Chapter 27: Unemployment and the Demand for Labor

11© 2014 by McGraw-Hill Education Chapter 27 Unemployment and the Demand for Labor 2© 2014 by McGraw-Hill Education • How economists measure employment and unemployment. • How minimum wage rates and unionization can cause unemployment. • Why there is a natural rate of unemployment. • Why there is a cyclical component of unemployment. • What factors may stop wages from falling to the equilibrium level. • What challenges are associated with unemployment insurance. What will you learn in this chapter? 3© 2014 by McGraw-Hill Education • Unemployment is a situation where someone wants to work but cannot find a job in the current market. – People who do not have jobs and are not interested in obtaining one are not counted as unemployed. • The Bureau of Labor Statistics (BLS) defines unemployment as people who: 1. Didn’t work at all in the previous week. 2. Were available to work if they had been offered a job. 3. Were making efforts to look for a job. Defining and Measuring Unemployment 24© 2014 by McGraw-Hill Education • The labor force refers to the people who are in the working-age population and are either employed or unemployed. – The working-age population is the civilian, noninstitutional population over 16 years old. • The unemployment rate is the number of employed people divided by the number of people in the labor force: Unemployment rate = Number of unemployed Labor force × 100 where Labor force = Number of Employed and Unemployed Measuring unemployment 5© 2014 by McGraw-Hill Education 1. A student who also works 15 hours per week. 2. A full-time student. 3. A stay-at-home dad that does not work elsewhere. 4. An individual that was laid off a year ago and is waiting until things get better to look for a job. 5. A 15-year-old working full-time in the summer. 6. A CPA working full-time at a financial firm. 7. A military officer serving overseas. 8. A retired school teacher. 9. A recent law school graduate who is looking for a job. Active Learning: Categorizing employment Categorize each of the following individuals as employed, unemployed, or not in the labor force. 6© 2014 by McGraw-Hill Education • Given the categories of employment, employment statistics can be calculated. • For the United States: – Unemployment rate in December 2006: ଺,଻଺ଶ,଴଴଴ ଵହଶ,଻ଷଶ,଴଴଴ × 100 = 4.4% – Unemployment rate in December 2011: ଵଷ,଴ଽ଻,଴଴଴ ଵହଷ,଼଼଻,଴଴଴ × 100 = 8.5% Measuring unemployment Month Working-age population (non-institutionalized) UnemployedEmployedLabor force 6,762,000145,970,000152,732,000230,108,000December 2006 13,097,000140,790,000153,887,000240,584,000December 2011 37© 2014 by McGraw-Hill Education The unemployment rate varies by gender and age. Measuring unemployment Unemployment rate (%) Year 0 2 4 6 8 10 12 14 16 18 20 2003 2005 2007 2009 2011 Unemployment rate by age Men Women Unemployment rate by sex Unemployment rate (%) Year 0 2 4 6 8 10 12 14 16 18 20 2003 2005 2007 2009 2011 16-24 35-44 45-54 25-34 55+ 8© 2014 by McGraw-Hill Education The unemployment rate also varies by race and education level. Measuring unemployment Unemployment rate by race Unemployment rate (%) Year 0 2 4 6 8 10 12 14 16 18 20 2003 2005 2007 2009 2011 Unemployment rate by education level Unemployment rate (%) Year 0 2 4 6 8 10 12 14 16 18 20 2003 2005 2007 2009 2011 White American African Asian Latino Less than high school High school Some college Bachelor’s or higher 9© 2014 by McGraw-Hill Education • The state of the economy is also understood by looking at the labor-force participation rate (LFPR): LFPR= Labor force Working−age population × 100 • The LFPR indicates what fraction of the population wants to be working, regardless of whether or not they actually have a job. – It is common for the LFPR to fall during a recession. Measuring unemployment 410© 2014 by McGraw-Hill Education • During the most recent U.S. recession, 2.4% of the working-age population stopped participating in the labor force. – It is likely that at least some of these people would have been unemployed if they had stayed in the labor force. – Thus, the unemployment rate may understate the effect of the recession. Measuring unemployment Unemployment rate (%) Labor-force participation rate (%) 4.4 66.4 8.5 64.0 Change +4.1 -2.4 Month December 2006 December 2011 Employment in the United States, 2006 and 2011 11© 2014 by McGraw-Hill Education Use the following information to calculate the unemployment and labor-force participation rates. Active Learning: Unemployment and LFPR rates Employed Unemployed Not in Labor Force 139.9 million 14.3 million 81.7 million 12© 2014 by McGraw-Hill Education • There two main limitations of the unemployment rate. • It does not