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Unemployment and the Labour Market

Unemployment and the Labour Market. The Labour Market. Sellers The sellers in this market are those who decide to enter the labour market and provide their labour skills in exchange for income. Buyers The buyers in this market are employers who are willing to pay wages and

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Unemployment and the Labour Market

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  1. Unemployment and the Labour Market

  2. The Labour Market Sellers The sellers in this market are those who decide to enter the labour market and provide their labour skills in exchange for income Buyers The buyers in this market are employers who are willing to pay wages and salaries for labour services Labour Market Wage levels are partly determined by the interaction of the demand for labour and supply of labour. Other factors will influence wage levels including union/management agreements, legal stipulations such as minimum wage, etc.

  3. Problems in the Labour Market • If the demand for labour exceeds the supply, there will be a shortage of labour to produce g/s - this can affect productivity, output, prices, economic growth, etc • When the amount of labour sought by buyers is less than the amount offered by sellers there is problems with unemployment. Therefore, it is important to be aware of factors affecting the demand for, and supply of, labour

  4. Graph Explained • As wages rise, more people will tend to enter the labour force to seek employment • Therefore the supply curve for labour slopes up to the right • As wages fall, employers will tend to employ more people • Therefore the demand curve for labour slopes down to the right

  5. Graph Explained (con’t) • If the average wage level was W1, the supply of labour would be greater than demand - Problem: unemployment • If the average wage was W2, too few people would be willing to offer their services to carry out production - Problem: labour shortage

  6. Summary • The average wage level will be affected by the demand for, and supply of, labour • Therefore it is important to understand the factors which affect labour demand and supply

  7. Factors Affecting the Potential Labour Force (supply) • Birth rate - changing role of women, changing attitudes toward family size, cost of having children, birth control • Mortality rate - improvements in medical technology, research and treatment, health care programs, increased public concern for health and fitness • Immigration • Emigration

  8. Factors Affecting the Demand for Labour • Level of production • Technology • Production method or type of operation • The business cycle • Seasonality • Government projects • Business performance, success and viability • Level of exports

  9. Measuring Unemployment Unemployment Rate = U LF X 100 U = unemployment LF = Labour Force

  10. Labour Force • Includes employed & unemployed • However, some people are excluded • See unit overview

  11. Labour Force Participation Rate LF X 100 POPN

  12. Weaknesses in How U/E is Measured • Definition of term unemployed • Definition of term employed • Many people are excluded from LF • Excludes discourage workers • Some people are underemployed • Some people are employed on a part time basis

  13. Economic Cost of U/E • Can be measured as the difference between potential GDP & actual GDP • Potential GDP - level of output that the economy would be able to produce with full employment • Actual GDP - output actually produced by the economy

  14. Output (income) Gap • Potential output - actual output = output gap • Represents loss of output due to U/E

  15. Okun’s Law • A way of measuring economic cost of employment • For every 1% rise in U/E rate above defined full employment rate, output falls by 3% (1:3) • Today adjusted to 2.5 = 1:2.5 ratio • In Canada 1:2

  16. Example • In 1983 actual output was $309.9 billion • At that time U/E rate was 11.8% • With 4% defined as full employment • For every % difference between U/E rate and full empl. Rate, output falls 2% • Difference is (11.8-4) = 7.8% • Output would fall by 7.8 x 2 = 15.6% • This 15.6% represents 309.9 x .156 = $48.3 billion loss in output due to U/E

  17. Example (con’t) • To determine what potential output would be without the loss, add the 15.6% to potential output • So, 309.9 + 48.3 = 358.2 billion potential Q • Potential Q = Actual Q + GDP gap

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