MASTER DE RECHERCHE EN SCIENCES ÉCONOMIQUES

2021/2022

Littérature Economique

The basic tools of finance

Unemployment

Présenté par:
Qaddouri Mehdi Encadré par:
Ragbi Meryem Pr. EL ABBASSI Idriss
Namri Taha
 PLAN
I. BASIC TOOLS OF FINANCE II. UNEMPLOYMENT
Identifying unemployment
Time value
 Job search
Managing Risk
Minimum wage laws
Asset valuation
Unions and collective bargaining
The Theory of Efficiency Wages
 The basic tools of finance

Most fundamentally, the financial system

concerns decisions and actions we undertake today that will affect
our lives in the future. But the future is unkown!
If one day we choose investing in some portofolio or in the stock market we
should make the right decisions, for many reasons which minimise risk as
possible we can and the same time increase profit.
Present value: measuring the time value of
money

• The time value of money (TVM) is the concept that a sum of money is worth
more now than the same sum will be at a future date due to its earnings potential
in the interim. This is a core principle of finance.

• Time value of money is important because it helps investors and people saving for
retirement determine how to get the most out of their dollars. This concept is
fundamental to financial literacy and applies to your savings, investments and
purchasing power.
 Examples

• Question: If you put $100 in a bank account today, how much will it be worth in
N years? That is, what will be the future value of this $100?
• Answer: Let’s use r to denote the interest rate expressed in decimal form (so an
interest rate of 5 percent means r 5 0.05). Suppose that interest is paid annually
and that it remains in the bank account to earn more interest—a process called
• compounding. Then the $100 will become

• (1+ r) × $100
 if we invest at an interest rate of 5 percent for 10 years, then the future
value of the $100 will be (1.05) 10× $100, or $163.

Question:

Should you choose $100 today or $200

in 10 years? Based on calculation of present value using an interest rate of
5 percent.
 You should choose 200$

The future $200 has a present value of $123, which is greater than $100.

$200 / = $123
 Risk aversion
• Risk avers
investor who prefers lower returns with known risks rather then higher returns with
unkown risks. this investor stay away from high-risk investments ad prefers
investments xhiwch provise a sure short return

• Risk lovers
• Risk lover is a person who is willing to take more risks while investing in order to
earn higher returns. a risk lover would prefer investing his money in stocks as they
have the potential to give higher returns than fixed deposits.
 Risk aversion and utility
Utility

Whealth

• This utility function shows how utility, a subjective measure of satisfaction, depends on wealth

every level of wealth provides a certain amount of utility. But the utility function gets flatter
as wealth increases, meaning it exhibits the property of diminishing marginal utility
Risk aversion provides the starting point for explaining various things we observe in
the economy. Let’s consider three of them: insurance, diversification, and the risk-
return trade-off.
 INSURANCE

Buying insurance is important as it

ensures that you are financially secure to
face any type of problem in life, and this
is why insurance is a very important part
of financial planning. A general
insurance company offers insurance
policies to secure health, travel, motor
vehicle, and home.
 Problems of Insurance
adverse selection Moral hazard

A high-risk person is more After people buy insurance, they

likely to apply for insurance
than a low-risk person because a
high-risk person
would benefit more from
insurance protection
have less incentive to be careful
about their risky
behavior because the insurance
company will cover much of the
resulting losses.
 How does market risk differ from specific
risk?
• Market risk and specific risk are two different forms of risk that affect assets. All
investment assets can be separated by two categories: systematic risk and
unsystematic risk. Market risk, or systematic risk, affects a large number of asset
classes, whereas specific risk, or unsystematic risk, only affects an industry or
particular company

Market risk Specific risk

Cannot be mitigated diversifiable risk, is the
through portfolio risk of losing an
diversification; Political investment due to
risk and macroeconomics company or industry
Risk
• Risk
Increasing the number of stocks in a
60 portfolio reduces firm-specific risk through
diversification
More risk

15
...but market risk
Less risk remains

• Diversification Reduces Risk Number of

stocks

This figure shows how the risk of a portfolio measured, it depends

on the number of stocks in the portfolio. Increasing the number of stocks reduces but does not
eliminate the risk
in a stock portfolio.
 Asset valuation
What determines the price of a share of a stocks?
What determines a person’s willingness to pay for a share of stock?

