Macroeconomic Analysis and Policy

Biswa Swarup Misra

Session-8

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 What Does the U-Rate Really Measure?
The u-rate is not a perfect indicator of joblessness or
the health of the labor market:
excludes discouraged workers
does not distinguish between full-time and
part-time work, or people working part time
because full-time jobs are not available.
Also, some people may 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.

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 Cyclical Unemployment vs. the Natural Rate
There’s always some unemployment, though the u-
rate fluctuates from year to year.
The 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 sessions

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 U.S. Unemployment Since 1960
12

Unemployment rate
10
(percentage of labor force)

4 Natural rate of
unemployment
2

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
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 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

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 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.

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 Public Policy and Job Search
Govt employment agencies:
give out 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

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 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.

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 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

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 Explaining Structural Unemployment

unemp-
Structural W loyment S
unemployment actual
W1
occurs when not wage
enough jobs to
go around. WE

Occurs when wage

is kept above eq’m.
There are three reasons for
this… D
L

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 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.

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 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. 63
 2. Unions
When unions raise the wage above eq’m,
quantity of labor demanded falls and
unemployment results.
“Insiders” – workers who remain employed,
they are better off
“Outsiders” – workers who lose their jobs,
they are worse off
Some outsiders go to non-unionized labor markets,
which increases labor supply and reduces wages
in those markets.
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 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.
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 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.

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 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.

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 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.

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 A C T I V E L E A R N I N G 3:
Exercise

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 Monster.com, and more
employers use Monster.com to find suitable workers to hire.
E. Sectoral shifts become more frequent.

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 A C T I V E L E A R N I N G 3:
Answers

Which of the following would be most likely to

reduce frictional unemployment?
A. The govt eliminates the minimum wage.
C. A new law bans labor unions.

These are likely to reduce

structural unemployment,
not frictional unemployment.

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 A C T I V E L E A R N I N G 3:
Answers

Which of the following would be most likely to

reduce frictional unemployment?
B. The govt increases unemployment insurance benefits.
E. Sectoral shifts become more frequent.

These are likely to increase

frictional unemployment, not reduce it.

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 A C T I V E L E A R N I N G 3:
Answers

Which of the following would be most likely to

reduce frictional unemployment?
D. More workers post their resumes at Monster.com, and more
employers use Monster.com to find suitable workers to hire.

Likely to speed up the process of matching

workers & jobs, which would
reduce frictional unemployment.

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 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 eqbm, not enough jobs
due to min. wages, labor unions, efficiency wages

In later sessions, we will learn about cyclical

unemployment, the short-term fluctuations in
unemployment associated with business cycles.

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 Unemployment Measurement India
As per results of the last survey on employment and unemployment conducted
during 2011-12 by National Sample Survey Office, estimated number of
unemployed persons on usual status basis in the country was 1.06 crore, of
which 0.78 crore was in the age group of 20-59 years for which information is
available.
During the same period estimated number of employed persons including part
time and full time was estimated at 47.4 crore.

Categories 2009-10 2011-12

Rural Male 1.9 2.1
Rural Female 2.4 2.9
Rural Person(Male+Female) 2.1 2.3
Urban Male 3.0 3.2
Urban Female 7.0 6.6
Urban Person( Male+Female) 3.7 3.8
Male(Rural+Urban) 2.2 2.4
Female(Rural+Urban) 3.3 3.7
Person(Rural+Urban) 2.5 2.7

MEASURING A NATION’S INCOME B.S.Misra 74

 Unemployment Measurement India
 Total number of 12,784 sampling units (7,508 villages and 5,276
urban blocks) were considered for data collection at the all-India
level.
 The number of households surveyed was 1,01,724 (59,700 in rural
areas and 42,024 in urban areas) and number of persons surveyed
was 4,56,999 (2,80,763 in rural areas and 1,76,236 in urban areas).
 Field investigators of NSSO collected data for all members of the
sample households by interviewing the informants of the selected
households.
 The fieldwork of the 68th round of NSSO was of one year duration
starting on 1st July, 2011 and ending on 30th June, 2012.
http://pib.nic.in/newsite/PrintRelease.aspx?relid=136875

