In This Chapter, Look For The Answers To These Questions

In this chapter,
look for the answers to these questions
• How is unemployment measured?

• What is the “natural rate of unemployment”?
• Why are there always some people
unemployed?
• How is unemployment affected by unions and
minimum wage laws?
• What is the theory of efficiency wages, and how
does it help explain unemployment?
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Labor Force Statistics
§ Agencies involved :
§ Ministry of Labour and its affiliates such as Labour
Bureau and the Director General of Employment
and Training (DGE&T);
§ National Sample Survey Organisation (NSSO);
§ Registrar General and Census Commissioner of
India.
§ The Central Statistical Organisation (CSO) through
the Economic Census.
§ 2019 - CSO and NSSO merged to form the
National Statistical Office (NSO) – headed by
Secretary to MoSPI
2
§ The Labour Bureau collects statistics through statutory and
voluntary returns under different Labour Acts
§ Four sources of data :
§ The State Governments compile such statistics at the State level
by-product of the administration of various Labour Laws;
§ Annual Survey of Industries (ASI), Rural Labour Inquiry, Working
Class Family Income and Expenditure Survey, and Rural Retail
Prices for Consumer Price Index (CPI) for Rural Labour/Agriculture
Labour;
§ Data received on a voluntary basis from various Government and
non-Government agencies, such as data on industrial disputes,
retrenchment layoff and closures and price returns for CPI numbers
for industrial workers;
§ Data collected through other field surveys and studies. It conducts
occasional surveys in specific geographic areas or for some specific
section of labour to study the socio-economic conditions of labour or
to assess the impact of labour enactments.
3
§ Directorate General of Employment and Training
§ in its administration of various provisions of the
Employment Exchanges (such as Compulsory
Notification of Vacancies) Act, 1959 has been collecting
statistics on employment and the likely vacancies to
occur for the organised sector of economy under the
Employment Market Information Programme (EMIP)
which covers:
§ (a) all establishments in the public sector (except defence
establishments and armed forces, however, the programme
covers civilian employees in defence establishments),
§ (b) non-agricultural establishments in the private sector,
employing 25 or more persons on a compulsory basis, and
establishments having 10-24 workers on a voluntary basis.
4
§ Office of Registrar General and Census
Commissioner of India
§ Once in ten years
§ main worker and marginal worker , under
various demographic, social and economic
characteristics, which include classification by
industrial activity and occupation.
§ The tabulation also gives the spatial distribution
of workers by rural/urban residence at National,
State and district levels.
5
§ National Sample Survey Organisation
§ comprehensive survey on employment and
unemployment quinquennially
§ The first comprehensive survey on employment
and unemployment was carried out during
1972-73 (27th Round).
§ NSSO classifies workers by three approaches
namely, usual status, current weekly status, and
current daily status and further by demographic,
social, economic and spatial characteristics.
6
GENESIS
• Considering the importance of availability of labour force data at

