• Labor earnings are relied on to maintain a standard of living

• The natural rate of unemployment: the amount of unemployment that the economy normally experiences

• Cyclical unemployment: refers to the year-to-year fluctuations in unemployment around its natural rate. This is also associated with short fluctuations in economic activity

• Unemployment does not go away on its own

28-1 Identifying Unemployment

How Is Unemployment Measured?

• The Bureau of Labor Statistics (BLS) measures unemployment

• 3 categories, age 16 and above are placed into

  • Employed: employees (paid or unpaid) (full-time or part-time)

  • Unemployed: not employed, but tried to find employment in the past 4 weeks

  • Not in the labor force: full-time students, homemakers, retirees-people not a job

• Labor force: the total number of workers, including both the employed and the unemployment

  • Labor force = Number of employment + Number of unemployed

• Unemployment rate: the percentage of the labor force that is unemployed

  • Unemployment = (Number of unemployed/labor force) * 100

• Labor-force participation rate: the percentage of the adult population that is in the labor force

  • Labor-force participation = (labor force/adult population) * 100

Does the Unemployment Rate Measure What We Want It to Measure?

• It is hard to differentiate the unemployed from those not in the labor force

• Switching through the different labor categories happens frequently

• This frequency makes the measurement hard to account for accurately

• Discouraged workers: individuals who would like to work but have given up looking for a job

How Long Are the Unemployed without Work?

• Most spells of unemployment are short but most unemployment observed at any given time is long-term

• Most people who are become unemployed will find jobs

• The economic unemployment problem is caused by a few workers who are jobless for a long period of time

Why Are There Always Some People Unemployed?

• In most markets, prices adjust to bring quantity supplied and quantity demanded into balance. Ideally, wages adjust to balance the quantity of labor supplied and the quantity of labor demanded

• Frictional unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

• Structural unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

28-2 Job Search

• Job search: the process by which workers find appropriate jobs given their tastes and skills

Why Some Frictional Unemployment Is Inevitable

• Frictional unemployment is often caused by the labor demand

• When A is preferred over B, A hires more workers and B lays off workers. This transition is a period of unemployment

• Sectoral shifts: changes in the composition of demand among industries or regions

• Since the economy is changed, frictional unemployment cannot be avoided. Workers tend to move toward industries in which they are most values

Public Policy and Job Search

• The faster information spreads about jobs, the more rapidly the economy can match workers and firms

• Governments try to facilitate this information through government-run employment agencies and public training programs

Unemployment Insurance

• Unemployment insurance: a government program that partially protects the incomes of workers who become unemployed

• Unemployed who quit their jobs, were fired for cause, or entered the labor force are NOT eligible

• Laid-off employees may receive unemployment tax if they were sacked because their skills were not needed

• Unemployment insurance benefits usually run after half a year, to a year

• Unemployment insurance reduces search effort and raises unemployment

• However, it does not guarantee a good salary forever, nor does it allow the raising of a standard of living over time

28-3 Minimum-Wage Laws

• Minimum wages are not the primary reason for unemployment, but they are still important

• Most workers earn more above the minimum wage

• Minimum wage laws affect the least experienced members of the labor force

• If the wage is kept above the equilibrium level at any reason, the result is unemployment

28-4 Unions and Collective Bargaining

• Union: a worker association that bargains with employers over wages, benefits, and working conditions

The Economics of Unions

• Most people discuss aspects of their jobs

• Collective bargaining: the process by which unions and firms agree on the terms of employment

• When a union bargains with a firm, it asks for higher privileges (wages, benefits, working conditions)

• Strike: the organized withdrawal of labor from a firm by a union

• When a union raises the wage above the equilibrium level is the quantity of labor supplied and reduces the quantity of labor demanded

• Insiders benefit from high union wages. Outsiders do not the union jobs

• Right-to-work laws: a bar requiring unions and employers to financially support the union

Are Unions Good or Bad for the Economy?

• When unions raise wages above the level that would prevail in competition, they reduce the quantity of labor demanded. This causes some workers to be unemployed and reduces the wages in the rest of the economy

  • This is inefficient and drags other workers down to benefit other workers

• Unions are a necessary antidote to the market power of the firms that hire workers

• Firms can use market power to pay lower wages and offer worse working conditions

28-5 The Theory of Efficiency Wages

• Efficiency wages: above-equilibrium wages paid by firms to increase worker productivity

• Minimum wage laws and unions prevent firms from lowering wages in the presence of a surplus of workers

Worker Health

• Better paid workers eat a better diet and therefore are more “healthy”

• Cutting wages may lower worker health and therefore reduce productivity

Worker Turnover

• Paying higher wages will provide an incentive for workers not to quit

• It is costly to train new hires, and usually, they are not as productive as higher ones

Worker Quality

• Firms are willing to pay for experienced workers who have a higher quality

Worker Effort

• High wages may compensate more for worker’s productivity

• Higher wages also provide an incentive against shirkers