give a good indication of how many people are: – Discouraged workers: People who have looked for work in the past year but have given up because of labor market conditions. – Underemployed workers: People who are either working less than they would like or in jobs below their skill level. Beyond the unemployment rate 513© 2014 by McGraw-Hill Education To provide a better picture of the labor market, the BLS calculates the following six measures of unemployment. Beyond the unemployment rate Rate in December 2006 (%)Category of unemployment Rate in December 2011 (%) U1: Long-time unemployed (more than 15 weeks) 1.4 5.0 U2: Job losers + those who completed temporary work 2.1 4.9 U3: Unemployed 8.54.4 U4: Unemployed + discouraged workers 4.6 9.1 U5: Unemployed, discouraged attached workers 5.2 10.0Workers + marginally U6: Unemployed, discouraged workers, marginally attached 7.9 15.2 workers + underemployed 14© 2014 by McGraw-Hill Education • The main source of information on unemployment in the U.S. is a household survey called the Current Population Survey (CPS), conducted by the BLS. • The BLS surveys approximately 60,000 U.S. households per month. • The CPS asks people if they are working and how much they are earning, among many other questions. Where do the data come from? 15© 2014 by McGraw-Hill Education • The existence of any amount of unemployment is a bit of a puzzle. • Labor is bought and sold in a market, just like other goods and services. – There is a demand for labor (from firms wanting to hire workers). – There is a supply of labor (from individuals looking for jobs). – There is a price (called the wage). • In most markets, the price is expected to adjust until the market reaches equilibrium, a point at which the quantity supplied equals the quantity demanded. • The existence of unemployment suggests that this simplest of models can’t fully explain what goes on in the labor market. Equilibrium in the labor market 616© 2014 by McGraw-Hill Education A simple labor market model can be used to help understand a few aspects of unemployment. Equilibrium in the labor market Wage Labor demand Units of labor Firms and the labor market • The labor demand curve shows the relationship between the total quantity of labor demanded by all firms in the economy and the wage rate. • All things being equal, firms will want to hire more labor when wages are lower and less labor when wages are higher. 17© 2014 by McGraw-Hill Education • The supply of labor comes from people who are able to work and who choose to participate in the labor market. – Not everyone who could potentially work wants to work. Equilibrium in the labor market Labor supply Wage Units of labor Workers and the labor market • The labor supply curve shows the relationship between the total labor supplied in the economy and the wage rate. • Other things being equal, people will be willing to supply more labor at higher wage rates, and less labor at lower wage rates. 18© 2014 by McGraw-Hill Education • The labor demand and labor supply curves describe the national labor market. • The intersection of the curves identifies the market equilibrium. Equilibrium in the labor market Wage Labor supply Labor demand W* L* The labor market in equilibrium Labor • At equilibrium, there is a stable wage (price) and amount of labor bought and sold. • The equilibrium does not explain unemployment. 719© 2014 by McGraw-Hill Education Unemployment occurs when the wage rate is higher than the equilibrium wage. The labor market with unemployment W1 Labor supply Labor demand LSLD W* L* Unemployment Wage Labor The labor market with unemployment • Workers are willing to provide more labor than firms are willing to hire. • The labor market has a surplus of workers. 20© 2014 by McGraw-Hill Education • To understand the causes of unemployment, it’s helpful to separate out two categories of unemployment. • First, the natural rate of unemployment is the normal level of unemployment that persists in an economy in the long run. • There are three contributors to the natural rate of unemployment: 1. Frictional unemployment. 2. Structural unemployment. 