more frequent time intervals (say, for every quarter), on the
recommendation of the National Statistical Commission (NSC),
the Ministry of Statistics and Programme Implementation
(MoS&PI) constituted a Committee on Periodic Labour Force
Survey (PLFS) under the Chairpersonship of Prof. Amitabh
Kundu, the then Member, NSC to develop the survey
methodology including the sample design for generating
monthly/quarterly labour market data.
7
OBJECTIVES
§ Measure the dynamics in labour force
participation and employment status in the short
time interval of three months for the urban areas
only in the Current Weekly Status (CWS).
§ for both rural and urban areas, level estimates of
all important parameters in both usual status
(ps+ss) and CWS will be brought out annually
8
DIFFERENT APPRAOCHES TO
DETERMINING ACTIVITY STATUS
1. Usual Status Activity:
• Activity status of a person during the reference
period of 365 days preceding the date of survey
• Activity status on which the person spent relatively
long time
• Measured in number of person years – those who
remained unemployed most of the year. Also
called open unemployment more appropriate for
those looking for regular emp. i.e., educated etc
2. Subsidiary Economic Activity Status:
• Apart from the usual principal status basis,
individuals may pursue activities for 30 days or
more during the reference period
9
3. Current Weekly Status Basis:
• Activity status for a person during a reference
period of 7 days preceding the date of survey
• A person is considered working (or employed)) if
he/ she worked for at least one hour on at least
one day during the 7 days preceding the date of
survey or if he/she had work for at least 1 hour on
at least one day during the 7 days preceding the
date of the survey but did not do the work –
otherwise unemployed
• Measured in number of persons – gives chronic
unemployment with reduced reference period of
one week.
10
4. Current Daily Status Activity:
• Determined on the basis of his/ her activity
status on each day of the reference week
using a priority-cum-major time criterion
• Status of 'working' gets priority over the status
of 'not working but seeking or available for
work', which in turn gets priority over the status
of 'neither working nor available for work’.
• Considered the most comprehensive measure
of unemployment – includes chronic and
underemployed on weekly basis
11
Source: PLFI 2017-18
12
Some estimates of unemployment
1. Committee of experts on Unemployment –
B.Bhagwati committee , 1973
§ 8 hours a day 273 days a years – full employment
§ 1971 9 million without a job and 9.6 with less than
14 hours work per week
§ 86% in rural areas
2. NSS 19th round
§ 8.5 million in rural and 1.2 million in urban working
less than 14 hours a week.
§ Were included in unemployed as they were
severely unemployed
§ 26.9 million severely unemployed – less than 28
hours per week
13
LABOUR FORCE PARTICIPATION IN
DIFFERENT APPROACHES
Source: LFPR 2017-18
14
LABOUR FORCE PARTICIPATION IN
DIFFERENT APPROACHES
15
Source: LFPR 2017-18
OTHER SOURCES
§ Unemployment Rate in India, CMIE
https://unemploymentinindia.cmie.com/kommon/bi
n/sr.php?kall=wtabnav&tab=4000&sectcode=2001
0000000000000000000000000000000000000000
0
16
§ Central Statistical Organisation
§ conducts Economics Census, which covers
both agricultural (other than crop production
and plantation) and non-agricultural activities
and is intended to gather basic information on
the number of enterprises and their employment
by location, type of activity and nature of
operation.
§ It provides information on the number of
persons working and the number of hired
employees in these enterprises.
17
§ Gst
§ impact on small informal sector –
unemployment
§ Unemployed who dropped out of the informal
labour market – unemployed , willing to work
but not looking for a job
§ NSSO considers
§ https://unemploymentinindia.cmie.com/
18
§ CMIE v NSSO
§ CMIE’s Consumer Pyramids panel of
households contains over 174,405 households,
522,000 members who are 15 or over 15 years
of age.
§ National Sample Survey Organisation’s 68th
Round on employment and unemployment was
conducted on a sample of 101,724 households
involving 326,810 individuals of 15 or greater
than 15 years of age.
19
§ While the NSSO completes its survey of 101,724
households in one year, the Consumer Pyramids
sample is surveyed in four months.
§ CMIE does not cover a few North eastern states ,
Andamans , daman and diu
§ CMIE has four categories : employed;
umemployed,willing to work and actively looking for a
job (should be unemployed on the date of the survey,
should be actively looking for a job in the 100 hundred
days (approximately three months) preceding the date
of the survey and should be willing to take up the job if a
job is found); unemployed, willing to work and not
actively looking for a job; unemployed, not willing to
work and not looking for a job.
20
Structure of employment
§ Unorganised sector ( less than 10 employees)
accounts for nearly 90% of the employment
§ Organised public sector accounts for most of the
employment in organized sector but has been
declining since 1994 in overall share.
§ Self employed 1996 – 2000
§ Rural – 56 % . 7% regular salaried and 37% casual
( daily wage) . Since then slight decrease in self
employed and increase in the other two incl casual
(04-05)
§ Urban area self employed remained around 43%,
employed 18% and casual 40%
21
BLS divides population into 3 groups:
§ Employed: paid employees, self-employed,
and unpaid workers in a family business
§ Unemployed: people not working who have
looked for work during previous 4 weeks
§ Not in the labor force: everyone else
The labor force is the total # of workers, including

the employed and unemployed.
22
Unemployment rate (“u-rate”):
% of the labor force that is unemployed
# of unemployed
u-rate = 100 x
labor force
Labor force participation rate:

% of the adult population that is in the labor force
labor force labor force

= 100 x
participation rate adult population
23
ACTIVE LEARNING 1
Calculate labor force statistics
Compute the labor force, u-rate, adult population,
and labor force participation rate using this data:
Adult population of the U.S.

by group, September 2013
# of employed 144.3 million
# of unemployed 11.3 million
not in labor force 90.6 million
ACTIVE LEARNING 1
Answers
Labor force = employed + unemployed
= 144.3 + 11.3
= 155.6 million
U-rate = 100 x (unemployed)/(labor force)

= 100 x 11.3/155.6
= 7.3%
ACTIVE LEARNING 1
Answers
Population = labor force + not in labor force
= 155.6 + 90.6
= 246.2
LF partic. rate = 100 x (labor force)/(population)