When you buy stock,it is natural to consider two things: the value of that share and the
price .
If the price is more than the value, the stock is said to be overvalued. If the price and the
value are
equal, the stock is said to be fairly valued. And if the price is less than the value,
the stock is said to be undervalued. Undervalued stocks are a bargain because you
pay less than the business is worth. When choosing 20 stocks for your portfolio,
you should look for undervalued stocks.
 The value of a stock to a stockholder is what she gets out of owning it
Recall that dividends are the cash payments that a company makes to its
shareholders and it depends on the company’s ability to earn profits.

If you want to pick a stock portfolio, there are three ways to do it.

1. One way is to do all the necessary research yourself by, for instance, reading
through companies’ annual reports.
2. A second way is to rely on the advice of Wall Street analysts.
3. A third way is to buy shares in a mutual fund, which has a manager who
conducts fundamental analysis and makes decisions for you.
 Important of assets valuation
Asset valuation is one of the most important things that need to be done by
companies and organizations. There are many reasons for valuing assets, including
the following:

Right Price
Asset valuation helps identify the right price for an asset, especially when it is
offered to be bought or sold
Audit
All public companies are regulated, which means they need to present audited
financial statements for transparency. Part of the audit process involves verifying
the value of assets.
 Conclusion
• . The concept of present value tells us that a dollar tomorrow is less valuable than
a dollar today, and it gives us a way to compare sums of money at different points
in time. The theory of risk management tells us that the future is uncertain and
that risk-averse people can take precautions to guard against this uncertainty

• This chapter has developed the basic tools of finance and the financial decisions
that people should do
  Introduction

What Is Unemployment?

A person can be referred to as

unemployed when he or she is
willing and able to work but is
currently jobless. Such people are
usually actively seeking job
opportunities.
In simpler terms, unemployment is the state of
not having a job. A country is said to have a
high rate of unemployment when many of its
citizens do not have jobs.
When a lot of people are without work in a
nation.
Identifying Unemployment
How is Unemployment
measured?

Does the unemployment rate measure

what we want it to measure?

How long are the Unemployed

without work?

Why are there always some people

Unemployed?
 How Is Unemployment Measured?
The core that measure unemployment and
provide us with multidimensional
information and aspects linked to this.

BLS of Unemployment analysis is

based on monthly studies, and survey
that the Bureau cloes to come with a
thorough mesurment.
 How Is Unemployment Measured?

- The working age population is composed by three

mutually exclusive groups.
  How Is Unemployment Measured?

Employed

The labor force

Unemployed
Adult population

Not in the labor

force

Adult population = labor force + not in the labor force

Labor force = employed + unemployed
 How Is Unemployment Measured?
Labour force Not in the labour force

Employed Unemployed

If he or she : A person who fits

If he or she has spent - Is on tempory neither of these
most of previous layoff. categories:
week working at a - Is looking for a job. - A full time student.
paid job. - A home maker.
- Or waiting for the
start date of a new - A retiree.
job.
 How is Unemployment measured?
• How is the unemployment rate calculated?
 The percentage of the labor force that is unemployed.

× 100
+¿
  How Is Unemployment Measured?
• How is the labor- force participation rate calculated?
 Percentage of the adult population that is in the labor force.

+¿
× 100
 How Is Unemployment Measured?

Figure 1: The Breakdown of the Population in January 2019

Employed
(156.7 M)
Labor force
(163.2 M)
Adult Population
(258.2 M) Unemployed (6.5 M)

Not in labor force

(95 M)
  How Is Unemployment Measured?
Employed
 The percentage of the labor force that is unemployed. 156.7 M
The labor force
163.2 M Unemployed
Adult population 6.5 M
• Unemployment rate:
→ . 258.2 M Not in the labor force
95 M

 Percentage of the adult population that is in the labor force.

