Unemployment Chapter 18

1
Lecture 11

• Unemployment (Chapter 18)
• Labour shortages
• Review for final exam
• Some key models
• Some key questions
• Last semesters final exam

2
Unemployment
Wage (/hr)
Supply1
Supply2
Unemployment
W1
W2
Demand2
Demand1
Q1
Q2
Quantity of Labour
3
Unemployment (contd)

• Compare labour supply growth to labour demand
  growth
• Sources of labour supply Labour market entrants
  net immigration labour market re-entrants -
  attrition
• LFPR LF/POP ? LF LFPR x POP
• ? labour force ?participation rate
  ?population
• Increases in labour demand
• GDP (GDP/E) x E ? E GDP / (GDP/E)
• ?E ?GDP - ?Productivity

4
Unemployment (contd)

• Compare ? Labour Force and ? Employment Demand
• Examples
• Population increase
• Canadian dollar rise
• Problems
• Holding all else constant
• Role of productivity

5
Unemployment (contd)

• Why wages dont fall to equate quantity of labour
  demanded to quantity supplied?
• Employers perspective
• Efficiency wages
• Adverse impacts of wage reductions
• Marginal costs gt Marginal revenue product

6
Unemployment (contd)

• Employees perspective
• Why might not accept a lower wage to become
  employed?
• What factors determine how much job search
  transpires?
• Why layoffs may be preferable to wage reductions

7
Types of unemployment

• Four main types of unemployment
• Cyclical
• Seasonal
• Structural
• Frictional
• Types of unemployment can be related
• Solutions to reduce unemployment relate to type

8
Types of unemployment (contd)

• How much of Canadas unemployment is structural?
• Approach, compare number of job vacancies to
  number of unemployed workers
• Less than 1/8th of the national unemployment
  rate could by due to structural mismatch between
  the skills demanded in available jobs and the
  skills possessed by the unemployed (Osberg and
  Lin, 2000).
• See http//www.csls.ca/cpp/1/OsbergLin.pdf

9
Labour shortages

• Media Coverage
• Background
• Data shortcomings
• Key studies
• Solutions

10
Labour shortages (contd)

• Recent media coverage/ headlines
• Serious labour shortage looms, study finds
  Globe and Mail, Jan. 27, 2004
• A massive skilled labour shortage is looming in
  Ontario. An OCC study on skilled trades,
  released today, shows that 52 per cent of skilled
  trades people are expected to retire within the
  next 15 years, with 41 per cent of respondents
  indicating they will face a skills shortage in
  their industry within five years. Ontario
  Chamber of Commerce, Apr. 13, 2004

11
Labour shortages (contd)

• Recent media coverage/ headlines (contd)
• The ageing of the workforce may exacerbate the
  skills shortage. The Conference Board of Canada
  forecasts a shortfall of nearly one million
  workers within 20 years. Human Resources
  Development Canada, 2003
• "A critical shortage of skilled workers in Canada
  could grow to one million by 2020 unless the
  country changes its approach to education and
  training," says Human Resources Minister Jane
  Stewart.

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Shortage (cont)
Wage (/hr)
Supply1
Supply2
W2
Labour Shortage
W1
Demand
QS1
QD1
Q2
Quantity of Labour
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Labour shortages (contd)

• Terminology
• Labour shortages
• Skills shortage
• Skilled labour shortage

14
Labour shortages (contd)

• Background
• LF POP x LFPR
• ? labour force ?population
• ?participation rate
• Why population growth might slow?
• Why labour force participation rates might
  decline?

15
Total Fertility Rate, Ontario
Sources Statistics Canada, and Ontario Ministry
of Finance projections. See http//www.gov.on.ca
/FIN/english/demographics/demog00e.htm
16
Age Pyramid of Ontario Pop.
Sources Statistics Canada, and Ontario Ministry
of Finance projections. See http//www.gov.on.ca
/FIN/english/demographics/demog00e.htm
17
Labour Force Participation Rate
18
Slowing labour force growth, Canada
Conference Board of Canada, Performance and
Potential, 2002-03
19
Labour shortages (contd)

• The job vacancy rate
• Official Data shortcomings
• Statistics Canadas Workplace and Employee
  Survey.
• 1999 Job vacancies 286,415 vacancy rate 2.6
• Employer-generated data often fills void
• Canadian Federation of Independent Business
  Surveys
• According to CFIBs Hard Facts survey, conducted
  in October to November 2000, 8,767 respondents
  reported that about 1 out of every 20 jobs
  remains unfilled because of an inability to find
  suitably skilled laboura rate of 4.7 per cent

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Labour shortages (contd)

• Conference Board (2001)
• Over the next 20 years, Canada will be faced
  with an increasing labour shortage.culminating
  in annual labour shortages reaching almost 1
  million workers by 2020
• Of course, such as huge shortfall will never be
  observed..
• Why not?

21
Labour shortages (contd)

• Skepticism
• Will There Really Be a Labor Shortage? (Cappelli,
  2003)
• Unemployment rates still relatively high
• Real wages fell until mid 1990s
• More PSE grads at trough of baby bust than peak
  of baby boom
• Labour force growth doesnt constrain number of
  jobs in economy unless operating at full
  employment
• Predictions of widespread shortages without
  precedent in modern US history.

22
Demand and Supply of University Trained Workers
23
Unemployment Rate Still High
24
Labour shortages (contd)

• Some solutions/adjustments to reduce shortages
• Increase supply of labour
• Improved utilization of labour
• Reduced demand for labour

25
Labour shortages (contd)

• Consequences of labour shortages
• Slower economic growth
• Inflationary pressures
• Quality reductions
• Overworked
• Severity depends, in part, on specific occupation

26
Review for Final

• Key models (diagrams)
• Income Leisure Choice Model
• Labour demand Short run, Long Run
• Effect of payroll taxes (graphically, math)
• Imperfect competition (monopoly, monopsony)
• Dangerous work safety regulation
• Human capital theory
• Deferred Wages
• Wage differentials
• Oaxaca Decomposition

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Other key questions/issues

• Labour force survey, labour force formulae
• Quasi-fixed costs
• Compensating wage differentials
• Human capital theory
• Immigration
• Optimal compensation systems
• Wage Differentials
• Disequilibrium (unemployment, labour shortages)