cheating policy on all quizzes or exams: talking: -10% phone: -10% cheat cheat = 0%

Unemployment: Continued

Week 6 Class 2

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Cheating Policy

On all Quizzes or Exams:

Talking: -10%Phone: -10%Cheat Cheat = 0%

1. When an economy is growing and unemployment is low what kind of jobs can people find? (Para. 1)

A: jobs that are satisfying to them and that pay well

2. When an economy is in recession and unemployment is high what will many people experience? (Para. 1)

A: hard to find jobs, people will settle for jobs that don’t closely match their skills, people will take lower paying jobs

A: income loss, family stress/pressure, loss of self-esteem (happiness), young people fail to develop job skills/experience

3. When unemployment is high an economy is underutilizing what? (Para. 1)

A: productive resources (human resources/labor)

4. When unemployment is high why might more people go back to school? (Para. 2)

A: to get more skills and delay entry into the labor market (wait for a better time)

5. What groups of individuals could have different unemployment rates than the general population? (Para. 3)

A: gender, age, race, education, different countries

Figure 1 (pg 85)

1. Working –age population?2. Labor force, not labor force?3. Unemployed, employed?

A rich 30 year old man who

has been travelling

around the world for three

years

1. Working –age population?2. Labor force, not labor force?3. Unemployed, employed?

A 40 year old stay at home

mom

Figure 1 (pg 85)

Four types of unemployment:• Natural unemployment• Cyclical unemployment• Frictional unemployment• Structural unemployment

Natural unemployment rate: the unemployment rate that exists when there is neither a recession nor a boom and real GDP is equal to potential GDP.

Cyclical, Frictional, andStructural Unemployment

The change in the unemployment rate above the natural unemployment rate is called cyclical unemployment because it is a short-term fluctuation caused by recession.

The natural unemployment rate is caused by a combination of frictional and structural unemployment.


Natural Unemployment Rate

Cyclical Unemployment

Frictional Unemployment Structural Unemployment


Cyclical unemployment: unemployment due to a recession, when the rate of unemployment exceeds the natural rate of unemployment.

Examples: • Auto workers who lost their jobs when car

factories cut production during the 2008 recession

• Workers who lost their jobs when the factories they worked in closed down during the Great Depression


Frictional unemployment: unemployment arising from normal turnover in the labor market, such as when people change occupations or locations, or are new entrants.

Examples:• Bob quits his job in California to live with his

new wife in New York City.• Jim quits his job because his boss is annoying.• 1947 many babies were born after the war,

1967 many graduate college and enter the labor force.


Structural unemployment: unemployment due to structural problems such as poor skills, insufficient work incentives, or long-term changes in the demand for certain skills.• People stop buying Blackberry

phones because they like Apple. Blackberry must fire workers.

• More machines are making cars because it’s cheaper, less people work.

• Less people to deliver mail because people use email.

Reasons People Are Unemployed

Job losers: people who were previously employed but lost their jobs.Job quitters: people who quit their jobs (but are not forced out).New entrants: people who entered the labor force for the first time.Re-entrants: people who re-entered the labor force after being out of it for a while.

.

Job Losers, Job Leavers, New Entrants, and Re-entrants (December 2006)

Job Losers





people change occupations or locations, or are new

entrants

long-term changes in the demand for certain skills

Job Leavers On average, Americans change jobs

every 3 to 4 years. Only a small part of the unemployed who quit do it to look for a new job.

The number of job leavers decreases during a recession, partly because of the reduced number of job openings during a recession.






entrants


New Entrants and Re-entrants A huge increase in the

unemployment rate occurs every June as graduates try to find jobs for the first time.

Stay at home moms…






entrants



Job losers: people who were previously employed but lost their jobs.Job quitters: people who quit their jobs (but are not forced out).New entrants: people who entered the labor force for the first time.Re-entrants: people who re-entered the labor force after being out of it for a while.

Tell me about someone you know that has been one of these.

Job Losers (Page 90, Paragraph 1-6)


Q: What is creative destruction? Give examples. Has this ever happened to people you know? Who? What happened?

Is this good or bad? What does it mean that the economy is always in a state of flux?eg. Me. Going from motorcycle business

to bank.

