ECN 202
Principles of Macroeconomics
Instructor: Nabila Maruf
Independent University, Bangladesh
Lecture Note: 4
Chapter 15: Unemployment
Spring 2018
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Unemployment
The problem of Unemployment is usually divided into
two categories:
Long-run problem
Short-run problem
Natural Rate of Unemployment
Unemployment that does not go away even in the long-
run
The amount of unemployment that the economy
normally experiences
2
Unemployment
Cyclical Unemployment
The year-to-year fluctuations in unemployment around
its natural rate
Closely associated with the short-run ups and downs of
economic activity
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Identifying Unemployment
How is Unemployment Measured?
Bureau of Labor Statistics (BLS) each adult (age 16 and
older) into one of the three categories:
Employed
Unemployed
Not in the labor force
Employed
All those who work
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Identifying Unemployment
Unemployed
Those who were not employed.
Were available for work
Tried to find work during previous four weeks
Not in the labor force
Those who don’t fit either of the first two categories
Such as full-time student, homemaker or retiree
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Identifying Unemployment
Labor Force
The total number of workers, including both the
employed and the unemployed.
Labor force = Number of Employed + Number of
Unemployed
Unemployment Rate
The percentage of the labor force that is unemployed
Unemployment Rate = Number of Unemployed 100
Labor Force
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Identifying Unemployment
Labor-force participation rate
The percentage of the adult population that is in the labor
force
Labor-force participation Rate = Labor Force
100
Adult Population
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Identifying Unemployment
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Identifying Unemployment
Unemployment Rate of Bangladesh (Source: LFS 2010)
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Identifying Unemployment
Natural rate of unemployment
The normal rate of unemployment around which the
unemployment rate fluctuates.
Cyclical unemployment
The deviation of unemployment from its natural rate.
Does the Unemployment Rate Measure What We Want It
To?
Difficult to distinguish between unemployed and not in the
labor force
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Identifying Unemployment
Discouraged Workers
Individuals who would like to work but have given up looking for
a job
How Long Are the Unemployed without Work?
Most spells of unemployment are short, and most
unemployment observed at any given time is long-term
Why Are There Always Some People Unemployed?
In an ideal labor market, wages would adjust to balance the
quantity of labor supplied to the quantity of labor demanded.
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Identifying Unemployment
In reality, unemployment rate never falls to zero.
It fluctuates around the natural rate of unemployment.
There are four ways to explain unemployment in the
long run:
Job Search
Minimum-Wage Laws
Unions
Efficiency Wages
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Identifying Unemployment
Frictional Unemployment
Unemployment that results because it takes time for
workers to search for the job that best suit their taste and
skills.
Explains relatively short spells of unemployment.
Structural Unemployment
Unemployment that results because the number of jobs
available in some labor markets is insufficient to provide a
job for everyone who wants one.
Explains longer spells of unemployment
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Identifying Unemployment
Job Search
The process by which workers find appropriate jobs
given their tastes and skills.
Why Some Frictional Unemployment is
Inevitable?
The economy is always changing
Sectoral shifts – changes in the composition of demand
among industries or regions.
It takes time for workers to find job in new sectors.
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Identifying Unemployment
Public Policy and Job Search
Faster the information spreads, faster the economy can
match jobs and workers.
Internet, public policy can play role.
Government programs try to facilitate job in various
ways:
Government-run employment agencies
Public training programs
Unemployment Insurance – A government program that
partially protects workers’ income when they become
unemployed.
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Identifying Unemployment
Minimum-Wage Laws
Forces wages to remain above the level that balances supply
and demand
Raises quantity of labor supplied and reduces quantity of
labor demanded
There is surplus of labor Unemployment
Affects least skilled and least experienced workers mainly
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Identifying Unemployment
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Identifying Unemployment
General Lesson from Minimum-wage law diagram:
If the wage is kept above the equilibrium level for any
reason, the result is unemployment.
Difference between frictional unemployment and
Structural Unemployment:
Frictional Unemployment
due to job search
Not due to failure of wages to balance
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Identifying Unemployment
Structural Unemployment
Wages above equilibrium
Waiting for jobs to open up
Unions and Collective Bargaining
Union – A worker association that bargains with
employers over wages benefits and working conditions.
The Economics of Unions
A union is a type of cartel.
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Identifying Unemployment
Collective Bargaining – The process by which unions and
firms agree on the terms of employment.
Strike – The organized withdrawal of labor from a firm by a
union.
Unions creates two conflicting groups of workers – insiders
and outsiders.
Insiders reap benefit of union and outsiders bear cost.
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Identifying Unemployment
Are Unions Good or Bad for the Economy?
Critics’ View
Inefficient – high union wages reduce employment in
unionized firms below the efficient, competitive level.
Inequitable – Some workers benefit at the expense of others.
Advocates’ View
If firms have high market power
Can exploit workers
Unions help to ensure higher wage and proper working
condition.
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Identifying Unemployment
Unions create happy and productive work force
In the End
No consensus between economists
Unions beneficial in some circumstances and adverse in
others.
The Theory of Efficiency Wages
Efficiency Wages
Above equilibrium wages paid by firms to increase worker
productivity.
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Identifying Unemployment
There are several types of efficiency-wage theory.
Four are:
Worker Health
Better paid better nutrition higher productivity
Worker Turnover
Higher the wage, fewer is the turnover
High turnover increases firms production cost
Worker Quality
Firms with higher wages attracts high quality workers
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Identifying Unemployment
Worker Effort
Reduces worker incentive to shirk
May not find another job with high wage
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Exercise
• Which of the following would most likely
reduce frictional unemployment?
• Eliminating the minimum wage
• Increasing unemployment insurance benefits
• A new law banning labor unions
• More workers posting their resumes at Monster.com,
and more employers use Monster.com to find suitable
workers to hire.
• Sectoral shifts becoming more frequent.
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