UNEMPLOYMENT

• Employment and Unemployment

• Types of Unemployment

• Reasons of Unemployment

• Consequences of Unemployment
 UNEMPLOYMENT
• Who’s considered
unemployed?
• How do we measure the
labor force?
• How do we calculate the
unemployment rate?
 UNEMPLOYMENT
when a labor force is
seeking employment but
cannot find it
 UNEMPLOYMENT
when a labor force is
seeking employment but
cannot find it
NUMBER UNEMPLOYMENT PERSONS
includes people age 15 years
old & older who are without a
job but looking for work
 UNEMPLOYMENT
when a labor force is
seeking employment but
cannot find it
NUMBER UNEMPLOYMENT PERSONS
includes people age 15 years
old & older who are without a
job but looking for work
 LABOR FORCE

Includes the total number of

people who are working or
unemployed
Who’s NOT included in the labor
force?
Full-time
college
students

Discouraged
workers
 DISCOURAGED
WORKERS
Not included in the
labor force, even
though they’re able to
work, because they are
not looking for work
 Labor Force Participation Rate
the percentage of the population that is in the
labor force
 UNEMPLOYMENT RATE
Number of unemployed in
labor force/ Total labor force x
100
UNDEREMPLOYMENT

beneath or below
Underemployment
a situation in which workers are
employed below their education or
skill level, or their availability
• Skilled workers in low-paying jobs
• Skilled workers in low-skill jobs
• Part-time workers preferring full-
time hours
not necessarily unemployed workers
unemployed workers who are currently
looking for jobs
 difficult to get accurate measurement of
underemployment
VISIBLE
underemployment status is easily identifiable
INVISIBLE
underemployment status is not easily
identifiable
Underemployment has been
attributed to…
• Adverse economic conditions such as
a recession
Underemployment has been
attributed to…
• Adverse economic conditions such as
a recession
• Supply of workers is greater than the
demand for workers
• Layoffs
• Technological change
 Types of
Unemployment
• Frictional Unemployment
• Structural Unemployment
• Cyclical or Keynesian Unemployment
• Just graduated from
college
• Looking for work by
scanning job sites,
reading newspaper
listings and attending job
fairs
• Manufacturing worker
• Loves to pull levers and
wear hard hats
• Temporary Santa
Claus every
holiday season
• High school gym teacher
• Trying to teach kickboxing to
the school’s guinea pigs with
the help of his students
 Frictional
Unemployment

Occurs because of the normal

turnover in the labor market and the
time it takes for workers to find new
jobs
 Structural
Unemployment

Occurs because of an absence of demand for a

certain type of worker

This typically happens when there are

mismatches between the skills employers want
and the skills that workers have.
 Cyclical
Unemployment
Many of the jobs lost when the
economy enters a recession

25%
 Cyclical
Unemployment
Many of the jobs lost when the
economy enters a recession

25%
1 in 4 people were willing and able,
but could not find work!
Why are there always some people
unemployed?
 CAUSES of Unemployment
• High Population Growth
• Absence of employment opportunities
• Seasonal Employment
• Joint Family System
• Increasing turnout of students
 CAUSES of Unemployment
• Slow Developing of Industries
• Insufficient Rate of Economic progress
 Economic and
Social Costs of
Unemployment
• Private costs for the unemployed
– Loss of income
– Fall in real living standards
– Increased health risks
• Stress
• Reduction in quality diet
• Social exclusion because of loss of work and income
• Loss of marketable skills (human capital) and
motivation
– The longer the duration of unemployment, the
lower the chances of finding fresh employment –
the unemployed become less attractive to
potential employers.
 Consequences of
Unemployment
• Economic Consequences for Businesses
– Negative consequences
• Fall in demand for goods and services
• Fall in demand for businesses further down the supply
chain
• Consider the negative multiplier effects from the
closure of a major employer in a town or city
 Positive
Consequences
• Bigger pool of surplus labor is available - but
still a problem if there is a plenty of structural
unemployment
• Less pressure to pay higher wages
• Less risk of industrial / strike action – fear of
job losses – leading to reduced trade union
power
 For Government
(Fiscal Policy)
• Increased spending on unemployment
benefits and other income – related state
welfare payments
• Fall in revenue from income tax and taxes on
consumer spending
• Fall in profits – reduction in revenue from
corporation tax
• May lead to rise in government borrowing
 Consequences for
the economy as a
whole
• Lost output (real GDP) from people being out
of work – the economy will be operating well
within its production frontier
• Unemployment seen as an inefficient way of
allocating resources – labor market failure?
• Fall in potential GDP – long term unemployed
may leave the labor force permanently
• Increase in the inequality – rise in relative
poverty
 Unemployment
Insurance