Unemployment by Duration (December 2006)

What influences could make someone’s unemployment duration longer?

-Lack of skills-Lack of education-Lack of working experience-Recession-Competition (Seasonal)-*Unemployment Compensation

Q: Why do younger people have a much higher unemployment rate?

A: High competition at graduation, low skills & experience, not satisfied with job so they change jobs.

Unemployment Part 2: Model of Labor Market and Government

Policy

Real wage = Nominal wage(Living Cost) Price level

Labor Demand and Supply

Real wage: the wage or price of labor adjusted for inflation. In contrast, the nominal wage is not adjusted for inflation.

Eg. Minimum wage in Canada is high but so too is the living cost.

Labor Supply, Labor Demand, and Equilibrium Employment Labor demand

curve: showing the quantity of labor firms are willing to hire at each wage.

Labor supply curve: the quantity of labor workers are willing to supply at each wage.

Here the unemployment should be zero because Labor supply = Labor demand.

What’s the problem???

Labor Market During an Economic Expansion


Does the market adjust to expansion and create 0% unemployment?!

Never!

The simple supply and demand model for the labor market predicts that employment and wages will rise during expansions and fall during recessions. (See Figure 7.) This prediction is inconsistent with the observation that unemployment exists.

To have unemployment, the real wage must not immediately adjust to make the labor supply equal to the labor demand.

Explaining Labor Market Trends

The Labor Market Model is too simple!It won’t cut it! It’s not good enough!


Does the market adjust to expansion and create 0% unemployment?!

Never!

Why Is the UnemploymentRate Always Greater Than Zero?

Reason 1Job rationing: a reason for unemployment in which the quantity of labor supplied is greater than the quantity of labor demanded because the real wage is too high.

Excess Supplyof Labor and Unemployment

Three explanations for why the real wage is above the equilibrium:

1. Minimum wages2. Insiders versus outsiders3. Efficiency wages

Job Rationing

Minimum wage: the lowest possible wage that employers can pay their employees. In the United States, the federal minimum wage is $5.85 per hour (as of July 2007). Ontario, Canada: $10.50 (2013).

Job Rationing

Insider: a person who works for a firm and has some influence over wage and hiring policy(eg. Labor Union, Government Policy).

Outsider: someone who is not working for a particular firm, making it difficult for him or her to get a job at that firm even though the person is willing to work for a lower wage.

Job Rationing

Efficiency wage: a wage rate higher than the market equilibrium, given to encourage workers to be more efficient.

Reasons why worker productivity increases with wage:

1. Lower turnover (not going to look for another job, saves company $ not to train new people)

Job Rationing

Reason 2Job search: a reason for unemployment in which uncertainty in the labor market and workers’ limited information require people to spend time searching for a job.



Reason 1Job rationing: a reason for unemployment in which the quantity of labor supplied is greater than the quantity of labor demanded because the real wage is too high.Reason 2Job search: a reason for unemployment in which uncertainty in the labor market and workers’ limited information require people to spend time searching for a job.

Job Search

This explanation for unemployment assumes that the labor market is always in a state of flux, with jobs being created and destroyed and people moving from one location or job to another.

As a result, the labor supply and demand curves are always changing never stopped.

Labor Market Flows

Job Rationing Model1. Lower the minimum wage. (A lower

minimum wage could reduce the unemployment rate for young and unskilled workers.)

2. Encourage a more flexible union–employer relationship.

3. Lower costs to train employees.4. Lower efficiency wages.

Policies to Reducethe Unemployment Rate

Job Search Model1. Improve job placement.2. Increase incentives for the

unemployed to look for jobs.3. Lower unemployment compensation.

Policies to Reducethe Unemployment Rate

Unemployment and Young People around the World

What other factors can affect unemployment rates? Do they cause more or less unemployment? Why? What can government do to decrease unemployment in these situations?

Chapter 4 Review Questions

When an economy is in recession and unemployment is high what will many people experience? (pg 82-83)

Explain the four types of unemployment: Natural, Cyclical, Frictional, Structural.

What are the four reasons someone might be unemployed? (pg 90)

Why is the Labor Model not enough to explain or predict unemployment? (page 96)

What age group of people are more likely to be unemployed? Why?