(Slot 5) Chapter 28 Unemployment

Principles of Economics, Ninth Edition
N. Gregory Mankiw
PowerPoint Slides prepared by:

V. Andreea CHIRITESCU
Eastern Illinois University
N. Gregory Mankiw, Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Chapter 28
Unemployment
Identifying Unemployment, Part 1
• Employed
– Those who worked
• Paid employees
• In their own business
• Unpaid workers in a family member’s
business
– Full-time and part-time workers
– Temporarily absent
• Vacation, illness, bad weather
• Unemployed
– Those who were not employed
• Available for work
• Tried to find employment during the previous
four weeks
– Those waiting to be recalled to a job
• Laid off
• Not in the labor force
– Not employed and not unemployed
– Full-time students
– Homemakers
– Retirees
Figure 1 The Breakdown of the Population in
January 2019
• Labor force
• Total number of workers, employed and
unemployed
= Number of employed + Number of unemployed
• Unemployment rate
– Percentage of labor force that is unemployed
• Labor-force participation rate
– Percentage of the total adult population that
is in the labor force
– Fraction of the population that has chosen
to participate in the labor market
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, June 2016
151.1
# of employed
million
# of unemployed 7.8 million
not in labor force 94.5 million

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Table 1 The Labor-Market Experiences of Various
Demographic Groups
• Labor-market experiences
– Women of prime working age (25 to 54
years old)
• Lower rates of labor-force participation than
men
– Once in the labor force
• Men and women – similar rates of
unemployment
• Labor-market experiences
– Blacks of prime working age
• Similar rates of labor-force participation as
prime-age whites
• Much higher rates of unemployment
– Teenagers
• Lower rates of labor-force participation
• Much higher rates of unemployment than
older workers
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.
• Natural rate of unemployment
– Normal rate of unemployment around
which the unemployment rate fluctuates
– 4.6% in 2018 (close to the actual
unemployment rate of 3.9%)
• Cyclical unemployment
– Deviation of unemployment from its
natural rate
Figure 2 Unemployment Rate Since 1960
• Official unemployment rate
– Useful
– Imperfect measure of joblessness
• Movements into and out of the labor force
– Common
– More than one-third of unemployed
• Recent entrants into the labor force
• Unemployment
– Not all unemployment ends with the job
seeker finding a job
• Half of all spells of unemployment end when
the unemployed leaves the labor force
• Some of those who report being unemployed
– May not be trying hard to find a job
• Want to qualify for a government help
• Working but paid “under the table”
• Some of those who are out of labor force
– May want to work: discouraged workers
• Discouraged workers
– Individuals who would like to work
– Have given up looking for a job
The Bureau of Labor Statistics defines:
• Marginally attached workers: currently are neither
working nor looking for work but indicate that they
want and are available for a job and have looked for
work sometime in the recent past.
• Discouraged workers: marginally attached workers
who have given a job-market related reason for not
currently looking for a job.
• Persons employed part-time for economic reasons:
want and are available for full-time work but have
had to settle for a part-time schedule.
• How long are the unemployed without
work?
– Most spells of unemployment are short
– Most unemployment observed at any
given time is long-term
– Most people who become unemployed
• Will soon find jobs
• How long are the unemployed without
work?
– Most spells of unemployment are short,
and most unemployment observed at any
given time is long-term
– Most of the economy’s unemployment
problem
• Attributable to the relatively few workers who
are jobless for long periods of time
• Unemployment rate
– Never falls to zero
– Fluctuates around the natural rate of
unemployment
• Frictional unemployment
– It takes time for workers to search for the
jobs that best suit their tastes and skills
– Explain relatively short spells of
unemployment
• Structural unemployment
– Results because the number of jobs
available in some labor markets
• Is insufficient to provide a job for everyone
who wants one
– Explains longer spells of unemployment
– Results when wages are set above the
equilibrium
• Minimum-wage laws, unions, and efficiency
wages
Job Search, Part 1
• Job search
– Process by which workers find appropriate
jobs given their tastes and skills
• Workers differ in their tastes and skills
• Jobs differ in their attributes
• Information about job candidates and job
vacancies is disseminated slowly
Job Search, Part 2
• Some frictional unemployment is
inevitable
– Changes in demand for labor among
different firms
– Changes in composition of demand
among industries or regions (sectoral
shifts)
– Changing patterns of international trade
• Workers need to move among industries
Job Search, Part 3
• Some frictional unemployment is
inevitable
– The economy is always changing
– From 2004 to 2014, employment
• Fell by 838,000 in construction and 2.1 million
in manufacturing
• Rose by 321,000 in mining, 629,000 in
computer systems design, 1.9 million in food
services, and 2.6 million in health care
Public Policy and Job Search, Part 1
• Reduce time for unemployed to find jobs
– Reduce natural rate of unemployment
• Government programs – to facilitate job
search
– Government-run employment agencies
– Public training programs
• Unemployment insurance
– Government program
– Partially protects workers’ incomes
• When they become unemployed
– Increases frictional unemployment
• Without intending to do so
– Qualify – only the unemployed who were
laid off because their previous employers
no longer needed their skills
• Unemployment insurance
– 50% of former wages for 26 weeks
– Reduces the hardship of unemployment
– Increases the amount of unemployment
• Unemployment benefits stop when a worker
takes a new job
• Unemployed
– Devote less effort to job search
– More likely to turn down unattractive job offers
– Less likely to seek guarantees of job security
Minimum-Wage Laws, Part 1
• Structural unemployment
– Number of jobs – insufficient
• Minimum-wage laws
– Can cause unemployment
– Forces the wage to remain above the
equilibrium level
• Higher quantity of labor supplied
• Smaller quantity of labor demanded
• Surplus of labor = unemployment
Figure 4 Unemployment from a Wage above the
Equilibrium Level
Minimum-Wage Laws, Part 2
• Wages may be kept above equilibrium
level
– Minimum-wage laws
– Unions
– Efficiency wages
• If the wage is kept above the equilibrium
level
– Result: unemployment
Unions & Collective Bargaining, Part 1
• Union
– Worker association
– Bargains with employers over
• Wages, benefits, and working conditions
– Less than 11% of U.S. workers today
• About 33% in the 1940s and 1950s
– Type of cartel
• Collective bargaining
– Process by which unions and firms agree on
the terms of employment
• Strike
– Organized withdrawal of labor from a firm by
a union
– Reduces production, sales, and profit
• Union workers
– Earn 10-20% more than similar workers who
do not belong to unions
• Union – raises the wage above the