• A government program that partially

protects workers’ incomes when they
become unemployed
 Natural rate of unemployment
(NRU)
and
Non-Accelerating Inflation Rate of
Unemployment (NAIRU)
 Natural rate of unemployment (NRU)
• rate of unemployment that would occur if there were
no cyclical unemployment
• the unemployment rate that would exist in a growing
and healthy economy from the combination of
economic, social, and political factors that exist at a
given time
• unemployment rate that will prevail when the
economy is producing at its full employment
potential level of output
 Natural rate of unemployment (NRU)
• rate of unemployment when the labor market is in
equilibrium
• unemployment correlated with the ups and downs in
the business
• = frictional + structural unemployment
• merely an estimate
• related to two other important concepts: full
employment and potential real GDP
 At full employment
Actual unemployment rate=natural rate
Real GDP=potential real GDP

 Below full employment

Actual unemployment rate>natural rate
Real GDP<potential real GDP

 Above full employment

Actual unemployment rate<natural rate
Real GDP>potential real GDP
The natural rate of unemployment is the difference between those who
would like a job at the current wage rate – and those who are willing
and able to take a job. In the above diagram, it is the level (Q2-Q1)
 Factors that can cause NRU to change
Frictional
• Change in labor force characteristics unemployment
– More young people in the labor force
– Increase in the labor force with members who
have historically not participated the labor force
– Changing technology
Structural
– Globalization unemployment

Natural Rate of Unemployment and NAIRU

 Factors that can cause NRU to change
• Changes in public policy
• Minimum wage

Natural Rate of Unemployment and NAIRU

 Institutional factors that would
determine the NRU:
• Availability of job information. A factor in determining frictional unemployment and
how quickly the unemployed find a job.

• The level of benefits. Generous benefits may discourage workers from taking jobs at
the existing wage rate.

• Skills and Education. The quality of education and retraining schemes will influence
the level of occupational mobility.

• The degree of labor mobility. This refers to how easily workers can move to different
jobs within the economy, may be geographical or occupational.

• Flexibility of the labor market. Powerful trade unions may be able to restrict the supply
of labor to certain labor markets

• Hysteresis. A rise in unemployment caused by a recession may cause the natural rate of
unemployment to increase. This is because when workers are unemployed for a time
period they become deskilled and demotivated and are less able to get new jobs.

Natural Rate of Unemployment and NAIRU

 The President is concerned that a recent financial crisis will increase the
natural rate of unemployment. After three quarters of negative economic
growth, the unemployment rate now stands at 10% and she fears it will
persist at this level indefinitely. As the President’s economic advisor, which
possible reply to the President’s concerns most agrees with the natural rate
of unemployment theory?

o As the recession has increased the cyclical unemployment, the natural rate
of unemployment has indeed increased as a result of this crisis.
o The natural rate of unemployment is calculated independently of the
cyclical or structural unemployment rates.
o All else being equal, the cyclical unemployment brought about by the
recession will not affect the natural rate of unemployment.

Natural Rate of Unemployment and NAIRU

 Economists have calculated that the natural rate of unemployment for
the small kingdom of Illyria is 4%. During an unprecedented economic
boom, the actual rate of unemployment has decreased to a mere 3%.
Assuming the economists’ calculations are accurate, which of the
following is a likely outcome for the Illyrian economy?
o The economists’ calculations cannot possibly be accurate as the real
unemployment rate cannot fall below the natural unemployment rate
by definition.
o Economic growth will slow in future quarters until real GDP is equal to
potential real GDP and the unemployment rate equals 4%.
o The structural rate of unemployment will drop until the natural rate of
unemployment equals the current employment rate 3%.

Natural Rate of Unemployment and NAIRU

 Non-accelerating inflation rate of
unemployment (NAIRU)
• determines how many people get jobs and how
much money working people get paid
• Is the rate of unemployment consistent with a
stable rate of inflation
• the idea is that inflation will tend to rise if the
unemployment rate falls below the natural rate
• represents equilibrium between the state of the
economy and the labor market.

Natural Rate of Unemployment and NAIRU

 Non-accelerating inflation rate of
unemployment (NAIRU)
• also referred to as the long-run Phillips curve
• is the specific level of unemployment that is
evident in an economy that does not
cause inflation to rise up
• Is estimated by using using the historical
relationship between the unemployment rate
and changes in the rate of inflation.

Natural Rate of Unemployment and NAIRU

 Legend: AD- Aggregate demand
LS-Labor supply
UE- Unemployment
NAIRU INF- Inflation

AD WAGES LS UE

unemployment
returns to its
original or natural LS WAGES INF
rate of
unemployment

Natural Rate of Unemployment and NAIRU