All in all, 63.2 % represents the
participated labor force rate and
• The labor-force participation rate: 4% is the Unemployment rate.
→ .
How Is Unemployment Measured?

Figure 2: Unemployment rate since 1960

 The percent of labor force is
illustrated on a scale of 0 to 10,
and the period of time that we are
talking about is from 1960 to 2015.

 The blue line is quite more or less

keeping the same level or the same
rate.

 The unemployment rate that's

knowing obvious fluctuating or
rise and fall throughout the years,
it gives up and down and that what
explains the various numbers we
have seen together before.
Identifying Unemployment
How is Unemployment
measured?
Does the unemployment rate
measure what we want it to
measure?
  Does the unemployment rate measure what we want it to measure?

 It’s difficult to distinguish between a person who is unemployed and a person who is not in the
labor force.
 Does the unemployment rate measure what we want it to measure?

Movements into and out of the labor force.

Not all unemployment ends with the job seeker finding a job.

Some of those who report being unemployed.

Other people may claim to be unemployed in order to receive

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

→ The official unemployment rate is useful but it doesn’t give us a perfect

measure of joblessness.
Identifying Unemployment

How is Unemployment
measured?
Does the unemployment rate
measure what we want it to
measure?

How long are the Unemployed

without work?
  How long are the Unemployed without work?

Figure 2: Unemployment rate since 1960

- 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.
Identifying Unemployment

How is Unemployment
measured?
Does the unemployment rate
measure what we want it to
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How long are the Unemployed

without work?

Why are there always some people

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  Why are there always some people Unemployed?
• The problem of unemployment is usually seen as two separate
problems:
Around which the
unemployment rate
fluctuates. Frictional
unemployment
The natural rate
The long-run of
problem unemployment Structural
unemployment

The short-run The cyclical

rate of
problem
unemployment.

Deviation of
unemployment from
its natural rate.
 Why Are There Always Some People Unemployed?
Frictional
Unemployment
- It takes time for workers
to search for the jobs that
best suit their tastes and
skills.
- This unemployment
occurs even when labor
supply equals labor
demand.
Structural
unemployment
-It is the unemployment
that results because the
number of jobs available
in some labor markets is
insufficient to provide a
job for everyone who
wants one.
-This unemployment
occurs when the wage is
stuck at a level higher than
the equilibrium wage.
the minimum amount of
remuneration that an
employer is required to pay
wage earners for the work
performed during a given
period, which cannot be
reduced by collective
agreement or an individual
contract

Minimum wage can generate unemployment if it is set above the level that balances supply and demand, it creates
unemployment.
 Unemployment from a Wage Above the Equilibrium Level

Wage

Labor
Surplus of labor =
supply
Unemployment
Minimum In this labor market, supply and
wage demand are balanced at the wage
WE.
WE

because of a minimum-
Labor wage law, the quantity of
demand labor supplied rises to LS
and the quantity of labor
demanded falls to LD .
0 LD LE LS Quantity of
Labor
Who Earns the Minimum Wage?

Minimum-wage laws matter most for the least skilled and least
experienced members of the labor force, such as teenagers. Their
equilibrium wages tend to be low and, therefore, are more likely to
fall below the legal minimum.
It is only among these workers that minimum wage laws explain the
existence of unemployment
 Who Earns the Minimum Wage?

Remuneration mode Minimum wage

Salaries and self employed
More than MW MW or less
haourly rate

97.7

99
50% 50%

2.3

1
H our ly r a t e All wor ke r s
 Who Earns the Minimum Wage?

MW earners by age
More than MW MW or less

99
92

1
(16-19) (25-+ )
 Who Earns the Minimum Wage?

