provide a job to every worker
  who wants one

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Natural and observed rate of unemployment,
1976-2001
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Unemployment and causes

• Frictional unemployment
• Job search the process by which workers find
  appropriate jobs given their tastes and skills
• Public policy and job search EI
• Causes of Structural unemployment
• Minimum-wage laws above equilibrium wage
• Unions and collective bargaining type of cartel
• Efficiency wages are above equilibrium wages paid
  by firms to increase worker productivity

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The theory of efficiency wages

• Why do firms want to pay higher wages?
• Worker health
• Worker turnover
• Worker effort
• Worker quality
• Worker-quality variant of efficiency wage theory
  illustrates the principles of adverse selection
  and moral hazard