Chapter Twenty-Six: Unemployment and its Natural Rate (p.579)



I.                    Identifying Unemployment

a.       How is Unemployment Measured?

                                                               i.      Measured every month by Bureau of Labor Statistics (BLS)

                                                             ii.      16 and over from surveyed houses in categories:

1.      employed = spent most of week working at a paid job

2.      unemployed =  on temp. layoff, looking for a job, or waiting to start a new job

3.      not in labor force = fits neither category.

                                                            iii.      labor force = number employed + number unemployed

                                                           iv.      unemployment rate = number of unemployed / labor force

                                                             v.      labor-force participation rate = labor force / adult population

                                                           vi.      natural rate of unemployment = normal rest of unemployment around which the unemployment rate fluctuates

                                                          vii.      cyclical unemployment = deviation of unemployment from its natural rate

b.      Does the Unemployment Rate Measure What We Want it to?

                                                               i.      More than 1/3 of unemployed are recent entrants to labor force

                                                             ii.      ½ unemployment ends with person leaving labor force

                                                            iii.      or call themselves unemployed to receive gov’t stuff

                                                           iv.      discouraged workers = tried to find a job but gave up after unsuccessful search

                                                             v.      no easy way to make unemployment rate reliable

1.      useful but imperfect

c.       How Long are the Unemployed Without Work?

                                                               i.      Short-term or long-term condition?

                                                            ii.      Most spells of unemployment are short, and most unemployment observed at any given time is long-term

                                                            iii.      Be careful when interpreting data

1.      most unemployed quickly find jobs

2.      problem is those who can never find jobs

d.      Why Are There Always Some People Unemployed?

                                                               i.      Unemployment is never zero.

1.      fluctuates w/ natural unemployment

                                                             ii.      four ways to explain in long run

1.      takes time for workers to search for jobs (frictional unemployment)

2.      jobs available are insufficient to provide for  everyone (structural unemployment for larger spells)


II.                 Job Search

a.       Process of matching workers with appropriate jobs

b.      Why Some Frictional Unemployment is Inevitable

                                                               i.      Result of changes in demand for labor

1.      can rise in one region, fall in another

                                                             ii.      sectoral shift = change in composition of demand among industries and/or regions. Cause unemployment.

                                                            iii.      Frictional unemployment inevitable b/c economy always changing

c.       Public Policy and Job Search

                                                               i.      Faster info. spread = faster economic rebound. Etc, etc.

                                                             ii.      Gov’t programs try to facilitate, blah.

1.      gov’t-run unemployment agencies

2.      public training programs

3.      make economy more efficient or interfering with markets?

4.      decisions best made by private workers, etc.

d.      Unemployment Insurance

                                                               i.      Gov’t program increasing amount of frictional unemployment

                                                             ii.      designed to offer partial protection against job loss

                                                            iii.      50% of former wages for 26 weeks (-ish)

                                                           iv.      is an incentive against finding work

                                                             v.      reduced income uncertainty (its primary goal)

                                                           vi.      opportunity to look for jobs for their skills

                                                          vii.      unemployment rate is imperfect measure of overall well-being


III.               Minimum-Wage Laws

a.       Not a predominant reason for unemployment

                                                               i.      most workers paid well over min-wage

b.      If the wage is kept above the equilibrium level for any reason, the result is unemployment

c.       different from frictional unemployment

                                                               i.      frictional = searching for jobs matching their skills

                                                             ii.      instead of waiting for jobs to open up


IV.              Unions and Collective Bargaining

a.       The Economics of Unions

                                                               i.      collective bargaining = process by with unions/firms agree on the terms of employment

                                                             ii.      strike = withdrawal of labor from the disagreeing firm

                                                            iii.      union raises wage, raises QS and lowers QD. then, unemployment.

                                                           iv.      insiders benefit from high union wages

1.      outsiders do not

                                                             v.      outsiders respond 2 ways:

1.      remain unemployed, wait to become insiders

2.      take jobs in firms not unionized

a.       QS rises in other parts of economy

                                                           vi.      explicit agreements illegal, “conspiracy in restraint of trade”

                                                          vii.      helped by: Wagner Act of 1935 and Nat’l Labor Relations Board

                                                        viii.      right-to-work laws = give workers in unionized firm right to choose whether to join union



b.      Are Unions Good or Bad for the Economy?

                                                               i.      Critics say!

1.      merely a cartel, reduce QD of labor

2.      cause unemployment

3.      reduce wages in economy

4.      inefficient and inequitable!

                                                             ii.      Advocates say!

1.      antidote to market power of firms

2.      balance firm’s power

3.      help respond to worker’s concerns


V.                 The Theory of Efficiency Wages

a.       Firms operate more efficiently if wagers are above EQ level

b.      Worker Health

                                                               i.      better wages, better food, better health

                                                             ii.      not relevant in countries like the US

c.       Worker Turnover

                                                               i.      frequency jobs are quit relate to entire set of incentives

                                                             ii.      better wages, better incentives, less turnover

d.      Worker Effort

                                                               i.      slackers are fired. Duh.

                                                             ii.      better wages, less slacking

                                                            iii.      similar to “reserve army of the unemployed” – Marx

e.       Worker Quality

                                                               i.      better wages, better people, better working

                                                             ii.      reservation wage = lowest wage one will accept

                                                            iii.      can’t predict who is better. assumes better wages will attract better people.