MGEA06H3 Lecture 2: Intro to Macro: Lecture 2

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University of Toronto Scarborough
Economics for Management Studies
Iris Au

Week 2: Ch. 8 - Unemployment and Inflation THE UNEMPLOYMENT RATE 1) Employed (E): paid job, FT/PT 2) Unemployed (U): actively searching for job during past four weeks; but don’t have one 3) Not in Labour Force (NILF): do not have job and not searching for one. **Labour Force doesn’t include soldiers, FT students, mat leave, etc; With these three population groups, we can calculate: 1) Labour Force (LF) = E + U, employed + unemployed 2) Labour Force Participation Rate (LFPR): % of adult population in labour force = (Labour Force / Adult Population) *100% 3) Unemployment Rate (ur): % of unemployed labour force = (# of Unemployed / LF) *100% 4) Employment Rate (er): % of employed adult population = (# of employed/Adult Pop.) *100% ***ER is NOT = 1 - UR EX) LFPR = (Labour Force / Adult Population) *100% = (17986.8+1364.8)/29401.2 = 66% ur = (# of Unemployed / LF) *100% = 1364.8/(17986.8+1364.8) = 7% er = (# of employed/Adult Pop.) *100% = 17986.8 / 29401.2 = 61% SIGNIFICANCE of the Unemployment Rate ➔ The UR tells what's happening in labour market (how easy/hard to get job) ➔ Need to interpret the UR carefully since it varies across regions/age groups ➔ UR can overstate (higher) the true level of unemployment: I. They lie about being unemployed, for EI or benefits II. Takes time for workers to find work ➔ UR can understate (lower) the true level of unemployment: I. UR omits these groups when calculating: A. Discouraged - individuals who would like to work but have given up searching B. Marginally Attached - not currently working & have stopped seeking because waiting for employment to begin, ex) seasonal workers C. Underemployed - do work, but not to desired capacity NATURAL Rate of Unemployment (NRU) Frictional Unemployment: unemployment due to time workers spend in job search, it's inevitable because: I. In any given time, people quit - people try out different jobs until settling down II. People get fired ➔ Low level of frictional unemployment is normal & may be good to economy as it allows workers to find perfect job Structural Unemployment: caused by excess supply of labour at the prevailing wage, even in the long run. Arises from rigidities in labour market. Supply > Demand (# jobs) **Supply curve comes from Households, Demand curve from Firms **Structural Unemployment = excess supply & labour *Positive relationship between supply & wages & negative with demand a) higher wage, higher supply, lower demand b) Lower wage, lower supply, higher demand c) Equilibrium at supply = demand Wage Rigidities are caused by: 1) (Binding) Min. wages, ex) min wages > equilibrium or market clearing wages 2) Labour unions - bargain for wages higher than equilibrium (or market clearing) wages 3) Efficiency wages - firms paid workers higher than equilibrium (or market clearing) wages to promote productivity a) This reduces turnover, promotes productivity so higher wages 4) Side effects of government policies: a) Some policies have unintentional impact on UR, ex) EI leads to higher unemployment 5) Mismatch between employers/employees - mismatch between workers skills and skills required by employer Natural Rate of Unemployment (NRU): NOT a constant & changes over time ➔ UR normal to economy ➔ Economy’s unemployment rate in the long run ➔ UR rate that will not put any pressure on inflation rate Natural Unemployment = Frictional unemployment + Structural Unemployment Actual Unemployment = Natural Unemployment + Cyclical Unemployment **Actual UE is not necessarily = Natural UE CHANGES in NRU 1) Labour Force Characteristics: a) Young workers have higher UR because they're inexperienced/floppy a.i) If LF has many young workers, then NRU may be higher since frictional UE tends to be higher b) If labour force characterized by large amount of young workers: 2) Labour Market Institutions:
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