EC 111 1st Edition Lecture 11PREVIOUS LECTUREI. Budget Deficits, Crowding Out, and Long-Run GrowthII. The US Government DebtIII. ConclusionIV. Labor Force StatisticsV. What Does the Unemployment Rate Really Measure?VI. The Duration of UnemploymentCURRENT LECTUREI. Cyclical Unemployment vs The Natural RateII. Explaining the Natural Rate: An OverviewIII. Job SearchIV. Public Policy and Job SearchV. Unemployment InsuranceVI. Explaining Structural UnemploymentCYLICAL UNEMPLOYMENT VS THE NATURAL RATE- There’s always some unemployment, though the u-rate fluctuates from year to year- Natural Rate of Unemploymento The normal rate of unemployment around which the actual unemployment rate fluctuateso We always have some unemployment- Cyclical Unemploymento The deviation of unemployment from its natural rateo Associated with business cycles, which we’ll study in later chaptersEXPLAINING THE NATURAL RATE: AN OVERVIEW- Even when the economy is doing well, there is always some unemployment- Frictional unemploymento Occurs when workers spend time searching for the jobs that best suit their skills and tasteso Short term for most workers- Structural unemploymento Occurs when there are fewer jobs than workerso Usually long termJOB SEARCH- Workers have different tastes and skills and jobs have different requirements- Job Search: is the process of matching workers with appropriate jobs- Sectorial Shifts: changes in the composition of demand across industries or regions of the country- Such shifts displace some workers who mist search for new jobs appropriate for their skills and tastes- The economy is always changing, so some frictional unemployment is inevitablePUBLIC POLICY AND JOB SEARCH- Government employment agencieso Provide information about job vacancies to speed up the matching of workers with jobs- Public training programso Aim to equip workers displaced from declining industries with the skills needed in growing industriesUNEMPLOYMENT INSURANCE- Unemployment Insurance: a government program that partially protects workers’ incomes when they become unemployed- Unemployment insurance increases frictional unemploymento People respond to incentives- Unemployment insurance benefits end when a worker takes a job so workers have less incentive to search or take jobs whole eligible to receive benefits- Increasing or extending unemployment insurance raises frictional unemployment- Benefits of unemployment insuranceo Reduces uncertainty over incomeso Gives the unemployed more time to search, resulting in better job matches and thus higher productivityEXPLAINING STRUCTURAL UNEMPLOYMENT- Structural unemployment occurs when not enough jobs to go around- Occurs when wage is kept above equilibrium- There are three reasons for this:1. Minimum-Wage Laws:a. The minimum wage may exceed the equilibrium wage for the least skilled or experienced workers causing structural unemploymentb. But this group is a small part of the labor force, so the minimum wage cant explain most unemploymentc. But increasing the minimum wage raises structural unemployment by increasing the quantity supplied of labor and decreasing the quantity demanded of labor 2. Unionsa. Union: a worker association that bargains collectively with employers over wages, benefits, and working conditionsb. Unions exert their market power to negotiate for higher wagesc. When unions bargain successfully, wages and unemployment rises in that industryd. The typical union worker earns 15 to 20% higher wages and get more benefits than a nonunion worker for the sametype of worke. When unions are successful, wages rise above the market equilibrium. As a result the quantity supplied of labor rises and the quantity demanded of labor falls and unemployment risesf. Insiders: workers who remain employed they are better offg. Outsiders: workers who lose their jobs, they are worse offh. Some outsiders go to nonunionized labor markets, which increases labor supply and reduces wages in those marketsi. Are unions good or bad?i. Critics: unions are cartels. They raise wages above equilibrium which causes unemployment and or depresses wages in non-union labor marketsii. Advocates: unions counter the market power of large firms make firms more responsive to workers’ concerns3. Efficiency Wagesa. Efficiency Wages: firms voluntarily pay above equilibrium wages to boost worker productivity. And by increasing worker productivity, the firm’s profit can increase as wellb. Four reasons why firms might pay higher wagesi. Worker Health: in less developed countries, poor nutrition is a common problem. Paying higher wagesallows workers to eat better, making them healthier and more prodctiveii. Worker Turnover: hiring and training new workers is costly. Paying high wages gives workers more incentive to stay and reduces turnover (restaurant industry)iii. Worker Quality: offering higher wages attracts better job applicants increases quality of the firm’s work forceiv. Worker Effort: workers can work hard or shirk. Shirkers are often fired is they are caught. Is beingfired a good deterrent? Depends on how hard it is to find another job. If market wage is above equilibrium wage, there aren’t enough jobs to go around, so workers have more incentive to work. (Big in industries that are paid by output, not by hours)Explainging the natural rate of unemployment: a summary- The natural rate of unemploymenr consists ofo Frictional unemployment It takes time the search for the right jobs Occurs even if there are enough jobs to go aroundo Structural unemployment When wage is above equilibrium not enough jobs Due to minimum wage labor unions and efficiency wages- In later chapters we will learn about cyclical unemployment. The short term fluctuations in unemployment associated with business