Econ 1010 chapter 21
- Unemployment is a problem due to two factors
o Lost production and incomes – very devastating to people as they cannot
afford their current standard of living as well as the prospects of others as
consumer consumption will surely decrease.
o Lost human capital – as unemployment increases there will be people
who will become unable to employ their intellectual capital to the fullest
capacity and thus will result as a loss to society as a whole.
- The working age population is the total number of people age 15 years and over.
The working age population is divided into two groups, those in the labour force
and those that are not. Members of the labour force are either employed or
- Labour force is the sum of the employed and the unemployed. The employed are
either full time or part time workers. And the part time workers either want part
time work (voluntary part time) or full time work (involuntary part time).
- To be counted as employed in the labour force survey a person must have either
a full time job or a part time job
- To be counted as unemployed a person must be available for work and must be
in these categories
o Without work but has made specific efforts to find a job within the
previous four weeks
o Laid off from a job and be waiting to be called back to work
o Waiting to start a new job within four weeks.
o People in the working population who are considered as neither
employed nor unemployed count towards the unemployed ratio.
- There are 4 indicators of the labour market
o The unemployed rate is the percentage of the people in the labour force
who are unemployed.
labourforce . And labour
force = number of people employed + number of people unemployed. The
unemployment rate fluctuates with the business cycle, it increases as a
recession deepens, reaches a peak after the recession ends, and decreases after a recovery gets going. The amount of unemployment is
an indicator of the extent to which people who want jobs can’t find them.
o The involuntary part time rate is the percentage of the people in the
labour force who work part time but want full time jobs
involuntary parttimerate= number of involuntary parttimeworkers x100
. Part time workers who want full time work are underemployed and thus
stats Canada counts their number.
o The labour force participation rate is the percentage of the working age
population who are members of the labour force
labourforce participationrate= labour force x100.
workingage population the
number of people in the labour force is an indicator of the wiliness of
people eof working age to take jobs.
o The employment to population ratio is the percentage of people of
working age who have jobs
employment¿ populationratio= number of peopleemployed x100
workingage population .
This ratio falls in recession and rises in an expansion. 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. The labour force participation rate and the employment to population
ratio have upward tends before the 1990 and then flatten off after 1990.
They fluctuate with the business cycle. The employment to population
ratio fluctuates more than the labour force participation rate and reflects
cyclical fluctuates in the unemployment rate.
- The unemployment rate is to measure the underutilization of labour resources
o Excludes some underutilized labour
o Some unemployment is unavoidable – is natural
- Underutilized labour excluded
o Marginally attached workers 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. A
subset of this group are discouraged workers Discouraged worker is a marginally attached worker who has
stopped looking for a job because of repeated failure to find one.
o Involuntary part time workers as they are partly unemployed when they
are currently responsible for part time work and is seeking for full time
- Natural unemployment - a part of the business market cycle, the constant
change will always force people to be unemployed and thus it is a natural part of
o The churning economy – transitions in economy such as voluntary,
involuntary turnovers, retirements and the expansion and contraction of
the market will destroy and create jobs.
The sources of unemployment – in the churning economy people
are unemployed when.
• Lose their jobs and search for another job
• Leave their jobs and search for another job
• Enter or re-enter the labour force to search for a job.
They end the unemployment when
• Are hired or recalled
• Withdraw from the labour force.
- People laid off from their jobs either permanently or temporarily are called job
losers. They account for more than half of the unemployment.
- People who voluntarily leave their jobs are called job leavers.
- People who enter or re-enter the labour force are called entrants and re-entrants.
o Entrants are people who are new to the job market such as newly grads
most of them spend time searching for a job.
o Re-entrants mainly consists of people who previously withdrawn from the
labour force. They are formerly discouraged workers.
- The unemployment that arises from normal labour turnover from people entering
and leaving the labour force and from the ongoing creation and destruction of
jobs is frictional unemployment. This is a sign of health in a dynamic growing
economy. This mainly consists of the screening and filtering of both workers and employers. People want to ensure that there are a good fit both economically and
within the workplace.
- The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or changes the locations of
jobs is called structural unemployment. This usually last longer than the frictional
as workers need to be retrained and fitted for the newly developed economy.
However, other jobs will tend to replace these automated jobs, but may require a
higher level of skill and thus is detrimental to older employees and elderly.
- Effective wage is a wage set above the going market wage, and it creates
unemployment just like the minimum wage does.
o Allows more supply of workers
o Attracts productive workers
o Stimulate greater work effort due to the opportunity cost of losing the job
o Worker turnover will be decreased and thus less recruitment and training
o The firm balances the benefit of the wage increase and the magnitude of
the extra payment.
- The higher than normal unemployment that arises at a business cycle trough and
the unusually low unemployment that exists at a business cy