Chapter 27 Unemployment David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith Some key terms ■ Unemployment rate: – ■ Labour force – ■ the percentage of the labour force without a job but registered as being willing and available for work those people holding a job or registered as being willing and available for work Participation rate – the percentage of the population of working age declaring themselves to be in the labour force 27.2 Unemployment in the UK, 1950-99 14 12 % p.a 10 Source: Economic Trends Annual Supplement, Labour Market Trends 27.3 Unemployment (%) in selected countries 14 12 10 % 1972 UK 1982 Ireland France 1999 EU USA 27.4 Labour market flows It is tempting to see the labour market in static terms Working Unemployed Out of the labour force but 27.5 Labour market flows New hires Recalls Working Job-losers Lay-offs Quits Discouraged workers Retiring Temporarily leaving Taking a job Unemployed Out of the labour force Re-entrants New entrants 27.6 More on labour market flows The size of these flows is surprisingly high ■ In 1999 unemployment in the UK began at 1.29 million ■ During the year: ■ – – 3.14 million became unemployed but 3.3 million left the ranks of the unemployed 27.7 The composition of unemployment ■ Different groups in society are more vulnerable to unemployment, varying by: age – gender – region – ethnic origin – 27.8 Types of unemployment ■ Frictional – ■ the irreducible minimum level of unemployment in a dynamic society ■ people between jobs ■ the ‘almost unemployable’ Structural – unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes ■ it takes time for ex-coal miners to retrain as international bankers 27.9 Types of unemployment (2) ■ ■ Demand-deficient unemployment – occurs when output is below full capacity – ‘Keynesian’ unemployment occurs in the transitional period before wages and prices have fully adjusted Classical unemployment – created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect 27.10 A ‘modern’ view of unemployment A similar categorization is retained, but an important distinction is to be noted between: ■ Voluntary unemployment ■ – ■ when a worker chooses not to accept a job at the going wage rate Involuntary unemployment – when a worker would be willing to accept a job at the going wage but cannot get an offer 27.11 The natural rate of unemployment Real wage AJ w* E F N* N1 Number of workers LF LD: labour demand LF: size of labour force AJ: the number of workers prepared to accept jobs AJ is to the left of LF because some members of the labour force are between jobs, others are LD waiting for better offers Equilibrium is at w*, N* The distance EF is the natural rate of unemployment 27.12 The natural rate of unemployment ■ The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium ■ This is entirely voluntary ■ It includes: – frictional unemployment – structural unemployment 27.13 Real wage Classical unemployment w2 w* AJ A B C LF Suppose that union power succeeds in maintaining a real wage of w2 Equilibrium is at A and unemployment is AC, of which BC is voluntary LD and AB is involuntary N2 N* N1 Number of workers To the extent that this unemployment reflects a conscious decision by unions to restrict employment, it is voluntary unemployment 27.14 UK unemployment 1956-95 12 10 % 56-59 60-8 69-73 Actual rate 74-80 81-87 88-90 91-95 Natural rate 27.15 Supply-side economics ■ entails the use of microeconomic incentives to alter – – – ■ the level of full employment the level of potential output the natural rate of unemployment In the long run the performance of the economy can only be changed only by affecting the level of full employment and the corresponding level of potential output 27.16 Real wage Tax cuts and unemployment w1 w2 w3 AJ A E B N1 N2 LF With an income tax, the gross wage paid by firms (w1) is higher than the take-home net pay of workers (w3) Equilibrium is at N1 F AB is the amount of tax C Unemployment is BC Without tax, equilibrium LD is at E Unemployment is now EF Number of workers EF is less than BC because of the relative slopes of LF & AJ but the differences may not be substantial 27.17 Other supply-side policies ■ Trade union reform – ■ reducing the power of trade unions may limit distortions in the labour market Other labour supply policies – training and retraining measures – improving the efficiency of the labour market ■ ■ such measures may affect frictional and structural unemployment Investment – higher investment may increase the demand for labour ■ may be achieved via tax incentives or low interest rates 27.18 Hysteresis ■ The idea that a (short-run) fall in labour demand may lead to a permanent fall in labour supply ■ This could help to explain high and persistent unemployment in Europe in the 1980s 27.19 Hysteresis (continued) ■ Four channels: – Insider-outsider distinction ■ – Discouraged workers ■ – people stop looking for jobs Search and mismatch ■ – only those in work take part in wage bargaining & they protect their own positions firms and workers get used to low search capital stock ■ low levels of investment in recession lead to permanently low capital stock levels 27.20 [...]... employment, it is voluntary unemployment 27.14 UK unemployment 1956-95 12 10 8 % 6 4 2 0 56-59 60-8 69-73 Actual rate 74-80 81-87 88-90 91-95 Natural rate 27.15 Supply-side economics ■ entails the use of microeconomic incentives to alter – – – ■ the level of full employment the level of potential output the natural rate of unemployment In the long run the performance of the economy can only be changed