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Unemployment rate:
the percentage of the labour force without a job but registered as being willing and available for work those people holding a job or registered as being willing and available for work the percentage of the population of working age declaring themselves to be in the labour force
27.1
Labour force
Participation rate
2.
27.2
3.
27.3
Working
Unemployed
but...
27.4
Working
Job-losers Lay-offs Quits Retiring Temporarily leaving
Unemployed
Discouraged workers
Taking a job
27.5
27.6
7.
Different
27.7
8. Types of Unemployment
Frictional
Structural
unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes
Demand-deficient unemployment
occurs when output is below full capacity Keynesian unemployment occurs in the transitional period before wages and prices have fully adjusted
Classical unemployment
created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect
27.9
9.
A similar categorization is retained, but an important distinction is to be noted between: Voluntary unemployment
when a worker chooses not to accept a job at the going wage rate when a worker would be willing to accept a job at the going wage but cannot get an offer.
27.10
Involuntary unemployment
AJ
LF
LD: labour demand LF: size of labour force AJ: the number of workers prepared to accept jobs AJ is to the left of LF because some members of the labour force are between jobs, others are LD waiting for better offers. Equilibrium is at w*, N*. The distance EF is the natural rate of unemployment.
27.11
w*
Number of workers
N* N1
The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. This is entirely voluntary.
It includes:
LF
w2 w*
Suppose that union power succeeds in maintaining a real wage of w2. Equilibrium is at A
and unemployment is AC, of which BC is voluntary LD and AB is involuntary
Real wage
Number of workers
N2 N* N1
To the extent that this unemployment reflects a conscious decision by unions to restrict employment, it is voluntary unemployment.
27.13
the level of full employment the level of potential output the natural rate of unemployment
In the long run the performance of the economy can only be changed only by affecting the level of full employment and the corresponding level of potential output.
27.14
AJ
A E B F C
LF
With an income tax, the gross wage paid by firms (w1) is higher than the take-home net pay of workers (w3). Equilibrium is at N1 AB is the amount of tax Unemployment is BC
w1 w2 w3
N1 N2
Number of workers
EF is less than BC because of the relative slopes of LF & AJ but the differences may not be substantial.
27.15
reducing the power of trade unions may limit distortions in the labour market
Investment
15. Hysteresis
The idea that a (short-run) fall in labour demand may lead to a permanent fall in labour supply
This could help to explain high and persistent unemployment in Europe in the 1980s
27.17
Four channels:
Insider-outsider distinction
only those in work take part in wage bargaining & they protect their own positions
Discouraged workers
capital stock
low levels of investment in recession lead to permanently low capital stock levels
27.18