= 100 x 155.6/246.2
= 63.2%
ACTIVE LEARNING 2
Limitations of the u-rate
In each of the following, what happens to the u-rate?
Does the u-rate give an accurate impression of what’s
happening in the labor market?
A. Sue lost her job and begins looking for a new one.
B. Jon, a steelworker who has been out of work since
his mill closed last year, becomes discouraged and
gives up looking for work.
C. Sam, the sole earner in his family of 5, just lost his
$80,000 job as a research scientist. Immediately,
he takes a part-time job at McDonald’s until he can
find another job in his field.
ACTIVE LEARNING 2
Answers
A. Sue lost her job and begins looking for a new one.
u-rate rises
A rising u-rate gives the impression that the labor
market is worsening, and it is.
ACTIVE LEARNING 2
Answers
B. Jon has been out of work since last year,
becomes discouraged, stops looking for work.
Discouraged workers
§ would like to work but have given up looking for jobs
§ classified as “not in the labor force” rather than
“unemployed”
U-rate falls because Jon is no longer counted as
unemployed.
A falling u-rate gives the impression that the labor
market is improving, but it is not.
ACTIVE LEARNING 2
Answers
C. Sam lost his $80,000 job, and takes a part-time
job at McDonald’s until he finds a better one.
U-rate unchanged because a person is “employed”
whether they work full or part time.
Things are worse, but the u-rate fails to show it.
What Does the U-Rate Really Measure?
§ The u-rate is not a perfect indicator of joblessness
or the health of the labor market:
§ It excludes discouraged workers.
§ It does not distinguish between full-time and
part-time work, or people working part time
because full-time jobs not available.
§ Some people misreport their work status in the
BLS survey.
§ Despite these issues, the u-rate is still a very
useful barometer of the labor market & economy.
31
The Duration of Unemployment
Most spells of unemployment are short:
§ Typically 1/3 of the unemployed
have been unemployed under 5 weeks,
2/3 have been unemployed under 14 weeks.
§ Only 20% have been unemployed over 6 months.
Yet, most observed unemployment is long term.
§ The small group of long-term unemployed persons
has fairly little turnover, so it accounts for most of
the unemployment observed over time.
Knowing these facts helps policymakers design
better policies to help the unemployed.
32
Cyclical Unemployment vs. the Natural Rate
There’s always some unemployment, though the
u-rate fluctuates from year to year.
Natural rate of unemployment
§ the normal rate of unemployment around which
the actual unemployment rate fluctuates
Cyclical unemployment
§ the deviation of unemployment from its
natural rate
§ associated with business cycles,
which we’ll study in later chapters
33
Explaining the Natural Rate: An Overview
Even when the economy is doing well, there is

