EC 102.01

1. EC 102.01 Midterm 1 – July 11 Monday, 17:00 NH 301 : ACAR – ISIK NH 305: INAM – YILDIZ Ch1, Ch3 (Sec 1,3,4), Ch5, Ch6 (Sec 3,4), Ch7 Midterm 2 – July 21 Thursday at 13:00 (no class on that date!) Venue will be announced!

2. Outline Chapter 7 – Employment and Unemployment Section 1 – Measuring Employment and Unemployment Section 2 – Types of Unemployment Section 3 – Theories of Unemployment Section 4 –Employment, Unemployment and Well-Being

3. Employment and Unemployment Rate of unemployment – an important macroeconomic performance measure Some level of unemployment is unavoidable in a changing economic context ! High levels imply inefficient utilization of resources in the economy BUT detrimental effects on the individual’s well being and social cohesion in longer term. Society’s perception on “what you do”

4. Measuring Employment and Unemployment Based on Household Labour Force Survey carried out nationwide on a monthly basis. Civilian non-institutionalized population over the age of 15. Civilian: not in active military duty! (“sivil”) Non-institutionalized: not residing in mental hospitals, nursing homes, orphanage, prison, jail, juvenile corrective facilities. Over the age of 15: “eligible”/able to participate in the labour market

5. Measuring Employment and Unemployment “Last week did you do any work for pay or profit?” YES – employed even if you worked only for a couple of hours for a casual job “Did you work 15 hours or more in a family business?” – unpaid family labour (care, housework etc. do not count, need to be considered as economically active! NO – two more questions: “Have you been actively searching for a job?” “Are you available to start a job?”

6. Measuring Employment and Unemployment If YES to both => Unemployed; NO to either => NiLF Labour Force = Employed + Unemployed Not in Labour Force (NiLF) = people who describe themselves as housewives, students, disabled, retired/pensioner. Rate of Unemployment = (Unemployed/LF) x 100 Percentage of LF who currently do not hold paid jobs but immediately available and/or actively looking for paid jobs.

7. Measuring Employment and Unemployment

8. Measuring Employment and Unemployment

9. Measuring Employment and Unemployment Entrance to/ Exit from Unemployment • Job losers: left their last job involuntarily • Job leavers: voluntarily quit their jobs • Reentrants: used to be in the labour force sometime ago, now rejoined after a period away • Entrants: just joined for the first time On the average about half of unemployed are job losers; at times of recession.... Discouraged workers: included in the NiLF, desire and indeed are available for a job but may have given up looking for work – “because of this official rate underestimates actual unemployment”

10. Types of Unemployment Causes are of concern rather than numbers per se ! Three-way categorization: frictional, structural, cyclical Frictional – reflects people’s transitions btw jobs. Some amount is inevitable, generally tends to be short-term, people tend to find good matches to their own skills. Structural – mismatch between the kinds of jobs being offered and the skills, experience etc. of LF. New technologies, “creative destruction” in Schumpeterian terms, governments tried various policies to alleviate structural employment

11. Types of Unemployment Cyclical – due to macroeconomic fluctuations; recessions/booms; tend to move in the same direction with business cycles; of course jobless recovery is also possible – GDP grows too slow to provide jobs for new entrants! Economists mostly concerned with cyclical unemployment; structural unemployment affects some sectors of the economy; some amount of frictional unemployment seems inevitable – major goal of economic policies: avoiding or minimizing cyclical unemployment.

12. Theories of Unemployment Classical – markets behave as idealized S/D models, characterized by perfect competition. Labour market is structured as such, equilibrium level of wages and quantity of labour is determined by market forces. If somehow unemployment occurs in such a market, this is primarily because of interference with the market forces/dynamics (e.g. legal minimum wage set above equilibrium level) Business regulations, labour related regulations, union activities, public safety net all distort market!

13. Theories of Unemployment Imperfect Labour Markets –Classical-Keynesian synthesis; given enough time markets may be able to adjust. “sticky-wages” – more Keynesian view, wages may stay above equilibrium for some time; too slow... due to psychological resistance to cuts, long-term contracts “insider-outsider” – insider workers may have the power to prevent outsiders from competing with them and lowering their wages. “efficiency wage” – paying higher-than-necessary wages may improve employee productivity

14. Theories of Unemployment Aggregate Demand – purely Keynesian perspective The economy as a whole is not just one market functioning smoothly – made up of several markets with own peculiarities. Focus on the level of aggregate demand – aggregate employment depends on the level of AD. Spending stimulates firms to produce, production generates incomes, incomes provides actors the ability to spend – vicious cycle. Identify the cause of cyclical unemployment as insufficient demand for labour in many individual labour markets; AD should be stimulated to boost employment

15. Employment and Unemployment Is there a “natural” rate of unemployment? Hypothesized to occur even in the absence of business cycle fluctuations. The unemployment rate is argued to fluctuate around a “natural” rate where booms tend to reduce unemployment below natural rate and recessions make it rise above. More like a trend line, averaged over time.

16. Employment and Unemployment Non-accelerating inflation rate of unemployment (NAIRU) – lowest rate of unemployment to be maintained without causing the economy to overheat Phillips Curve – depicting the relation between inflation rate and unemployment rate. NAIRU – over the rate inflation sharply increases for lower levels of unemployment Natural rate ~ NAIRU

17. Employment and Unemployment No such world! Purely classical point of view: economy will tend to an equilibrium position (natural rate) whenever it is pushed away. Natural rate – if any – fluctuates, not a straight line at all.

18. Trends in Employment and Unemployment Employment rates: total

19. Trends in Employment and Unemployment Unemployment rates: total

20. Employment, Unemployment and Well-Being Changing nature of work and dynamics, challenges to the conventional thinking Changing Labour Force Challenges to the full employment for “male breadwinner” discourse of post WWII era Changing composition of LF – participation of women LFPR = (LF/civilian non insti. popu.)*100 Fraction of potential paid workers who are either in paid jobs or seeking/available for paid work

21. Employment, Unemployment and Well-Being

22. Employment, Unemployment and Well-Being Changing Nature of Work “flexibility” – fashionable! - flexible to suit to people’s needs and constraints - easing terms and conditions for employers Flexicurity – EU terminology; flexibility+security ALMPs to facilitate LFP and maintain social inclusion “informality” - lacking formal conditions such as social security coverage, work contract etc. “hours of work” – changing pattern of weekly hours of work; mostly not paid for overtime.

23. Employment, Unemployment and Well-Being Average hours actually worked per year per person in employment Adaman,Bugra,Insel (2004) research – 1200 workers Average weekly hours worked: 59 hrs – informal, 49 hrs – formal.