İktisada Giriş II Unemployment © 2007 Thomson South-Western© 2007 Thomson South-Western IDENTIFYING UNEMPLOYMENT How Is Unemployment Measured? • Categories of Unemployment – The problem of unemployment is usually divided into • two categories, the long-run problem and the short-run problem. The natural rate of unemployment • The cyclical rate of unemployment •© 2007 Thomson South-Western How is Unemployment Measured? Natural Rate of Unemployment • The natural rate of unemployment is unemployment • that does not go away on its own even in the long run. It is the amount of unemployment that the economy • experiences in the long-run.© 2007 Thomson South-Western How Is Unemployment Measured? Cyclical Unemployment • Cyclical unemployment refers to the year-to-year • fluctuations in unemployment around its natural rate. It is associated with short-term ups and downs of • the business cycle.© 2007 Thomson South-Western How Is Unemployment Measured? Describing Unemployment: Three Basic • Questions How does government measure the economy ’ s rate • of unemployment? What problems arise in measuring the • unemployment rate?© 2007 Thomson South-Western How Is Unemployment Measured? Unemployment is measured: • by the Bureau of Labor Statistics (BLS) in the US. • by the Turkish Statistical Institute (TURKSTAT) in • Turkey.© 2007 Thomson South-Western How Is Unemployment Measured? Every three months, TURKSTAT conducts • “Household Labor Force Surveys”. Based on the answers to the survey questions, • TURKSTAT places each adult (population over the age 15) into one of three categories: Employed (includes “Underemployed” as well) • Unemployed • Not in the labor force •© 2007 Thomson South-Western How Is Unemployment Measured? Population = Children + Adult Population • Adult Population = Employed + Unemployed + • Not in the Labor Force© 2007 Thomson South-Western How Is Unemployment Measured? Employed vs. unemployed • A person is considered employed if s/he has spent • some of the previous week working at a paid job. A person is unemployed if s/he is looking for a job, • is on temporary layoff, or is waiting for the start date of a new job.© 2007 Thomson South-Western How Is Unemployment Measured? A person is underemployed if s/he is looking for • another job because: not working full time when s/he wants to • not employed in his/her profession • getting paid too little. • A person who is not looking for a job, a full-time • student, a housewife, a retiree, ill, old or disabled is not in the labor force. © 2007 Thomson South-Western How Is Unemployment Measured? Labor Force • The labor force is the total number of workers, • including the employed and the unemployed. Labor Force = Employed + Unemployed.© 2007 Thomson South-Western How Is Unemployment Measured? The unemployment rate is calculated as the • percentage of the labor force that is unemployed. 100 x Force Labor Unemployed Number Rate nt Unemployme ?© 2007 Thomson South-Western How Is Unemployment Measured? The underemployment rate is calculated as the • percentage of the labor force that is underemployed. 100 x Force Labor yed Underemplo Number Rate yment Underemplo ?© 2007 Thomson South-Western How Is Unemployment Measured? The labor-force participation rate is the • percentage of the adult population that is in the labor force. Labor forc e particip ation rate Labor forc e Adult popu lation ? 100 X© 2007 Thomson South-Western How Is Unemployment Measured? Turkey ’ s figures show declining unemployment • rates during 2002-2004.© 2007 Thomson South-Western Figure 2 U.S. Unemployment Rate Since 1960 10 8 6 4 2 0 1970 1975 1960 1965 1980 1985 1990 2005 Percent of Labor Force 1995 2000 Natural rate of unemployment Unemployment rate© 2007 Thomson South-Western Figure 3 U.S. Labor Force Participation Rates for Men and Women Since 1950 100 80 60 40 20 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 2000 Labor-Force Participation Rate (in percent) Women Men 1995 2005© 2007 Thomson South-Western Problems in Measuring the Unemployment Rate It is difficult to distinguish between a person • who is unemployed and a person who is not in the labor force. Discouraged workers , people who would like to • work but have given up looking for jobs after an unsuccessful search, don ’ t show up in unemployment statistics. Other people may claim to be unemployed in order • to receive unemployment insurance , even though they aren ’ t looking for work.© 2007 Thomson South-Western Problems in Measuring the Unemployment Rate Existence of a large underground economy in • Turkey. Large numbers appear to be “not in the labor force” but in fact they work.© 2007 Thomson South-Western Why Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to • balance the supply and demand for labor, ensuring that all workers would be fully employed. Quantity of labor Wage Labor Supply Labor Demand W E Q E© 2007 Thomson South-Western Why Are There Always Some People Unemployed? Frictional unemployment refers to the • unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search • for the jobs that are best suit their tastes and skills.© 2007 Thomson South-Western Why Are There Always Some People Unemployed? Structural unemployment is the unemployment • that results because the quantity of labor demanded (# of jobs available) in some labor markets is always smaller than quantity of labor supplied. This is because the actual wage rate is kept above the equilibrium wage rate due to: Minimum wage laws • Unions • Efficiency wages •© 2007 Thomson South-Western Frictional Unemployment: JOB SEARCH Job search is the process by which workers • find appropriate jobs given their tastes and skills. It results from the fact that it takes time for • qualified individuals to be matched with appropriate jobs. Job search causes frictional unemployment. •© 2007 Thomson South-Western Frictional Unemployment: JOB SEARCH Job search is not due to a wage rate higher • than equilibrium. Therefore job search does not cause structural unemployment.