102 CH 09 Unemployment

Overview
• Data used to measure unemployment

Unemployment • Unemployment and the process of job search
• Unemployment and minimum-wage laws
Chapter 9 • Unemployment and bargaining between firms
and unions
• Unemployment and the efficiency wage
1 2
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Categories of unemployment Three basic questions

• Natural Rate of Unemployment
– persists in the long run • How does government measure the
– unemployment that is normal in economy unemployment rate?
• Cyclical Unemployment • What problems arise in interpreting the
– year-to-year fluctuations in unemployment around unemployment data?
its natural rate • How long are the unemployed typically
– associated with with short-term ups and downs of without work?
the business cycle
3 4
How Is Unemployment Measured? How Is Unemployment Measured?
• Unemployment is measured by Statistics • Based on the answers to the survey

Canada questions, Statistics Canada places each
– It surveys 50,000 randomly selected adult (aged 15 and older) into one of three
households every month. categories:
– The survey is called the Labour Force Survey. – Employed
– Unemployed
– Not in the labour force
5 6
1
Working age population Employed person
• All civilian and non-institutionalized Employed persons are working-age

persons aged 15 or above inidividuals who, during the reference
• Link to Statistics Canada, Population week:
http://cansim2.statcan.gc.ca/cgi-win/cnsmcgi.pgm?Lang=E&SP_Action=Theme&SP_ID=3867&SP_Mode=2
• did any paid work at all or
• had a job but were not at work
7 8
Unemployed person Not--in-

Not in-labour
labour--force person
Unemployed persons are those who were • Persons 15 years of age and over who,
available for work in the past 4 weeks and: during the reference week, were neither
• were without work, and had actively looked for employed nor unemployed are classified
work in the past four weeks, or as not in the labour force.
• had not actively looked for work in the past four
weeks but were on temporary layoff, or
• had not actively looked for work in the past four
weeks but had a new job to start in four weeks
or less from the reference week.
9 10
Figure 1 The Breakdown of the Population in 2002

Labour force
Labour Force = Unemployed + Employed
11
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. ECON 213-170
2
The Unemployment Rate The participation rate
Number unemployed Labour Force

Unemployment rate = X 100 Labour Force Participation Rate = X 100
Labour Force Adult Population
13 14
Table 1 The Labor-

Labor-Market Experiences of Various
Demographic Groups
Statistics Canada
• Statistics Canada Labour Force Survey
15
Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Figure 2 Canadian and Regional Unemployment

Calculate labour force statistics Rates 1966
1966--2004
Compute the labour force, u-rate, adult population, and

labour force participation rate using this data:
Adult population by group, 2005
# of employed 16.17 million
# of unemployed 1.17 million
not in labour force 8.47 million
17
3
Figure 3 Labour Force Participation Rates for Men
and Women Since 1951
Measurement problems
Unemployed vs. not in the labour force.

• Discouraged searchers don’t show up in
unemployment statistics.
• Some may claim to be unemployed even
though they aren’t looking for work.
20
ECON 213-170 Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
Unemployment spells
• Most spells of unemployment are short.

• Policy solutions should be directed toward Labour Market Equilibrium
those suffering prolonged spells of
unemployment
21 22
Labor market equilibrium Natural rate of unemployment

• In an ideal labour market, wages would • The natural rate of unemployment is the
adjust to balance the supply and demand rate of unemployment to which the
for labour, ensuring that all workers would economy tends to return in the long run.
be fully employed. • In Canada, it is estimated that the natural
rate of unemployment is currently between
6 and 8 percent.
23 24
4
Frictional unemployment Structural unemployment
• results because the number of jobs

• It takes time for workers to search for the available in some labour markets is
jobs that are best suit their tastes and insufficient
skills. • occurs when the quantity of labour
• Frictional unemployment results from the supplied exceeds the quantity demanded
time that it takes to match workers with • is often thought to explain longer spells of
jobs. unemployment
25 26
Figure 4 Observed and Natural Unemployment

Rates, 1966-
1966-2005
Cyclical unemployment
• arises due to short-run economic

fluctuations.
27 28
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Copyright © 2006 Nelson,
ECON a division of Thomson Canada Ltd.
213-170
Why Some Frictional Unemployment is

