Chapter 27 Unemployment

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Chapter 27Unemployment

• David Begg, Stanley Fischer and Rudiger
  Dornbusch, Economics,
• 6th Edition, McGraw-Hill, 2000
• Power Point presentation by Peter Smith

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Some key terms

• Unemployment rate
• the percentage of the labour force without a job
  but registered as being willing and available for
  work
• Labour force
• those people holding a job or registered as being
  willing and available for work
• Participation rate
• the percentage of the population of working age
  declaring themselves to be in the labour force

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Unemployment in the UK, 1950-99
Source Economic Trends Annual Supplement, Labour
Market Trends
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Unemployment () in selected countries
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Labour market flowsIt is tempting to see the
labour market in static terms
Working
Unemployed
Out of the labour force
but...
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Labour market flows
Working
Unemployed
Out of the labour force
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More on labour market flows

• The size of these flows is surprisingly high
• In 1999 unemployment in the UK began at 1.29
  million
• During the year
• 3.14 million became unemployed
• but 3.3 million left the ranks of the unemployed

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The composition of unemployment

• Different groups in society are more vulnerable
  to unemployment, varying by
• age
• gender
• region
• ethnic origin

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Types of unemployment

• Frictional
• the irreducible minimum level of unemployment in
  a dynamic society
• people between jobs
• the almost unemployable
• Structural
• unemployment arising from a mismatch of skills
  and job opportunities when the pattern of demand
  and production changes
• it takes time for ex-coal miners to retrain as
  international bankers

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Types of unemployment (2)

• Demand-deficient unemployment
• occurs when output is below full capacity
• Keynesian unemployment occurs in the
  transitional period before wages and prices have
  fully adjusted
• Classical unemployment
• created when the wage is deliberately maintained
  above the level at which labour supply and labour
  demand schedules intersect

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A modern view of unemployment

• A similar categorization is retained, but an
  important distinction is to be noted between
• Voluntary unemployment
• when a worker chooses not to accept a job at the
  going wage rate
• Involuntary unemployment
• when a worker would be willing to accept a job at
  the going wage but cannot get an offer.

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The natural rate of unemployment
LD labour demand
Real wage
AJ is to the left of LF because some members of
the labour force are between jobs, others are
waiting for better offers.
LD
Number of workers
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The natural rate of unemployment

• The natural rate of unemployment is the rate of
  unemployment when the labour market is in
  equilibrium.
• This is entirely voluntary.
• It includes
• frictional unemployment
• structural unemployment

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Classical unemployment
AJ
LF
Real wage
w
LD
To the extent that this unemployment reflects a
conscious decision by unions to restrict
employment, it is voluntary unemployment.
N
N1
Number of workers
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UK unemployment 1956-95
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Supply-side economics

• entails the use of microeconomic incentives to
  alter
• the level of full employment
• the level of potential output
• the natural rate of unemployment
• In the long run the performance of the economy
  can only be changed only by affecting the level
  of full employment and the corresponding level of
  potential output.

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Tax cuts and unemployment
AJ
LF
Real wage
LD
Number of workers
EF is less than BC because of the relative slopes
of LF AJ but the differences may not be
substantial.
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Other supply-side policies

• Trade union reform
• reducing the power of trade unions may limit
  distortions in the labour market
• Other labour supply policies
• training and retraining measures
• improving the efficiency of the labour market
• such measures may affect frictional and
  structural unemployment
• Investment
• higher investment may increase the demand for
  labour
• may be achieved via tax incentives or low
  interest rates

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Hysteresis

• The idea that a (short-run) fall in labour demand
  may lead to a permanent fall in labour supply
• This could help to explain high and persistent
  unemployment in Europe in the 1980s

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Hysteresis (continued)

• Four channels
• Insider-outsider distinction
• only those in work take part in wage bargaining
  they protect their own positions
• Discouraged workers
• people stop looking for jobs
• Search and mismatch
• firms and workers get used to low search
• capital stock
• low levels of investment in recession lead to
  permanently low capital stock levels