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Chapter

Week 9 chapter notes


Department
Economics for Management Studies
Course Code
MGEB06H3
Professor
Jack Parkinson

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Chapter 6 Unemployment Notes
x natural rate of unemployment Æ the steady-state rate of unemployment toward which the economy gravitates in the long run
x another term that is often used for the natural unemployment rate is the level of “structural” and “frictional” unemployment
x unemployment rises above the long-run average level when the economy is in a recession and it falls below this level when the
economy is overheated—this short-run variations are referred to as cyclical unemployment
6.1 Job Loss, Job Finding, and the Natural Rate of Unemployment
x let L denote the labour force, E the number of employed workers, and U the number of unemployed workers
x because every worker is either employed or unemployed, the labour force is the sum of the 2: L = E + U
x in this notation, the rate of unemployment is U / L
x let s denote the rate of job separation, the fraction of employed individuals who lose or leave their job each month
x let f denote the rate of job finding, the fraction of unemployed individuals who find a job each month
x together, the rate of job separation s and the rate of job finding f determine the rate of unemployment
x if the unemployment rate is neither rising nor falling—that is, if the labour market is in a steady state—then the number of
people finding jobs fU must equal the number of people losing jobs sE fU = sE
Æ
fU = s (L – U)
Æ
f (U / L) = s (1 – U / L)
x solving for U/L U / L = [s / (s + f)] = [1 / (1 + f / s)]
x this equation shows that the steady-state rate of unemployment U/L depends on the rates of job separation s and job finding f
x the higher the rate of job separation, the higher the unemployment rate
x the higher the rate of job finding, the lower the unemployment rate
x any policy aimed at lowering natural unemployment rate must reduce the rate of job separation or increase the rate of job finding
x any policy that affects the rate of job separation or job finding also changes the natural rate of unemployment
6.2 Job Search and Frictional Unemployment
x frictional unemployment Æ results because it takes time for workers to search for the jobs that best suit their skills and tastes
x sectoral shift Æ a change in the composition of demand among industries or regions
Public Policy and Frictional Unemployment
x government employment agencies disseminate info about job vacancies with view to matching jobs and workers more efficiently
x publicly funded retraining programs are designed to ease the transition of workers from declining to growing industries
x if these programs succeed at increasing the rate of job finding, they decrease the natural rate of unemployment
x employment insurance (EI) Æ government program under which unemployed collect benefits for certain period after losing jobs
x by softening economic hardship of unemployment, EI increases amount of frictional unemployment and raises natural rate
x unemployed who receive EI benefits are less pressed to search fro new employment and may turn down unattractive job offers
x in addition, because workers know that their incomes are partially protected by EI, they are less likely to seek jobs with stable
employment prospects and are less likely to bargain for guarantees of job security
x these behavioural changes raise the rate of job separation
x the program has the benefit of reducing workers’ uncertainty about their incomes
x moreover, inducing workers to reject unattractive job offers may lead to a better matching between workers and jobs
6.3 Real-Wage Rigidity and Structural Unemployment
x wage rigidity Æ the failure of wages to adjust to equilibrate labour supply and labour demand
x when the real wage is above the level that equilibrates supply and demand, the quantity of labour supplied exceeds demand
x firms must in some way ration the scarce jobs among workers
x real-wage rigidity reduces the rate of job finding and raises the level of unemployment
x structural unemployment Æ the unemployment resulting from wage rigidity and job rationing
x workers are unemployed not because they are actively searching for the jobs that best suit their individual skills but because there
is a fundamental mismatch between the number of people who want to work and the number of jobs available
x at the going wage, the quantity of labour supplied exceeds demand, so many workers are simply waiting for jobs to open up
Minimum-Wage Laws
x the government causes wage rigidity when it prevents wages from falling to equilibrium levels
x minimum-wage laws set a legal minimum on the wages that firms pay their employees
x for most workers, this minimum wage is not binding because they earn well above the minimum
x yet for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above its equilibrium
level and therefore reduces the quantity of their labour that firms demand
x many believe that tax credits are a better way than raising the minimum wage to increase the incomes of the working poor
Unions and Collective Bargaining
x a second cause of wage rigidity is the monopoly power of unions
x wages of unionized workers are by bargaining between union leaders and firm management, where, often, the final agreement
raises the wage above the equilibrium level and allows the firm to decide how many workers to employ
x the result is a reduction in the number of workers hired, a lower rate of job finding, and an increase in structural unemployment
x unions can also influence the wages paid by firms whose work forces are not unionized because the threat of unionization can
keep wages above the equilibrium level, which leads most firms to dislike unions
x unions not only raise wages but also increase the bargaining power of labour on many other issues, such as hours of employment
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