Chapter 27 Unemployment
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith
Some key terms
n Unemployment rate:
– the percentage of the labour force without a
n Labour force
– those people holding a job or registered as
job but registered as being willing and available for work
n Participation rate
being willing and available for work
– the percentage of the population of working age declaring themselves to be in the labour force
27.2
Unemployment in the UK, 1950-99
14
12
10
.
a
8
.
6
p %
4
2
0
1950
1970
1990
Source: Economic Trends Annual Supplement, Labour Market Trends
27.3
Unemployment (%) in selected countries
14
12
10
8
%
6
4
2
0
1972
1982
1999
UK Ireland
France
EU USA
27.4
Labour market flows It is tempting to see the labour market in static terms
Working Unemployed
Out of the labour force but...
27.5
Labour market flows
New hires Recalls
Working Unemployed
Job-losers Lay-offs Quits
Discouraged workers
Retiring Temporarily leaving
Re-entrants New entrants
Out of the labour force
Taking a job
27.6
More on labour market flows
n The size of these flows is
surprisingly high
n In 1999 unemployment in the UK
began at 1.29 million
– 3.14 million became unemployed – but 3.3 million left the ranks of the
n During the year:
unemployed
27.7
The composition of unemployment
n Different groups in society are
more vulnerable to unemployment, varying by: – age – gender – region – ethnic origin
27.8
Types of unemployment
n Frictional
– the irreducible minimum level of
n people between jobs n the ‘almost unemployable’
n Structural
– unemployment arising from a mismatch of
unemployment in a dynamic society
n it takes time for ex-coal miners to retrain as
skills and job opportunities when the pattern of demand and production changes
international bankers
27.9
Types of unemployment (2)
n Demand-deficient unemployment
– occurs when output is below full capacity
– ‘Keynesian’ unemployment occurs in the
n Classical unemployment
– created when the wage is deliberately
transitional period before wages and prices have fully adjusted
maintained above the level at which labour supply and labour demand schedules intersect
27.10
A ‘modern’ view of unemployment
n A similar categorization is retained, but an important distinction is to be noted between:
– when a worker chooses not to accept a
n Voluntary unemployment
job at the going wage rate n Involuntary unemployment
– when a worker would be willing to accept a job at the going wage but cannot get an offer.
27.11
The natural rate of unemployment
AJ
e g a w
l
LF
a e R
LD: labour demand LF: size of labour force AJ: the number of workers prepared to accept jobs
F
w*
E
LD
AJ is to the left of LF because some members of the labour force are between jobs, others are waiting for better offers. Equilibrium is at w*, N*.
N* N1 Number of workers
The distance EF is the natural rate of unemployment.
27.12
The natural rate of unemployment
n The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium.
– frictional unemployment
– structural unemployment
n This is entirely voluntary. n It includes:
27.13
Classical unemployment
e g a w
AJ
l
a e R
LF
A
B
Suppose that union power succeeds in maintaining a real wage of w2. Equilibrium is at A
C
and unemployment is AC, w2 w*
LD
N2 N* N1 Number of workers
of which BC is voluntary and AB is involuntary To the extent that this unemployment reflects a conscious decision by unions to restrict employment, it is voluntary unemployment.
27.14
UK unemployment 1956-95
12
10
8
%
6
4
2
0
56-59
60-8
69-73
74-80
81-87
88-90
91-95
Actual rate Natural rate
27.15
Supply-side economics
n entails the use of microeconomic
incentives to alter – the level of full employment – the level of potential output – the natural rate of unemployment
n 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.
27.16
Tax cuts and unemployment
e g a w
l
AJ
a e R
LF
A
E
F
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
B
w1 w2 w3
C
LD
Unemployment is BC Without tax, equilibrium is at E. Unemployment is now EF.
Number of workers
N1 N2
EF is less than BC because of the relative slopes of LF & AJ but the differences may not be substantial.
27.17
Other supply-side policies
n Trade union reform
– reducing the power of trade unions may limit distortions
in the labour market
n Other labour supply policies
– training and retraining measures
– improving the efficiency of the labour market
n such measures may affect frictional and structural
unemployment
n Investment
– higher investment may increase the demand for labour
n may be achieved via tax incentives or low interest rates
27.18
Hysteresis
n The idea that a (short-run) fall in labour demand may lead to a permanent fall in labour supply
n This could help to explain high and persistent unemployment in Europe in the 1980s
27.19
Hysteresis (continued)
n Four channels:
– Insider-outsider distinction
n only those in work take part in wage bargaining &
they protect their own positions
– Discouraged workers
n people stop looking for jobs
– Search and mismatch
n firms and workers get used to low search
– capital stock
n low levels of investment in recession lead to
permanently low capital stock levels
27.20
