CHAPTER 15: UNEMPLOYMENT

HOW IS UNEMPLOYMENT MEASURED: 

 Employed: This category includes those who worked as paid employees, worked in their
own business, or worked as unpaid workers in a family member’s business. Both full-time and
part-time workers are counted. This category also includes those who were not working but who
had jobs from which they were temporarily absent because of, for example, vacation, illness, or
bad weather.
 Unemployed: This category includes those who were not employed, were available for
work, and had tried to find employment during the previous four weeks. It also includes those
waiting to be recalled to a job from which they had been laid off.
  Not in the labor force: This category includes those who fit neither of the first
 two categories, such as full-time students, homemakers, and retirees.
Labor force : the total number of workers, including both the employed and the
unemployed=  Number of employed + Number of unemployed.
 Unemployment rate: the percentage of the labor force that is unemployed
 The labor-force participation rate measures the percentage of the total adult population
that is in the labor force
 Case study: 
 Men and women-- similar rates of unemployment-- different rate of labor-force
participation
 White and blacks-- similar rates of labor-force participation -- different rates of
unemployment
 Case study: 
 Women’s labor-force participation increase because of technology, birth control and
change in political and social attitudes
 Men’s  labor-force participation decrease because men stay in school longer, older men
retire earlier and live longer, more fathers stay at home to raise children
How government measures the amount of unemployment: 
 Natural rate of unemployment: the normal rate of unemployment around which the
unemployment rate fluctuates ( Congress Budget Office)
 Cyclical unemployment: the deviation of unemployment from its natural rate
 Because people move into and out of the labor force so often, there are problems
measuring unemployment. THIS IS WHY THE UNEMPLOYMENT RATE IS NOT A
PERFECT MEASURE OF JOBLESSNESS
 Those who report being unemployed may not, in fact, be trying hard to find a job-- they
want to qualify for a government program that gives financial assistance to the
unemployed or because they are working but paid “under the table” to avoid taxes on
their earnings( considered as out of the labor force or employed)
 Some of those who report being out of the labor force may want to work. These
individuals may have tried to find a job and may have given up after an unsuccessful
search. Such individuals, called discouraged workers, do not show up in unemployment
statistics, even though they are truly workers without jobs.
 Duration of unemployment: Most spells of unemployment are short, but most
unemployment observed at any given time is long-term. Most people who become unemployed
will soon find jobs. Yet most of the economy’s unemployment problem is attributable to the
relatively few workers who are jobless for long periods of time.
 Why there is unemployment: (4 ways)-- the unemployment rate never falls to zero
 It takes time for workers to search for the jobs that are the most suitable for them
=> FRICTIONAL UNEMPLOYMENT: unemployment that results because it takes
time for workers to search for jobs that best suit their tastes and skills.
=> explain short-spell unemployment and short-term variations of economic activity--
firms and workers are in and out of market
 Causes:-- inevitable
1. Changes in the demand for labor among different firms.
2. Changes in the composition of demand among industries or regions are
called sectoral shifts
3. Changing patterns of international trade are also a source of frictional
unemployment 
 The number of jobs available in some labor markets may be insufficient ( quantity of
labor supplied exceeds the quantity demanded)
=> STRUCTURAL UNEMPLOYMENT results because the number of jobs available
in some labor markets is insufficient to provide a job for everyone who wants one
=> longer spell of unemployment
 Causes: When wages are set above the level that brings supply and demand
to the equilibrium.
1. Minimum wage law
2. Unions
3. Efficiency wages
JOB SEARCH: -- frictional unemployment
 Job search: the process by which workers find appropriate jobs given their tastes and
skills
 Public policy and job search: Government programs try to facilitate job search in
various ways: government-run employment agency (give out job vacancies), public training
programs (ease workers’ transition from declining to growing industries)
 Unemployment insurance: a government program that partially protects workers’
incomes when they become unemployed ( lost job or was laid off) 
 Offer workers partial protection against job loss or laid-off process (when a firm does not
need workers’ skill so it fires them)--50 % of the worker’s former wages for 26 weeks.
 The unemployed who quit their jobs, were fired for cause, or just entered the labor force
are not eligible
 Disadvantage: cause further unemployment
 People respond to incentives: Because unemployment benefits stop when a worker takes
a new job, the unemployed devote less effort to job search and are more likely to turn
down some  unattractive job offers.
 Unemployment insurance makes unemployment less onerous, workers are less likely to
seek guarantees of job security when they negotiate with employers over the terms of
employment.
Minimum wages: 
 When a minimum wage law forces the wage to remain above the level that balances
supply and demand, it raises the quantity of labor supplied and reduces the quantity of labor
demanded compared to the equilibrium level. There is a surplus of labor. -- unemployment
 the law does not prevent most wages from adjusting to balance supply and demand-- do
not affect everyone
 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
Union and collective bargaining: 
 A union is a worker association that bargains with employers over wages, benefits, and
working conditions.
 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 an agreement, the union can organize a withdrawal
of labor from the firm, called a strike.
 When a union raises the wage above the equilibrium level, it raises the quantity of labor
supplied and reduces the quantity of labor demanded, resulting in unemployment. Workers who
remain employed at the higher wage (insider)are better off, but those who were previously
employed and are now unemployed( outsider) are worse off- they can  remain unemployed and
wait for the chance to become insiders and earn the high union wage
 Good: Unions are a necessary antidote to the market power of firms that hire workers and
are important for helping firms respond efficiently to workers’ concerns.
Efficiency wages: 
 Efficiency wages above-equilibrium wages paid by firms to increase worker productivity
 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
 Differences: 
 Minimum-wage laws and unions prevent firms from lowering wages in the presence of a
surplus of workers
 Efficiency-wage theory states that such a constraint on firms is unnecessary in many
cases because firms may be better off keeping wages above the equilibrium level:
improve workers’ health, decrease workers’ turnover (left job for a better one), increase
workers’efforts and quality--  Improve productivity and profit, reduce absentism