Macroeconomics 1

Topic 6: Unemployment
 Core concepts

• What’s unemployment? How is it measured?

• The different types of unemployment

• Possible causes and the role of the wage, unions and collective bargaining

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What is Unemployment?

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Unemployment

1. Being in working age and

able to work

Conditions to be considered
unemployed

2. No job but actively looking

for one

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How do we estimate the number of
unemployed people?

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 Measuring unemployment

We ask people through a survey.

People fall into 1 of 3 categories:

• Employed

• Unemployed

• Out of labour force

Labour force = Employed + Unemployed

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Measuring unemployment

Unemployment = Total number of people unemployed

This is not the indicator usually used for economic analysis, why?

 
Unemployment rate =

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 Measuring participation rate

• Sometimes economists want to know the size of the labor force relative to the adult
population

 
Participation rate =

• Why do you think this is an important indicator?

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 Unemployment Analysis

August Septemner

Unemployed persons 480,000 510,174

Unemployment rate 4.3% 4.5%
Participation rate 64% 65%
Labor force 11,162,790 11,337,200
Employed persons 10,682,790 10,827,026

• Question 1. Have some people lost their jobs?

• Question 2. Have the number of employed persons in. crease or decrease?

• Activity: Write a short paragraph explaining the growth in unemployment rate in

this example

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 Question 3

Using the definition of unemployment, which of the following individuals would be

unemployed?

A. A fulltime student quits school, enter the labour market for the first time, and
searches for employment

B. Because of the increased level of automobile imports, an employee of Toyota is

laid off but expects to be called back to work soon

C. Because of a reduction in the military budget, your next door neighbour loses her
job in a plant where nuclear warheads are made and must look for a new job

D. All of these individuals are unemployed

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Let’s think together, when do you think
unemployment rate will tend to go up or go
down in a country?

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Let’s think together, when do you think
unemployment rate will tend to go up or go
down in a country?

Source: https://www.gso.gov.vn

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 Let’s think together, when do you think
unemployment rate will tend to go up or go
down in a country?
Cyclical Unemployment = Changes in unemployment rate due to fluctuations in
economic activity

• Unemployment goes up when economic activity falls

• Unemployment goes down when economic activity increases

Can unemployment rate do down to zero?

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Let’s think together, Why there is always some
unemployment?

Cyclical unemployment rate

Natural unemployment rate

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Identifying unemployment

Natural rate of unemployment Cyclical rate of unemployment

Long-run problem Short-run problem

Does not go away on its own, even in Year to year fluctuations in

the long run unemployment around its natural rate

Is associated with short-term ups and

downs of the business cycle
Is the amount of unemployment that the
economy normally experiences

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Let’s think together, Why there is always
some unemployment?

Natural unemployment rate = Unemployment normally experienced by a country

Frictional unemployment

Natural unemployment rate

Structural unemployment

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 Why is there unemployment?

results from the time that it takes to match workers with

Frictional unemployment
jobs

results from a mismatch between that skills the business

Structural unemployment
require and the skills that workers have

results from the real wage in the labour market being

Classical unemployment
above the market clearing level

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 Frictional unemployment

• Frictional unemployment is short run unemployment that arises from the process
of matching workers with jobs.

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

• It takes time for workers to search for and find jobs in new sectors

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 Structural unemployment

• Structural unemployment is long run unemployment that arises from the

mismatch between workers’ skills and the requirement of jobs

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 Classical unemployment

• Classical unemployment results from the real wage in the labor market being
above the market clearing level

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 What can we do to reduce the natural
unemployment rate?
• Structural unemployment: Training to ease the transition from falling to growing
industries

• Frictional unemployment:

Programs include:

o Gov’t- financed employment agencies

o Public training programs

o Unemployment benefits

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Impact of unemployment benefits

Alleviate the suffering during

unemployment periods

Positive impact

Benefits increase the chance of

workers being matched with the right
jobs

Evidence suggests that benefits

Negative impact reduce the search effort of the
unemployed

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 More jobs will be lost to robots

1. What are some of the jobs that are being taken over by robots?

2. What is the value of marginal product?

3. What role does the value of marginal product play in determining the quantity of a
factor of production to hire?

4. What is the goal of a firm? How does this goal determine the jobs that will be
performed by humans and the jobs that will be performed by robots?

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The psychological and social impact of
unemployment

Watch the video I Need A Dollar

Article relating to psychological impacts of

unemployment:
https://link.springer.com/article/10.1186/s40172-018-00
68-5

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 Wages and Unemployment
• Any force that fixes the wage above the free labor market equilibrium is thought to
produce unemployment.

• Different theories explain this source of unemployment:

Classical Unemployment

Unions and Collective Bargaining

The Efficiency Wage Theory

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 Classical unemployment

• If the minimum-wage is set above the level that balances supply and demand, it
creates unemployment

• This is illustrated as the surplus of labor:

> 

- = Classical Unemployment

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Labour demand and supply

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 Unions and collective bargaining

• A union is a worker association that bargains with employers over wages and
working conditions

• The process by which unions and firms agree on the terms of employment is called
collective bargaining

• A strike can be organized if the union the firm can’t reach an agreement.

• Workers in unions (insiders) reap the benefits of collective bargaining, while

workers not in the union (outsiders) bear some of the costs.

• By acting as a cartel with ability to strike or otherwise impose high costs on

employers, unions usually achieve above-equilibrium wages for their members

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Labour demand and supply 2

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 The theory of efficiency wages

• Efficiency wages are above-equilibrium wages paid by firms in order to increase

worker productivity

• The 4 types of efficiency wage theory are:

o Worker health

o Worker turnover

o Worker effort

o Worker quality

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Labour demand and supply 3

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 Is unemployment measured correctly?

• Discouraged workers, people who would like to work but have given up looking
for jobs after an unsuccessful search, don’t show up in unemployment statistics

• Other people may claim to be unemployed in order to receive financial

assistance, even though they aren’t truly looking for work.

• Alternative estimates suggest that unemployment is much higher than the official
rate.

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 How long are the unemployed without work?

• Most spells of unemployment are short

• Most unemployment observed at any given time is long term

• Most of the economy’s unemployment problem is attributed to relatively few

workers who are jobless for long periods of time

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Falling oil prices create winners and
losers

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Why scarce resources are
sometimes unemployed?

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 Summary

• The unemployment rate is the percentage of those who would like to work but don’t
have jobs At full capacity unemployment is at its natural rate.

• Deviations from the natural rate are called cyclical unemployment.

• Natural unemployment rate is composed by frictional and structural unemployment

• Wages above the market equilibrium raise the quantity of labor supplied and reduce
the quantity demanded

• One reason for some unemployment is classical unemployment, second reason is

the market power of unions, third reason is suggested by the theories of efficiency
wages

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