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Chapter 14: UNEMPLOYMENT

Chapter 14: UNEMPLOYMENT. AND ITS NATURAL RATE. Problem of unemployment. The long-run unemployment or the natural rate of unemployment is the amount of unemployment that the economy normally experiences

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Chapter 14: UNEMPLOYMENT

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  1. Chapter 14: UNEMPLOYMENT AND ITS NATURAL RATE

  2. Problem of unemployment • The long-run unemployment or the natural rate of unemployment is the amount of unemployment that the economy normally experiences • The Short-run unemployment or cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate • We focus on the natural rate of unemployment

  3. Outline • Measurement of unemployment rate • Interpretations of unemployment data • Explain the determinants of natural rate of unemployment

  4. Measurement of unemployment • Source is the Labour Force Survey • Each surveyed household is classified as • Employed • Unemployed • Not in the labour force • Labour force= # employed+ # unemployed • Unemployment rate is the percentage of labour force that is unemployed

  5. Measurement of unemployment • Labour-Force Participation Rate (LFPR) is the percentage of adult population that is in the labour force • Unemployment rates: Variation by region, by age, and by gender

  6. Measurement of unemployment Participation rate Source: Statistics Canada, CANSIM, table 282-0002

  7. Labour Force Participation Rates by Gender: 1976-2002 Source: Statistics Canada, CANSIM, table 282-0002

  8. Unemployment rates by gender, 1976-2001

  9. Unemployment rates for age group: 15-24 years and for all 15+

  10. Unemployment Rates by Region Source: Statistics Canada, CANSIM, table 282-0055

  11. Problems with the measurement of unemployment • Movements into and out of labour force are common • Behaviour of EI beneficiaries • Discouraged workers • Duration of unemployment • Most spells of unemployment are short, and most unemployment at any given time is long-term • Low LFPR

  12. Types of unemployment • Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run • Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes • Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

  13. Types of unemployment • Natural rate of unemployment is the rate of unemployment to which the economy tends to return in the long-run • Frictional unemployment results because of the time it takes workers to search for jobs that suit their skills and tastes • Structural unemployment results because the number of jobs available in some labour markets is insufficient to provide a job to every worker who wants one

  14. Natural and observed rate of unemployment, 1976-2001

  15. Unemployment and causes • Frictional unemployment • Job search: the process by which workers find appropriate jobs given their tastes and skills • Public policy and job search: EI • Causes of Structural unemployment: • Minimum-wage laws: above equilibrium wage • Unions and collective bargaining: type of cartel • Efficiency wages are above equilibrium wages paid by firms to increase worker productivity

  16. The theory of efficiency wages • Why do firms want to pay higher wages? • Worker health • Worker turnover • Worker effort • Worker quality • Worker-quality variant of efficiency wage theory illustrates the principles of adverse selection and moral hazard

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