MW EARNERS BY EDUCATION LEVEL

more than MW MW or less

99%
98%
96%

4%

2%

1%
wit hout H SD H SD but not a tt e nd c olle g e c olle g e de g r e e
 Who Earns the Minimum Wage?

MW EARNERS BY TYPE OF JOB

more than MW MW or less

99%
94%

6%

1%
Pa r t ti me wor ke r s Full ti me wor ke r s
Who Earns the Minimum Wage?

MW EARNERS BY INDUSTRY
Leisure and hospitality restorant and fast food

60%
11%

MW or le ss
MW evolution in US

In 1979 13,7% of the hourly paid

workers earned the MW or less ,
this number declined by the time
to be just 2,3% in 2017
 Unions and Collective Bargaining

union a worker association that

bargains with employers over
wages, benefits, and working
conditions
 Unions and Collective Bargaining

Workers in unions discuss their wages ,

benefits and working conditions as group
the process by which unions and firms
agree on the terms of employment is called
collective bargaining
If the union and the firm do not reach
agreement, the union can organize a
withdrawal of labor from the firm,
called a strike.
strike the organized withdrawal of
labor from a firm by a union

Economists who study the effects of unions typically

find that union workers earn about 10 to 20 percent
more than similar workers who do not belong to
unions.
Unions and Collective Bargaining

Workers who remain employed at the higher wage are

better off, but those who were previously employed
and are now unemployed are worse off.

Workers in unions (insiders) reap the benefits of

collective bargaining, while workers not in the
union (outsiders) bear some of the costs.
 Are Unions Good or Bad for the Economy?

 Critics argue that unions cause the allocation of
labor to be inefficient and inequitable.
 Wages above the competitive level reduce the
quantity of labor demanded and cause
unemployment.
 Some workers benefit at the expense of other
workers.
 Advocates of unions contend that unions are a
necessary antidote to the market power of firms
that hire workers.
 They claim that unions are important for helping
firms respond efficiently to workers’ concerns.
 The Theory of Efficiency Wages

efficiency wages is the above-equilibrium

wages paid by firms to increase worker
productivity

According to this theory, firms operate more efficiently if

wages are above the equilibrium level.
 The Theory of Efficiency Wages

In some ways, the unemployment

that arises from efficiency wages
is similar to the unemployment
that arises from minimum-wage
laws and unions. In all three cases,
unemployment is the result of
wages above the level that
balances the quantity of labor
supplied and the quantity of labor
demanded.
 The Theory of Efficiency Wages

A firm may prefer higher-than-equilibrium wages for the

following reasons:
 Worker Health
 Worker Turnover
 Worker Effort
 Worker Quality
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.

Worker health concerns are far

less relevant for firms in rich
countries such as the United
States, where the equilibrium
wages for most workers are well
above the level needed for an
adequate diet.
 Worker Turnover

Hiring & training new workers is costly. Paying high

wages gives workers more incentive to stay, reduces
turnover.

Worker Quality
Offering higher wages attracts better job applicants,
increases quality of the firm’s workforce.

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 equilibrium wage, there
aren’t enough jobs to go around, so workers have more
incentive to work not shirk.
Henry Ford’s experiment

• Henry Ford introduced the

assembly line technique in
auto production, thereby
ushering in a productivity
revolution
• In 1914, Ford began paying
his workers $5 per day,
which was far above the
norm
• It is $105 per day in 2007
money
Henry Ford’s experiment

• Turnover and absenteeism fell.

• Productivity rose so much that Ford’s
costs fell
• Henry Ford himself called the $5-a-day
wage “one of the finest cost-cutting
moves we ever made”
Conclusion
Bibliography
• N. Gregory Mankiw ”Brief Principles of Macroeconomics” Ninth
Edition Harvard University
• https://slideplayer.com/slide/8375943/
• https://equitablegrowth.org/why-is-collective-bargaining-so-difficult-i
n-the-united-states-compared-to-its-international-peers/
• https://www.simpliance.in/blog/minimum-wages-labour-law-for-begi
nners/