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Economic Notes - Jan 16.docx

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Western University
Economics 1022A/B
Jeannie A Gillmore

Economics – Textbook Notes Chapter 21 – Monitoring Jobs and Inflation Employment and Unemployment Why Unemployment is a Problem Unemployment is a serious problem. It results in: 1. Lost production and incomes 2. Lost human capital a. Prolonged unemployment permanently damages a person’s job prospects by destroying human capital Labour Force Survey The population is divided into two broad groups: The working age population and others who are too young to work, or who live in institutions and are unable to work. The working age population is the total number of people age 15 years and over  It is divided into two groups: o People in the labour force – the sum of the employed and unemployed  The employed are either full-time or part-time workers; part-time workers are voluntary part-time or involuntary part-time o People not in the labour force  To be counted as employed in the Labour Force Survey, a person must have either a full-tine job or a part-time job  To be counted as unemployed, a person must be available for work and must be in one of three categories: o Without work but has made specific efforts to find a job within the previous 4 weeks o Laid off from a job and be waiting to be called back to work o Waiting to start a new job within 4 weeks Four Labour Market Indicators There are four indicators of the labour market. They are: 1. The Unemployment Rate a. The amount of unemployment is an indicator of the extent to which people who want jobs cant find them b. The unemployment rate is the percentage of the people in the labour force who are unemployed i. ii. 2. The Involuntary Part-Time Rate a. Part-time workers who want full-time work are underemployed b. The involuntary part-time rate is the percentage of the people in the labour force who work part time but want full-time jobs i. 3. The Labour Force Participation Rate a. The number of people in the labour force is an indicator of the willingness of people of working age to take jobs b. The labour force participation rate is the percentage of the working age population who are members of the labour force i. 4. The Employment-to-Population Ratio a. The number of people of working age who have jobs is an indicator of both the availability of jobs and the degree of match between people’s skills and jobs b. The employment-to-population ratio is the percentage of people of working age who have jobs i. Unemployment and Full Employment The purpose of the unemployment rate is to measure the underutilization of labour resources, but it is an imperfect measure for two sets of reasons:  It excludes some underutilized labour  Some underemployment is unavoidable – is “natural” Underutilized Labour Excluded Two types of underutilized labour are excluded from the official unemployment measure. They are:  Marginally Attached Workers o A marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past  Subset: A discouraged worker is a marginally attached worker who has stopped looking for a job because of repeated failure to find one  Part-time Workers Who Want Full-time Jobs o Some part-time workers would like full-time jobs, but can’t find them o These workers are called involuntary part-timers and they are partially unemployed “Natural” UnemploymentThere is always someone without a job who is searching for one – it is a churning economy.  The Churning Economy o The process of business creation, expansion, contraction, and failure creates and destroys jobs o People who were in school graduate and try to find a job, and people may become unhappy with a job and look for a new one  The Sources of Unemployment o People become unemployed if they:  Lose their jobs and search for another job  Leave their jobs and search for another job  Enter of reenter the labour force to search for a job o And people end a spell of unemployment if they:  Are hired or recalled  Withdraw from the labour force o Job losers  people who are laid off form their jobs, either permanently or temporarily  Biggest source of unemployment o Job leavers  people who voluntarily quit their jobs  Smallest source of unemployment o Entrants/Reentrants  people who enter or reenter the labour force  Frictions, Structural Change, and Cycles o The unemployment that arises from normal labour turnover is frictional unemployment  A permanent and healthy phenomenon in a dynamic, growing economy  People search for a job that is the best match of their skills and interests with the available jobs and find a satisfying job and a good income  While these unemployed people are searching, their unemployment is frictional o The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs is called structural unemployment  Usually lasts longer than frictional unemployment o An efficiency wage is a wage set above the going market wage, and it creates unemployment just like the minimum wage does  It enables the firm to face a steady stream of available new workers  It attracts the most productive workers  The fear of losing a well-paid job stimulates greater work effort  Workers are less likely to quit their jobs o The higher-than-normal unemployment that arises at a business cycle trough and the unusually low unemployment that exists at a business cycle peak is called cyclical unemployment  A worker who is laid off in a recession, but is rehired later in the expansion  What is “Natural” Unemployment o Natural unemployment is the unemployment that arises from normal frictions and structural change when there is no cyclical unemployment  Natural unemployment as a percentage of the labour force is called the natural unemployment rate o Full employment is a situation in which the unemployment rate equals the natural unemployment rate  When there is “full employment” and the unemployment rate at full employment is the “natural rate,” it is the unemployment that results from natural physical
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