Chapter 27 Unemployment

1. Chapter 27Unemployment David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

2. Some key terms Unemployment rate: the percentage of the labour force without a job but registered as being willing and available for work. Labour force those people holding a job or registered as being willing and available for work. Participation rate the percentage of the population of working age declaring themselves to be in the labour force.

3. Hanehalkı İşgücü İstatistikleri Metodolojisi

4. Çalışma Durumuna Göre Nüfus

5. Nüfusun İşgücü Durumu

6. Unemployment in the UK1950-2007 Source: Economic Trends Annual Supplement, Labour Market Trends

7. Unemployment (%) in selected countries

8. Unemployment Rate in Turkey(1988-2011)

9. Unemployment Rate in Turkey(2007-2011)

10. Labor Force in Turkey(2006-2010)

11. The Reasons Not To be Included in Labour Force (Thousand) - ( 15 + years old )

12. Important Details • Discourages workers are those who want to work but do not search a job any more. They are not counted as unemployed. In 2009, US had 13.5 million unemployed workers and 2.1 discouraged workers. • Underemployment: If a worker works in a job far below her capacity. She will be counted as employed. • Because of these two factors, the unemployment situation is much worse than what the statistics tell us.

13. Unemployment seperated by Education (%)- ( 15 + years )Turkey (2009-2011)

14. Labor Participation in Turkey (%) - ( 15 + y )

15. Labour market flowsIt is tempting to see the labour market in static terms LABOUR FORCE Working Unemployed Non-participants but...

16. Labour market flows New hires Recalls Job-losers Lay-offs Quits Retiring Temporarily leaving Discouraged workers Re-entrants New entrants Taking a job LABOUR FORCE Working Unemployed Non-participants

17. More on labour market flows The size of these flows is surprisingly high. In 1999 unemployment in the UK began at 1.29 million. During the year: 3.14 million became unemployed but 3.3 million left the ranks of the unemployed.

18. Types of unemployment Frictional the irreducible minimum level of unemployment in a dynamic society people between jobs the ‘almost unemployable’ Structural unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes it takes time for ex-coal miners to retrain as international bankers

19. Types of unemployment (2) Demand-deficient unemployment occurs when output is below full capacity ‘Keynesian’ unemployment occurs in the transitional period before wages and prices have fully adjusted Classical unemployment created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect

20. A ‘modern’ view of unemployment A similar categorisation is retained, but an important distinction is to be noted between: Voluntary unemployment when a worker chooses not to accept a job at the going wage rate. Involuntary unemployment when a worker would be willing to accept a job at the going wage but cannot get an offer.

21. The natural rate of unemployment The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. This is entirely voluntary. It includes: frictional unemployment structural unemployment

22. The natural rate of unemployment LF: size of labour force AJ LF AJ: the number of workers prepared to accept jobs F w* E LD Equilibrium is at w*/ N*. The distance EF is the natural rate of unemployment. N1 N* LD: labour demand Real wage AJ is to the left of LF because some members of the labour force are between jobs, others are waiting for better offers. Number of workers

23. Keynesian unemployment Beginning at E, suppose labour demand falls to LD’. A w2 H G If labour demand remains at LD’, the new equilibrium when wages and prices have fully adjusted will be at G. LD’ AJ With sticky wages and prices in the short-run, the economy will move to equilibrium at A LF and there will be unemployment of AF. Of which EF will be voluntary and AE will be involuntary (i.e. Keynesian). Real wage E F w* LD Number of workers

24. Classical unemployment Suppose that union power succeeds in maintaining a real wage of w2. Equilibrium is at A A B C w2 and unemployment is AC, of which BC is voluntary and AB is involuntary. N2 AJ LF Real wage w* To the extent that this unemployment reflects a conscious decision by unions to restrict employment, it is voluntary unemployment. LD N1 N* Number of workers

25. Supply-side economics entails the use of microeconomic incentives to alter the level of full employment the level of potential output the natural rate of unemployment. In the long run the performance of the economy can only be changed by affecting the level of full employment and the corresponding level of potential output.

26. Tax cuts and unemployment Firms pay a gross wage of w1 w1 > w3 (the take-home net pay of workers). A w1 Equilibrium is at N1 E w2 F AB is the amount of tax B w3 Unemployment is BC C Without tax, equilibrium is at E. Unemployment is now EF. N1 N2 AJ Real wage LF LD EF < BC i.e. unemployment is reduced. Number of workers

27. Other supply-side policies Trade union reform reducing the power of trade unions may limit distortions in the labour market Other labour supply policies training and retraining measures improving the efficiency of the labour market such measures may affect frictional and structural unemployment Investment higher investment may increase the demand for labour may be achieved via tax incentives or low interest rates