© 2007 Thomson South-Western Why Some Frictional Unemployment Is Inevitable Frictional unemployment is inevitable because • the economy is always changing. Changes in the composition of demand among • industries or regions are called sectoral shifts . Ex: From agriculture towards manufacturing and services in Turkey. It takes time for workers to search for and find • jobs in new sectors. © 2007 Thomson South-Western Public Policy and Job Search Internet helps better information flow. • Government programs can reduce the time it • takes unemployed workers to find new jobs. These programs include the following: • Government-run employment agencies. Ex: Turkish • Job Placement Agency- T ü rkiye İ ş Kurumu Public training programs. • Unemployment insurance. •© 2007 Thomson South-Western Public Policy and Job Search Unemployment insurance is a program that • makes payments for a limited time to insured workers after they become unemployed. Aim is to protect workers. Unemployment insurance fund is supported by • current workers, employers and the government.© 2007 Thomson South-Western Public Policy and Job Search Unemployment insurance • improves the chances of workers being matched • with the jobs that better fit their skills and preferences. So may increase labor productivity. may increase the amount of frictional • unemployment. Because of less pressure to find a job, unemployed workers may reduce their job search effort.© 2007 Thomson South-Western Structural Unemployment Structural unemployment occurs when the • quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to • explain longer durations of unemployment. Why is there Structural Unemployment? • Minimum-wage laws • Unions • Efficiency wages •© 2007 Thomson South-Western MINIMUM-WAGE LAWS When the minimum wage is set above the level • that balances supply and demand, it creates unemployment. Minimum wage law (MWL) is not the most • important cause of structural unemployment because most wages are above the minimum wage. Therefore MWL is not binding for many workers. It is binding only for low skilled labor.© 2007 Thomson South-Western MINIMUM-WAGE LAWS In Turkey, • gross minimum wage: 562,50 YTL – net minimum wage: 403,02 YTL – 159,48 YTL difference includes income tax (15%), – social security premium (14%), unemployment insurance (1%) cost to employer: 683,44 YTL – 120,94 YTL difference includes social security – premium (19,5%), unemployment insurance (2%) © 2007 Thomson South-Western Figure 4 Unemployment from a Wage Above the Equilibrium Level Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage L D L S W E L E© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A union is a worker association that bargains • with employers over wages, benefits and working conditions. A union is a type of cartel attempting to exert • its market power. Union density is equal to union members / • labor force . 59% in Turkey, 30% in UK, 15% in US, 79% in Sweden, 88% Denmark.© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING The process by which unions and firms agree • on the terms of employment is called collective bargaining.© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A strike will be organized if the union and the • firm cannot reach an agreement. A strike occurs when the union organizes a – withdrawal of labor from the firm.© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A strike makes some workers better off and • other workers worse off. Workers in unions (insiders) reap the benefits • of collective bargaining, while workers not in the union (outsiders) bear some of the costs.© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING By acting as a cartel with ability to strike or • otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members. Union workers earn 10 to 20 percent more than • nonunion workers.© 2007 Thomson South-Western Are Unions Good or Bad for the Economy? Critics argue that unions cause the allocation of • labor to be inefficient and inequitable. Wages above the competitive level reduce the • quantity of labor demanded and cause unemployment. Employer lays off some of the workers to avoid bankruptcy. Unionized workers benefit at the expense of • workers in non-unionized sectors.© 2007 Thomson South-Western Are Unions Good or Bad for the Economy? Advocates of unions contend that unions are a • necessary antidote to the market power of firms that hire workers. They claim that unions are important for • helping firms respond efficiently to workers ’ concerns. In summary, it is a political debate. •© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES Efficiency wages are above-equilibrium wages • paid by firms in order to increase worker productivity. The theory of efficiency wages states that • workers operate more efficiently if wages are above the equilibrium level.© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES A firm may prefer higher than equilibrium • wages for the following reasons: Worker health: Better paid workers eat a better diet, get 1. better health services and thus are more productive. Worker turnover: A higher paid worker is less likely to 2. look for another job. Worker effort: Higher wages motivate workers to put 3. forward their best effort.© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES Worker quality: Higher wages attract a 4. better pool of workers to apply for jobs. EX: painting job. Two workers, one high quality: Erdem; one low quality: Cem. Erdem ’ s reservation wage is 10 YTL/hour, Cem ’ s is 2YTL/hour. Assume I cannot measure quality. Then if I offer 6 YTL/hour, only Cem will accept the job. Erdem will refuse. Asymmetric information causes high quality applicant to refuse. To prevent this, I offer 11 YTL/hour. Then I have 50% chance to get high quality applicant.