Topic 7: Unemployment

1
Topic 7 Unemployment

• Define the unemployment and the labor force
• How much unemployment is reasonable?
• Sources of unemployment
• How to reduce unemployment
• Define full employment
• Readings P84 P90, P295 P296

2
Define Unemployment

• Unemployment is a situation that the economy has
  people aged more than 16 who want to have a job
  but do not have one.
• The costs of unemployment

3
Define Labor Force

• Labor Force is the number of people, aged more
  than 16, who hold or seek jobs.
• The Employed includes people in the labor force
  having a full time or part time job.
• The Unemployed includes people in the labor
  force seeking a job but do not have one.
• Labor force Employed people Unemployed
  people
• Who are the people out of the labor force?

4
Unemployment Rate

• Unemployment Rate is the number of unemployed
  people, expressed as a percentage of the labor
  force.
• Unemployment Rate
• Properties of the unemployment rate

• ( Unemployed/ Size of Labor Force) x 100

5
Properties of the Unemployment Rate

• Unemployment rate and economic growth rate are
  conversely related
• Unemployment rate has never been zero

• Unemployment rates varies
• across groups

6
How Much Unemployment is Reasonable?

• Frictional Unemployment is the unemployment that
  is due to normal turnover in the labor market. It
  includes people who are temporarily between jobs
  because they are moving or changing occupations,
  or are unemployed for similar reasons.
• Structural Unemployment refers to workers who
  have lost their jobs because they have been
  displaced by structural change of the economy
  such as automation, because their skills are no
  longer in demand, or because of similar reasons.

7
How Much Unemployment is Reasonable?

• Cyclical Unemployment is the portion of
  unemployment that is attributable to a decline in
  the economys total production. It rises when the
  level of economic activity declines as in does in
  a recession and falls down to zero as prosperity
  is restored.
• What kind/s of unemployment is/are not desirable
  and what kind/s of unemployment is/are
  unavoidable?
• Frictional Unemployment is _________________
• Structural Unemployment is _________________
• Cyclical Unemployment is __________________

Unavoidable
Unavoidable
Undesirable
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How to Reduce Unemployment?

• Frictional and structural unemployment cannot be
  eliminated but can be reduced.
• To reduce frictional unemployment
• Better information for job search
• Appropriate unemployment benefit system
• Unemployment Benefit is a government program that
  replaces some of the wage lost by eligible
  workers who lost their job.
• People intend to stay unemployed if the benefit
  is great. (e.g. Spain)

9
How to Reduce Unemployment?

• To reduce structural unemployment
• Re-education
• To eliminate cyclical unemployment
• Keep the prosperity of the economy

10
Define Full Employment

• Full employment is the situation in which
  everyone who is willing and able to work can find
  a job.
• If the economy produces its potential GDP,
  _________ unemployment is zero. The economy is in
  full employment. In such situation, the
  unemployment rate equals the _____________________
  _______.
• In full employment, the sum of ___________
  unemployment and ______________ unemployment
  equals to __________________________________.

cyclical
natural rate of unemployment
frictional
structural
the natural rate of unemployment
11
Examine unemployment rate in the AD-AS diagram
Case 1
Case 2
Case 3

• Case I
• Case II
• Case III

The economy is in full employment
Unemployment rate the natural rate
Unemployment rate gt the natural rate
Unemployment rate lt the natural rate
12

• The sum of frictional and structural
  unemployment rates can be less than the natural
  rate. Why?
• Do you buy the sticky price?
• Different countries may have different natural
  rates of unemployment
• Reasons
• Culture
• Unemployment benefit system