Job search Inevitable
• Search unemployment is inevitable
• the process by which workers find because the economy is always changing.
appropriate jobs given their tastes and skills. • Changes in the composition of demand
• results from the fact that it takes time for among industries or regions are called
qualified individuals to find appropriate jobs. sectoral shifts.
• It takes time for workers to search for and
find jobs in new sectors.
29 30
5
Public Policy Employment Insurance programs
• Government-run employment agencies • Is intended to ease the burden of the

give information about job vacancies unemployed by temporarily providing them
with income.
• Public training programs aim to ease the • Economists believe that the EI program has
transition of workers from declining to reduced the incentive to work and has
growing industries and to help increased the natural rate of unemployment
disadvantaged groups to find jobs. • Yet economists disagree whether economic
well-being would be enhanced or
diminished by eliminating the program
31 32
Fig 4 Unemployment from a Wage Above

Equilibrium Level
Minimum wage laws
Wage
• When the minimum wage is set above the Surplus of labour

Labour
supply
level that balances supply and demand, it Unemployment
Minimum
creates unemployment. wage
WE
Labour
demand
0 LD LE LS Quantity of
Labour
33
Minimum wage in the US UNIONS

• Senate proposals to raise the minimum wage were rejected Wednesday,
making it unlikely that the lowest allowable wage, $5.15 an hour since
1997, will rise in the foreseeable future. • A union is a worker association that
• [Union] President John Sweeney said minimum wage workers "deserve a
pay raise — plain and simple — no strings attached."
bargains with employers over wages and
working conditions.
• "It is appalling that the same right-wing leaders in Congress who have
given themselves seven pay raises since the last minimum wage increase
have voted down the modest minimum wage increase proposed by the
• As of 2002, 26 percent of all Canadian
Kennedy amendment," he said in a statement. workers belonged to unions.
• But Republican opponents, echoing the arguments of business groups,
said higher minimum wages can work against the poor if they force small • In the1940s and 1950s, union membership
businesses to cut payrolls or go out of business.
as a fraction of the labour force was
"Mandated hikes in the minimum wage do not cure poverty and they
clearly do not create jobs," said Sen. Mike Enzi, R-Wyo., who offered the considerably smaller, at just 10 percent in
Republican alternative.
1941 and 20 percent in 1951.
35 36
6
COLLECTIVE BARGAINING Insiders vs. outsiders
• The process by which unions and firms • A strike makes some workers better off
agree on the terms of employment is and other workers worse off.
called collective bargaining • Workers in unions (insiders) reap the
A strike benefits of collective bargaining, while
– the union organizes a work cease workers not in the union (outsiders) bear
– organized when the union and the firm cannot some of the costs.
reach an agreement
37 38
Unions have (labour) market

Criticism of unions
power
• By acting as a cartel with ability to strike or • Critics argue that unions cause the
otherwise impose high costs on allocation of labour to be inefficient and
employers, unions usually achieve above- inequitable.
equilibrium wages for their members. • Wages above the competitive level reduce
• Union workers earn 10 to 20 percent more the quantity of labour demanded and
than nonunion workers. cause unemployment.
• Some workers benefit at the expense of
other workers.
39 40
Arguments in favour Efficiency wage theory
• Unions are a necessary to offset the

market power of firms • Efficiency wages are above-equilibrium
• Unions are important for helping firms wages paid by firms in order to increase
respond efficiently to workers’ concerns worker productivity.
41 42
7
The efficiency wage theory
• A firm may prefer higher than equilibrium
wages for the following reasons:
– Improve workers’ health
– Reduce worker turnover
– Induce higher effort and commitment
– Attract better qualified workers
43
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102 CH 09 Unemployment

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102 CH 09 Unemployment

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Overview

• Data used to measure unemployment

Categories of unemployment Three basic questions

How Is Unemployment Measured? How Is Unemployment Measured?

• Unemployment is measured by Statistics • Based on the answers to the survey

• All civilian and non-institutionalized Employed persons are working-age

Unemployed person Not--in-

Figure 1 The Breakdown of the Population in 2002

Labour Force = Unemployed + Employed

Number unemployed Labour Force

Table 1 The Labor-

Figure 2 Canadian and Regional Unemployment

Compute the labour force, u-rate, adult population, and

Adult population by group, 2005

# of employed 16.17 million

# of unemployed 1.17 million

not in labour force 8.47 million

Unemployed vs. not in the labour force.

• Most spells of unemployment are short.

Labor market equilibrium Natural rate of unemployment

• results because the number of jobs

Figure 4 Observed and Natural Unemployment

• arises due to short-run economic

Why Some Frictional Unemployment is

• Government-run employment agencies • Is intended to ease the burden of the

Fig 4 Unemployment from a Wage Above

• When the minimum wage is set above the Surplus of labour

Minimum wage in the US UNIONS

Unions have (labour) market

Arguments in favour Efficiency wage theory

• Unions are a necessary to offset the

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