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Chapter 9

Unemployment and its Natural Rate - Chapter 9.docx

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York University
ECON 1010
Frank Miller

Unemployment and its Natural Rate - Counties that save and invest high fraction of their income enjoy more rapid growth in capital stock and GDP - Natural rate of unemployment: refers to amount of unemployment that the economy normally experiences - Cyclical unemployment: refers to year-to-year fluctuations in unemployment around its natural rate o Associated with short-run ups and downs of economic activity Need to measure the following: - How the government measures the economy’s rate of unemployment? - What problems arise in interpreting the unemployment data? - How long are the unemployed out of work? Identifying Unemployment How Unemployment is Measured - 50,000 households surveyed to produced data on unemployment and other aspects of labour market; Labour Force Survey o Employed: spending some of the previous week working at a paid job o Unemployed: person Is on temporary layoff or is looking for a job o Not in the labour force: person who is neither working or looking for a job; full-time students, home makers or those that are retired - Labour force: number of employed + number of unemployed; total numbers of workers - Unemployment rate: (number unemployed/labour force) x 100 - Labour force participation: (labour force/adult population) x 100 o Measures percent of adult population that is in the labour force o Fraction of the population that has chosen to participate in the labour market o Can be computed for more specific groups - Man-cession: during recession of 2009, labour market affected employment prospects of men more than those for women - Fall in oil and natural gas prices harmed economies in Western Canada but benefited areas in rest of the country Labour Force Participation Rate in Canadian Economy - Due to advent of new technology, it takes less time to do household tasks - This is attributable to improved birth control and changing women’s role due to evolving political and social attitudes - Men and women now playing almost equal role in the economy o Young men starting to stay in school longer o Old men retiring earlier and living longer o Some fathers stay at home to raise children Does Unemployment Rate Measure What We Want it To? - Some people may not be trying to find a job; temporarily laid off and waiting to be recalled to work - Some may want to be unemployed to receive EI or because they want to be paid under the table - Discouraged searchers: people who would like to work but have given up looking for a job - Workers may also be working part time when they want to work full-time; underemployed How Long are the Unemployed out of Work? - In 2009, unemployment lasted for 15.6 weeks - Averages vary from province to province - Average values hide the fact that there may be a wide dispersion of unemployment experiences across individuals; some might be unemployed for longer periods of time - Essential to direct policy initiatives towards those suffering from prolonged spells of unemployment Why are there Always Some People Unemployed? - Prices adjust to bring quantity supplied and quantity demanded into balance - In ideal market: wages would adjust to balance quantity of labour supplied and quantity demanded - This would ensure at all workers are employed; NOT REALISTIC - Always some people out of jobs - Natural rate of unemployment: rate of unemployment to which the economy tends to return in the long run; between 6 to 8 percent - Cyclical unemployment rate = observed unemployment – natural unemployment rate; arises due to short run fluctuations o Frictional unemployment: unemployment that results because it takes time for workers to search for jobs that best suit their tastes and skills o Structural unemployment: unemployment that results because the number of jobs available in some labour markets is insufficient to provide job for everyone who wants one Job Search - Process of matching workers with appropriate jobs - Workers differ in taste and skill, jobs differ in attributes and information about job candidates and job vacancies is dispersed slowly among many firms/households Why Some Frictional Unemployment is Inevitable - Frictional unemployment is often the result of changes in demand for labour among different firm - When one firm is doing better than another; there is a transition of labour - Sectoral shifts: changes in composition of demand among industries or regions; temporarily cause unemployment (takes time for workers to find job in new sectors) - Economies are readily changing so some unemployment is inevitable Public Policy and Job Search - Internet may help facilitate job search and reduce frictional unemployment - Natural rate of unemployment can decrease if policy can reduce time it takes unemployed workers to get a job o Government run employment agencies: give out information about job vacancies o Public training programs: aim to ease transition of workers from declining to growing industries and t help disadvantaged groups escape poverty Employment Insurance - A government program that partially protects workers’ incomes when they become unemployed - May cause the unemployment rate to be higher; people are getting free money for staying at home o # of hours worked in past year and unemployment rate in area of residence determine amount of EI someone receives - People may devote less effort to job search and readily turn down unattractive jobs - Likelihood of finding new employment increases near the end of the benefit period -
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