always some unemployment, including:
Frictional unemployment
§ occurs when workers spend time searching for the
jobs that best suit their skills and tastes
§ short-term for most workers
Structural unemployment
§ occurs when there are fewer jobs than workers
§ usually longer-term
34
Job Search
§ Workers have different tastes & skills, and
jobs have different requirements.
§ Job search is the process of matching workers
with appropriate jobs.
§ Sectoral shifts are changes in the composition of
demand across industries or regions of the country.
§ Such shifts displace some workers,
who must search for new jobs appropriate
for their skills & tastes.
§ The economy is always changing,
so some frictional unemployment is inevitable.
35
Public Policy and Job Search
§ Govt employment agencies
provide information about job vacancies to
speed up the matching of workers with jobs.
§ Public training programs
aim to equip workers displaced from declining
industries with the skills needed in growing
industries.
36
Unemployment Insurance
§ Unemployment insurance (UI):
a govt program that partially protects workers’
incomes when they become unemployed
§ UI increases frictional unemployment.
To see why, recall one of the
Ten Principles of Economics:
People respond to incentives.
UI benefits end when a worker takes a job,
so workers have less incentive to search or
take jobs while eligible to receive benefits.
37
Unemployment Insurance
Benefits of UI:
§ Reduces uncertainty over incomes
§ Gives the unemployed more time to search,
resulting in better job matches and thus higher
productivity
38
Explaining Structural Unemployment
Structural unemp-
unemployment W loyment S
occurs when actual
W1
wage
not enough jobs
to go around. WE
Occurs when wage
is kept above eq’m.
There are three
reasons for this… D
L
39
1. Minimum-Wage Laws
§ The min. wage may exceed the eq’m wage
for the least skilled or experienced workers,
causing structural unemployment.
§ But this group is a small part of the labor force,
so the min. wage can’t explain most
unemployment.
40
2. Unions
§ Union: a worker association that bargains with
employers over wages, benefits, and working
conditions
§ Unions exert their market power to negotiate
higher wages for workers.
§ The typical union worker earns 20% higher
wages and gets more benefits than a nonunion
worker for the same type of work.
41
2. Unions
§ When unions raise the wage above eq’m,
quantity of labor demanded falls and
unemployment results.
§ “Insiders” – workers who remain employed,
are better off.
§ “Outsiders” – workers who lose their jobs,
are worse off.
§ Some outsiders go to non-unionized labor
markets, which increases labor supply and
reduces wages in those markets.
42
2. Unions
Are unions good or bad? Economists disagree.
§ Critics:
Unions are cartels. They raise wages above eq’m,
which causes unemployment and/or depresses
wages in non-union labor markets.
§ Advocates:
Unions counter the market power of large firms,
make firms more responsive to workers’ concerns.
43
3. Efficiency Wages
§ The theory of efficiency wages:
Firms voluntarily pay above-equilibrium wages
to boost worker productivity.
§ Different versions of efficiency wage theory
suggest different reasons why firms pay high
wages.
44
3. Efficiency Wages
Four reasons why firms might pay efficiency wages:
1. Worker health
In less developed countries, poor nutrition is a
common problem. Paying higher wages allows
workers to eat better, makes them healthier,
more productive.
2. Worker turnover
Hiring & training new workers is costly.
Paying high wages gives workers more
incentive to stay, reduces turnover.
45
3. Efficiency Wages
Four reasons why firms might pay efficiency wages:
3. Worker quality
Offering higher wages attracts better job applicants,
increases quality of the firm’s workforce.
4. Worker effort
Workers can work hard or shirk. Shirkers are fired
if caught. Is being fired a good deterrent?
Depends on how hard it is to find another job.
If market wage is above eq’m wage, there aren’t
enough jobs to go around, so workers have more
incentive to work not shirk.
46
ACTIVE LEARNING 3
Applying the concepts
Which of the following would be most likely to reduce
frictional unemployment?
A. The govt eliminates the minimum wage.
B. The govt increases unemployment insurance
benefits.
C. A new law bans labor unions.
D. More workers post their resumes at LinkedIn.com,
and more employers use LinkedIn.com to find
suitable workers to hire.
E. Sectoral shifts become more frequent.
ACTIVE LEARNING 3
Answers
A. The govt eliminates the minimum wage.
C. A new law bans labor unions.
These are likely to reduce

structural unemployment,
not frictional unemployment.
ACTIVE LEARNING 3
Answers
B. The govt increases unemployment insurance
benefits.
E. Sectoral shifts become more frequent.
These are likely to increase

frictional unemployment, not reduce it.
ACTIVE LEARNING 3
Answers
D. More workers post their resumes at LinkedIn.com,
and more employers use LinkedIn.com to find
suitable workers to hire.
Likely to speed up the process of
matching workers & jobs, which would
reduce frictional unemployment.
Explaining the Natural Rate of
Unemployment: A Summary
The natural rate of unemployment consists of
§ frictional unemployment
§ It takes time to search for the right jobs
§ Occurs even if there are enough jobs to go around
§ structural unemployment
§ When wage is above eq’m, not enough jobs
§ Due to min. wages, labor unions, efficiency wages
In later chapters, we will learn about cyclical
unemployment, the short-term fluctuations in
unemployment associated with business cycles.
51
Summary
• The unemployment rate is the percentage of
those who would like to work who do not have
jobs.
• Unemployment and labor force participation vary
widely across demographic groups.
• The natural rate of unemployment is the normal
rate of unemployment around which the actual
rate fluctuates. Cyclical unemployment is the
deviation of unemployment from its natural rate
and is connected to short-term economic
fluctuations.
Summary
• The natural rate includes frictional
unemployment and structural unemployment.
• Frictional unemployment occurs when workers
take time to search for the right jobs.
• Structural unemployment occurs when above-
equilibrium wages result in a surplus of labor.
• Three reasons for above-equilibrium wages
include minimum wage laws, unions, and
efficiency wages.

In This Chapter, Look For The Answers To These Questions

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In This Chapter, Look For The Answers To These Questions

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In this chapter,

look for the answers to these questions

• How is unemployment measured?

• Considering the importance of availability of labour force data at

Source: LFPR 2017-18

The labor force is the total # of workers, including

Labor force participation rate:

labor force labor force

Adult population of the U.S.

# of employed 144.3 million

# of unemployed 11.3 million

not in labor force 90.6 million

U-rate = 100 x (unemployed)/(labor force)

LF partic. rate = 100 x (labor force)/(population)

Even when the economy is doing well, there is

These are likely to reduce

These are likely to increase

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