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Chapter 21.doc

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Rizwan Tahir

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Chapter 21: Monitoring Jobs and Inflation Tuesday, January 15, 2013 1:33 PM Why Unemployment is a Problem o Results in lost incomes and production, human capital o Unemployment benefits create safety net but don't fully replace lost wages, not everyone receives benefits o Prolonged unemployment permanently damages person's job prospects by destroying human capital Labour Force Survey o Population divided into two groups: ‒ Working-age population: number of people aged 15> who are not in institutional care  People in labour force (employed)  People not in labour force (unemployed- finding job, waiting to be called back to previous job, waiting to start new job)  Labour force: sum of employed and unemployed workers ‒ People too young to work (<15) or in institutional care Four Labour Market Indicators o Unemployment rate ‒ Percentage of labour force that is unemployed ‒ (Number of people unemployed / labour force ) x 100 ‒ Increases in recession and reaches peak value after recession ends o Involuntary part-time rate ‒ Percentage of labour force who work part time but want full time jobs ‒ (number of involuntary part time works / labour force) x 100 o Labour force participation rate ‒ Percentage of working-age population who are members of labour force ‒ (labour force / working-age population) x 100 o Employment-to-population ratio ‒ Percentage of working-age population who have jobs ‒ (employment / working-age population) x 100 Other Definitions of Unemployment o Purpose of unemployment rate is to measure underutilization of labour resources o Official measure is imperfect because excludes: ‒ marginally attached workers • Person who currently is neither working nor looking for work but wants and is available for job and has looked for work sometime in recent past • Discouraged worker: marginally attached worker who has stopped looking for job because of repeated failures to find one ‒ part time workers who want full time jobs (involuntary part time) • Want full-time jobs but can't find them • In official stats, workers are called economic part-time workers, partly unemployed • Most costly unemployment is long term unemployment that results from job loss o Over 25, short term unemployment rate is low and only fluctuates slightly o Under 25, short term unemployment rate is high and fluctuates more strongly Can be classified into 3 types… a. Frictional Unemployment o Unemployment that arises from normal labour market turnover o Increases number of people entering/reentering labour force and increases in unemployment benefits raise frictional unemployment o Frictional unemployment is permanent and healthy for growing economy a. Structural Unemployment o Unemployment created by changes in technology and foreign competition that change skills needed to perform jobs or locations of jobs o Lasts longer than frictional unemployment a. Cyclical Unemployment o Is higher than normal unemployment at business cycle trough and lower than normal unemployment at business cycle peak o Ex. worker laid off because in recession and then rehired when expansion begins = cycle unemployment "Natural" Unemployment o Is the unemployment that arises from frictions and structural change when there is no cyclical unemployment o Natural unemployment rate is natural unemployment as percentage of labour force o Changes over time, key factors: ‒ Age distribution of population • Economy with young population has larger number of new job seekers every year • Has high level of frictional unemployment  Scale of structural change • Technological upheaval- when pace and volume of technological change and change is driven by international competition increases • Natural unemployment increases  Real wage rate • Natural unemployment increases if minimum wage is raised to exceed equilibrium wage rate • Or if more firms use efficiency wage (wage set above equilibrium real wage to enable firm to attract most productive workers, motivate them to work hard, not quit)  Unemployment benefits • Unemployment benefits increase natural unemployment by lowering opportunity cost of job search Full Employment •Situation where unemployment rate = natural un
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