Unemployment and Labor Force Participation Outline Defining Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Labor Force Participation Defining Unemployment Working age population Number of people 16 years and older adults who are not in the military or institutionalized Unemployed adults who do not have a job but are looking for work Labor Force all workers employed plus unemployed Measuring Unemployment Unemployment rate the percent of the labor force without a job Unemployed Unemployed Unemployme nt rate 100 Unemployed Employed Labor force January 2012 12 758 million 12 758 Unemployme nt 100 8 3 12 758 mil 141 637mil 154 395 Is Unemployment a Good Indicator Discouraged workers workers who have given up looking for work but who would still like a job Are not counted as unemployed Account for 0 69 of the labor force Jan 2012 Involuntary part time workers workers who are working part time but would like a full time job Is Unemployment a Good Indicator Underemployment rate an alternative BLS measure that adds discouraged workers and the involuntary part time workers to the official unemployment rate In January 2012 the official unemployment rate was 8 3 while the underemployment rate was 15 1 The numbers of discouraged workers and involuntary part time workers go up during recessions Thousands of discouraged workers Discouraged Workers 1 400 1 200 1 000 800 600 400 200 0 Month Year Is Unemployment a Good Indicator Doesn t measure the quality of jobs or how well people are matched to their jobs Examples A taxi driver with a PhD in chemistry is counted as fully employed A worker with a part time job who wants to work fulltime is counted as fully employed Economists also look at other indicators Labor force participation rate Number of full time jobs Average wages Frictional Unemployment Frictional unemployment Short term unemployment caused by difficulties of matching employee to employer Scarcity of information creates frictional unemployment The internet has probably reduced frictional unemployment Frictional Unemployment Usually doesn t last very long 2005 a non recession year 35 of unemployment lasted less than 5 weeks 2010 as the economy slowly recovered from the recession 18 7 of unemployment lasted less than 5 weeks Let s take a look at the following figure Duration of Unemployment Frictional Unemployment Is a large share of total unemployment because the U S economy is so dynamic Creative Destruction Joseph Schumpeter progress is about creating new jobs and destroying old jobs It takes time to adjust to those shocks creating frictional unemployment Structural Unemployment Structural Unemployment Persistent long term unemployment Caused by long lasting shocks or permanent changes in the economy Oil shocks alternatives take time to create New information technologies create new industries and cause the disappearance of others Globalization decline of manufacturing and the rise of the service economy Structural Unemployment If it lasts long enough unemployment can become chronic The longer a worker is out of work his or her skills become less relevant Hiring managers are wary of hiring workers who have been unemployed for a long time Unemployment can become a trap Labor Regulations and Structural Unemployment In the U S unemployment increases with a shock then declines In Europe unemployment has increased with shocks but has not declined Labor Regulations Unemployment rates in the U S and Europe behave differently because of differences in labor regulations Unemployment benefits are more generous in Europe The benefit replacement rate is much higher in Europe Unemployment benefits last longer in Europe Benefit Replacement Minimum Wage Minimum wages are higher in Europe and unions are stronger The higher the minimum wage is above the market wage the greater unemployment will be Unions have the same effect We can use the supply and demand model to show these effects Minimum Wage Union Demands Wages Basic Dynamics What happens when the supply of labor shrinks in our model Quantity of labour Employment Protection Laws Employment at will doctrine says that an employee may quit and an employer may fire at any time and for any reason Most basic U S employment law Many exceptions race religion sex sexual orientation national origin age or handicap status European labor law is quite different Employment Protection Laws Portugal s law for example forbids at will employment Throughout Western Europe public law and collective bargaining not contracts govern work rules and benefits Results Greater job security Greater cost of hiring and firing workers Employment Protection Laws Greater cost of hiring and firing increases unemployment Once someone is hired it is very difficult to fire them even for cause World Bank rigidity of employment index the higher the index the greater the hiring and firing costs the next figure shows the effect of hiring and firing costs on long term unemployment Structural Unemployment Structural Unemployment In summary European labor regulations Create valuable insurance for workers with a full time job Make labor markets less flexible and dynamic Increase the duration of unemployment Increase unemployment rates among young minority or otherwise riskier workers Human capital is wasted Regulations to Reduce Structural Unemployment Active labor market policies like work tests job search assistance and retraining programs that focus on getting workers back to work Reducing unemployment benefits Adopting active labor market policies Allowing exceptions to collective bargaining agreements Insiders don t want to give up their benefits What Affects Unemployment Labor regulations Unemployment benefits Minimum wages Powerful unions Employment protection laws Policies that can reduce structural unemployment Job retraining Job search assistance Work tests Early employment bonuses Cyclical Unemployment Cyclical Unemployment unemployment that is correlated with the business cycle Lower growth is usually correlated with higher unemployment for two reasons 1 When GDP falls firms lay off workers 2 Idle labor and capital economic growth is not being maximized ability of the economy to create more jobs Cyclical Unemployment Cyclical Unemployment Cyclical Unemployment What causes cyclical unemployment Non Keynesians Caused by real shocks that require a reallocation of resources Cyclical unemployment is just another example of frictional and
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