MEASURING A NATION’S INCOME B.S.Misra 75

Capturing Unemployment in India
The NSSO collects data on employment and unemployment using
alternative reference periods relating to three approaches.
These are: the 'usual status' (US) approach, based on the a
reference period of one year;
the 'current weekly status' (CWS) approach, based on a reference
period of one week; and
the 'current daily status' (CDS), based on the activity pursued on
each day of the reference week.
While all three approaches are used for collection of data on
employment and unemployment in the quinquennial surveys, the
first two approaches are only used for the intervening annual
surveys.
The definitions of these three approaches are set out below.

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 Capturing Unemployment in India
In a number of earlier rounds, the NSSO has experimented
with various concepts and methodologies in trying out and
standardizing a proper framework to estimate, in
quantitative terms, the characteristics of labour force,
employment, unemployment and under-employment.
The experimental surveys were followed by regular annual
sample surveys till late sixties.
Afterwards, the quinquennial surveys started in 27th round
(1972-73), with the follow up surveys in 32nd round
(1977-78), 38t h round (1983) and 43rd round (1987-88)
and 50t h Round (1993-94).
The NSSO now also gives annual estimate of employment and
unemployment on the basis of a thin sample. 77
 Capturing Unemployment in India
The data are obtained through sample surveys conducted by the
National Sample Survey Organisation (NSSO).
Every fifth year, the sample size is of the order of One lakh
households.
In intervening years, the sample size is of the order of 40,000
households.
Each survey is divided into four sub-rounds, with each sub-
round of three months duration.
(The results of each sub-round are not presently compiled
separately.)
The survey covers the whole of the rural and urban areas of
India, except for a few inaccessible and difficult pockets.
The activity status of each person in the household is collected
with reference to the previous 365 days, the previous 7 days 78
and daily for 7 days.
 'Usual Status' Approach
'Usual Status' approach. This is based on the status of the
activity on which a person spent the majority of the 365
days preceding the date of the survey.
A person is considered to be 'working or employed' if
he/she was engaged for a relatively longer time during the
past year in any one or more work-related (economic)
activities.
A person is considered to be 'seeking or available' for work
or 'unemployed' if the person was not working but was
either seeking or available for work for a relatively longer
period of time during the past year.

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 Concept of work

The NSSO has defined ‘work’ or ‘ gainful activity’

as the activity pursued for pay, profit or family
gain or in other words, the activity which adds
value to the national product.
Normally, it is an activity, which results in
production of goods and services for exchange.
However, all activities in ‘agricultural sector’ in
which a part or whole of the agricultural
production is used for own consumption and does
not go for sale are also considered as gainful.

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 'Current Weekly Status' Approach
'Current Weekly Status' approach. A person is considered
to be working or employed if the person was engaged for
at least one hour on any one day of the previous week on
any work related (economic) activity.
A person who has not worked for even one hour on any
one day of the week, but has been seeking or has been
available for work at any time for at least one hour during
the week, is considered to be 'seeking/available for work'
(unemployed).
Others are considered to be 'not available for work' (not in
the labour force).

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 'Current Daily Status' Approach
'Current Daily Status' approach.
This approach attempts to classify employment by
person-days, rather than by persons.
A person is considered to be 'working' (employed) for
the entire day if he/she has worked 4 hours or more
during the day.
If a person has worked one hour or more, but less than 4
hours, he/she is considered to be 'employed' for half the
day, and 'seeking/available for work' (unemployed) or
'not available for work' (not in the labour force) for the
other half of the day depending on whether he/she is
seeking or available for work.

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 Relevance of CWS, CDS and US
CWS reflects the unemployment during the current week of
those classified as being employed in the US criterion.
The difference between the unemployment rates on the CWS
and US provides one measure of seasonal unemployment.
CDS captures the within week unemployment status of those
classified as employed as per the CWS status.
US unemployment rate gives us the percentage of individuals
in the labour force classified as unemployed.
CDS tells us unemployment in terms of person days.

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