3. Real-wage or classical unemployment. Categories of unemployment 21© 2014 by McGraw-Hill Education • Frictional unemployment is caused by workers who are changing location, job, or career. – It is a natural and healthy part of life in a dynamic economy. • Structural unemployment is caused by a mismatch between the skills workers can offer and the skills in demand. • Real-wage or classical unemployment results from wages being higher than the market- clearing level. Categories of unemployment 822© 2014 by McGraw-Hill Education • Second, cyclical unemployment is caused by short-term economic fluctuations. • Economists use the term business cycles to describe the pattern of short-term ups and downs. • Wages are “sticky” in the real world, meaning that they are slow to respond to shifts in the economy. – This results in actual wages that are above the market-clearing level. Cyclical unemployment 23© 2014 by McGraw-Hill Education Cyclical unemployment in the United States is easily observed. Cyclical unemployment Annual unemployment rate Annual per capita GDP growth rate 3. and when the growth rate of GDP/capita increases 2. unemployment soon rises 4. unemployment soon decreases. 1. Usually, when the GDP/capita growth rate slows 2 2 0 2 4 6 8 10 12 Percent 2 4 1980 1990 2000 2010 Year 24© 2014 by McGraw-Hill Education Indicate whether each of the following situations describes frictional, structural, classical, or cyclical unemployment. Active Learning: Categorizing the type of unemployment 1. Mary is temporarily unemployed after she decides to move to NYC for better job prospects. 2. Montana increases its minimum wage, which makes it difficult for David to find work. 3. Few winter fires leaves many firefighters unemployed from November to April. 4. Advances in computer-aided architecture technology leaves Ann, a drafter, unemployed. 925© 2014 by McGraw-Hill Education • Unemployment is an important indicator of the overall health of the economy, but addressing the issue is not always easy. – There are many factors that may stop the wage rate from adjusting. – Unemployment is a very personal issue for those who experience it. • There are a few factors that may unintentionally cause unemployment by keeping the market wage higher than the equilibrium wage. Public policies and other influences on unemployment 26© 2014 by McGraw-Hill Education • The government might prevent falling wages through minimum-wage legislation. – A minimum wage is the lowest wage that a firm is legally allowed to pay its workers. • Labor unions are groups of employees who bargain with their employer(s) over salaries and work conditions. • Efficiency wages are deliberately set above the market rate to increase productivity. Factors that may stop wage rates from falling 27© 2014 by McGraw-Hill Education • Frictional and structural unemployment are part of the normal working of the economy. – Most economists believe that some government policies can affect the level of these kinds of unemployment. • Unemployment insurance is money paid by the government to people who are unemployed. – Can affect how quickly people find jobs, which will affect the natural rate of unemployment. • The effect of unemployment insurance is ambiguous because: – People might not look as hard for work if the payment is generous. – If people don’t have to rush into taking the first job they’re offered, they are more likely to find the right job for them. Unemployment insurance 10 28© 2014 by McGraw-Hill Education • There are a couple other factors that influence unemployment. • Taxes on wage income are important, as lower taxes would reduce unemployment, all else equal. – The reasoning is that people have a higher incentive to find a job, knowing they will keep more of the income they earn from the job. – The magnitude of the impact taxes have on job-search efforts, however, is inconclusive. • The degree of difficulty for firing employees can also affect unemployment. – Employers may be reluctant to hire people if they know that it will be difficult to get rid of them. Other factors: Taxes and worker rights 29© 2014 by McGraw-Hill Education • To be considered unemployed, a person needs to meet three conditions: 1. Be part of the working-age, civilian population. 2. Not have worked in the previous week. 3. Be actively looking for work. • The unemployment and labor-force participation rates give an indication of employment and unemployment conditions in an economy. • Like other markets, the labor market features labor demand and labor supply curves. Summary 30© 2014 by McGraw-Hill Education • The labor market reaches an equilibrium wage where the labor demand and labor supply curves intersect. • A market wage above the equilibrium wage causes unemployment. – Unemployment is a surplus of labor at the market wage. • Frictional and structural unemployment cause economies to have long-run, natural levels of unemployment. Summary 11 31© 2014 by McGraw-Hill Education • Unemployment that responds to business cycles is called cyclical unemployment. • There are three main reasons why wage rates might not adjust to the equilibrium: 1. A minimum wage above the equilibrium wage. 2. Labor unions. 3. Efficiency wages. • Setting proper unemployment insurance rates is challenging because it changes worker incentives. Summary