equilibrium level
– Higher quantity of labor supplied
– Smaller quantity of labor demanded
– Unemployment
– Better off: employed workers (insiders)
– Worse off: unemployed (outsiders)
• May stay unemployed
• Take jobs in firms that are not unionized
• Union – raises wage above
equilibrium
– Supply of labor in industries
not unionized will increase,
lower wages
• Workers in unions
– Reap the benefit of “Gentlemen, nothing
stands in the way of a
collective bargaining final accord except that
• Workers not in unions management wants
profit maximization and
– Bear some of the cost the union wants more
moola.”
• Are unions good or bad for the economy?

– Critics
• Unions – a type of cartel
• Allocation of labor
– Inefficient – high union wages reduce
employment in unionized firms below
the efficient level
– Inequitable – some workers benefit at
the expense of other workers
• Are unions good or bad for the economy?

– Advocates
• Unions – necessary antidote to the market
power of the firms that hire workers
– In the absence of a union, firms pay
lower wages and offer worse working
conditions
• Unions – help firms respond efficiently to
workers’ concerns
– Keep a happy and productive workforce
Theory of Efficiency Wages, Part 1
• Efficiency wages
– Above-equilibrium wages paid by firms to
increase worker productivity
• Worker health; Worker turnover
• Worker quality; Worker effort
• Worker health
– Better paid workers
• Eat a more nutritious diet
• Healthier and more productive
• Worker turnover
– Firm – can reduce turnover among its
workers
• By paying them a high wage
• Worker quality
– Firm – pays a high wage
• Attracts a better pool of workers
• Increases the quality of its workforce
• Worker effort
– High wages – make workers more eager
to keep their jobs
• Give workers an incentive to put forward their
best effort
Active Learning 3 Applying the concepts
Which of the following would be most likely to
reduce frictional unemployment?
A. The government eliminates the minimum
wage.
B. The government 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 4
Are the following workers more likely to experience short-term
unemployment or long-term unemployment? Explain.
A. a construction worker who is laid off because of bad
weather
B. a manufacturing worker who loses his job at a plant in an
isolated area
C. a stagecoach-industry worker who is laid off because of
competition from railroads
D. a short-order cook who loses his job when a new restaurant
opens across the street
E. an expert welder with little formal education who loses his
job when the company installs automatic welding machinery

(Slot 5) Chapter 28 Unemployment

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Principles of Economics, Ninth Edition

PowerPoint Slides prepared by:

Adult population of the U.S.

not in labor force 94.5 million

• Union – raises the wage above the

• Are unions good or bad for the economy?

• Are unions good or bad for the economy?

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