Dini Kusuma Wardani

F0221073

Summary Chapter 28
UNEMPLOYMENT

Introduction
Like GDP, unemployment ranks high as an indicator of economic well-­‐being. This chapter starts
by describing how unemployment is measured and, related to this measurement issue, why
unemployment can sometimes be a misleading indicator of the true health of the economy.
Note, for instance, that there is unemployment even during normal or good economic times. Partly
for this reason, economists distinguish between two types of unemployment:
1. The natural rate of unemployment is the rate of unemployment that the economy experiences
even during normal times, that is, even when the economy is not in a recession.
2. Cyclical unemployment refers to the additional unemployment that occurs during recessions.

Outline
1. Identifying Unemployment
2. Job Search
3. Minimum Wage Laws
4. Unions
5. Effieciency Wages

Identifying Unemployment
Data on unemployment in the US economy are assembled monthly by the Bureau of Labor
Statistics (BLS), which is part of the Department of Labor.
Each month, the BLS compiles these data from a survey of about 60,000 households called the
Current Population Survey.
Based on responses to survey question, the BLS puts each adult aged 16 and over into one of three
categories:
1) Employed. This category includes paid employees, both full-time and part-time, people
who worked in their own business, and those who were temporarily absent from work
because of illness or vacation.
 2) Unemployed. This category includes people who were not employed, were available for
work, and had tried to find a job within the previous four weeks, as well as those who were
temporarily laid off and waiting to be recalled.
3) Not in the Labor Force. This category includes everyone else: students, homemakers,
retired people.
The BLS then defines the labor force as the total number of workers, both employed and
unemployed:
Labor force = Number of Employed + Number of Unemployed
The Unemployment rate as the percentage of the labor force that is employed,
Unemployment Rate = Number of Unemployment x 100
Labor Force
And the labor force participation rate as the percentage of the total adult population that is in
the labor force,
Labor Force Participation Rate = Labor Force x 100
Adult Population

The most difficult part of measuring the unemployment rate entails determining who is
unemployed versus who is out of the labor force:
Suppose an employed worked loses his or her job, and starts looking for a new one. What happens
to the unemployment rate? It rises, since the number of unemployed workers goes up while the
labor force stays the same.
But suppose after awhile, that same person becomes a discouraged worker: someone who would
like to work but has given up looking for a job. Maybe that person decides to go back to school or
maybe he or she just stays at home and doesn’t bother looking for a job. Either way, the number
of unemployment workers goes down, and while the labor force goes down as well, the net effect
is to decrease the rate of unemployment.
Symmetrically, what happens if the economy starts to look better, so that a discouraged worked
starts to look for a job? Now the number of nemployed workers rises, and while the labor force
also gets bigger, the net effect is to increase the unemployment rate.
So changes in the unemployment rate don’t always accurately reflect whether economic conditions
are improving or deteriorating.
 One explanation is that it takes time for workers to find jobs that are best-suited for them.
This type of unemployment is often called frictional unemployment.
 A second set of explanations focus on why there might not be enough jobs to employ
everyone who wants one, tgis type of unemployment is often called structural
unemployment.
  So the essence of frictional unemployment is that yhere are jobs out there, it just takes time
and effort for workers to find them. The essence of dtructural unemployment is that there
are just not enough jobs out there for everyone who wants one.

Job Search
Job search is the process by which workers find appropriate jobs given their tastes and skills.
The process of job search can explain why there is always some frictional unemployment:
- Suppose that in the market for laptop computers and PC’s, Dell takes market share away
from Hawlett-Packard. HP lays off workers; Dell hores one ones. In the interim there is a
period of unemployment in the industry
- Similarly, if the price of oil rises, energy exploration companies hire more workers, while
auto manufacturers and airlines lay off workers, because of these sectoral shifts,
unemployment arises.
A certain amount of frictional unemployment is inevitable, simply because the economy is always
changing.

Minimum Wage Laws

When the minimum wage is set above the level that balances supply and demand, it creates
unemployment. In that there are workers who want to work at the minimum wage, but who will
not be able to find those job even after expensive search.
Unions and Collective Bergaining
A labor union is an association of workers that bergains with employers over wages, benefits, and
working conditions through a process of collecting bargaining. If the two sides can’t agree, the
union can organize a strike, the organized withdrawal of labor from the firm.

The overall effects of unions on wages and unemployment therefore resemble the effects of
minimum wage laws:
- Insider or union members, benefit from the higher wages.
- But outsider are hurt because at higher wages, fewer workers are hired.
The Theory of Efficiency Wages
Efficiency wages are above-equilibrium wages paid by firms in order to increase worker
productivity.
The theory of efficiency wages states that firms operate more efficiently if wages are above the
equilibrium level.
A firm may prefer higher than equilibrium wages for the following reasons:
 Worker Health: Better paid workers eat a better diet and thus are move productive
 Worker Turnover: A higher paid worker is less likely to look for another job.
 Worker Effort: Higher wages motivate workers to put forward their best effort.
 Worker Quality: Higher wages attract a better pool of worker to apply for jobs.