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Reading materials

UNIT 6 N. Gregory Mankiw (2021), Principles of Economics 9th edition,

Cengage Learning, ISBN 978-0-357-03831-4
Unemployment
CHAPTER 28: Unemployment

LECTURER: Assoc.Prof. HA QUYNH HOA, PhD

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Look for the answers to these questions: Labor Force Statistics

Ø How is unemployment measured? Produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
Ø What is the “natural rate of unemployment”? o Based on regular survey of 60,000 households
Ø Why are there always some people unemployed? o Based on “adult population” (16 yrs or older)
Ø How is unemployment affected by unions and minimum wage laws?
Ø What is the theory of efficiency wages, and how does it help explain
unemployment?

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Labor Force Statistics Labor Force Statistics

u BLS divides adult population into 3 groups: u Unemployment rate (“u-rate”): % of the labor force that is unemployed
o Employed: paid employees, self-employed, and unpaid workers in a
family business # of unemployed
u−rate = 𝑋100%
o Unemployed: people not working who have looked for work during Labor force
previous 4 weeks. u Labor-force participation rate: % of the adult population that is in the labor force
o Not in the labor force: everyone else
u Labor force = Employed + Unemployed Labor force
Labor−force participation rate = 𝑋100%
The total # of workers Adult population

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Pros and Cons of u_rate? Problems of Unemployment Duration

The u-rate: u Most spells of unemployment are short:
u Not a perfect indicator of joblessness or the health of the labor market Ø Typically, 1/3 of the unemployed have been unemployed under 5 weeks,
o It excludes discouraged workers. 2/3 have been unemployed under 14 weeks.
o It does not distinguish between full-time and part-time work, or people Ø Only 20% have been unemployed over 6 months.
working part time because full-time jobs not available.
o Some people misreport their work status u Yet, most observed unemployment is long term.
u Still a very useful barometer of the labor market & economy. Because, The small group of long-term unemployed persons has fairly little turnover,
reported job number comes from:
so it accounts for most of the unemployment observed over time.
• HHs survey of 60,000 HHs sample
• Establishment survey of 160,000 business: counts employees in paid job on business
payroll.
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Explaining the Natural Rate:

Cyclical Unemployment vs. the Natural Rate An Overview
Even when the economy is doing well, there is always some unemployment,
u Natural rate of unemployment
including:
Normal rate of unemployment around which the actual unemployment
u Frictional unemployment
rate fluctuates
• Occurs when workers spend time searching for the jobs that best suit
The average rate of unemployment that the economy typically
their skills and tastes
experience.
• Short-term for most workers
u Cyclical unemployment
u Structural unemployment
Deviation of unemployment from its natural rate
• Occurs when there are fewer jobs than workers
Associated with business cycles, which we’ll study in later chapters
• Usually, longer-term

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Frictional unemployment : Job Search Frictional unemployment: Public Policy and Job Search
Workers have different tastes & skills, and jobs have different requirements. u Government employment agencies
u Job search Provide information about job vacancies to speed up the matching of
Process of matching workers with appropriate jobs workers with jobs.
u Sectoral shifts u Public training programs
Changes in the composition of demand across industries or regions of the Aim to equip workers displaced from declining industries with the
country. skills needed in growing industries.

Displace some workers, who must search for new jobs appropriate for their
skills & tastes.

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Frictional unemployment: Unemployment Insurance Explaining Structural Unemployment

Unemployment insurance (UI): Structural unemployment occurs W unemployment
S
u A government program that partially protects workers’ incomes when they when there are not enough jobs to actual
become unemployed go around. W1
wage
u Increases frictional unemployment. • Occurs when wage
WE
• People respond to incentives. is kept above equilibrium.
• UI benefits end when a worker takes a job, so workers have less incentive
to search or take jobs while eligible to receive benefits. • There are three reasons for this…
Benefits of UI:
D
o Reduces uncertainty over incomes L

o Gives the unemployed more time to search, resulting in better job matches
and thus higher productivity 13 14

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2. Unions
1. Minimum-Wage Laws u Union:
o Worker association that bargains with employers over wages, benefits, and
u The minimum wage is the lowest remuneration that employers can
working conditions
legally pay their employees; the price floor below which employees
may not sell their labor. o Exert their market power to negotiate higher wages for workers.
u The minimum wage affects unemployment off o The typical union worker earns 20% higher wages and gets more benefits than
a nonunion worker for the same type of work.
• the least skilled workers
u Unions raise the wage above equilibrium: Quantity of labor demanded falls and
• the least experienced workers.
unemployment results.
But this group is a small part of the labor force, so the min. wage can’t
• “Insiders” – workers who remain employed, are better off.
explain most unemployment.
• “Outsiders” – workers who lose their jobs, are worse off.
Some outsiders go to non-unionized labor markets, which increases labor
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supply and reduces wages in those markets 16

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2. Unions 3. Efficiency Wages

Are unions good or bad? Economists disagree. u The theory of efficiency wages:
u Critics: Firms voluntarily pay above-equilibrium wages to boost worker productivity.
• Unions are cartels. Different versions of efficiency wage theory suggest different reasons why firms
• They raise wages above equilibrium, which causes unemployment and/or pay high wages.
depresses wages in non-union labor markets.
u Advocates:
o Unions counter the market power of large firms, make firms more
responsive to workers’ concerns.

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Summary 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.
• 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.

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