1. 11 CHAPTER D YNAMIC P OWER P OINT ™ S LIDES BY S OLINA L INDAHL Unemployment and Labor Force Participation Two Paris job riots, 2005-2006

2. CHAPTER OUTLINE Defining Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Labor Force Participation For applications, click herehere To Video To Video

3. Some good blogs and other sites to get the juices flowing: Food for Thought….

4. B ACK TO Introduction A Recurring Story in American History Many jobs have disappeared- and been replaced by new jobs….

5. Click below for the current U.S. unemployment rate Employment, Unemployment, and Labor Force Participation in the U.S. Population (August 2010)

6. http://www.nytimes.com/roomfordebate/2010/09/20/is-this-what-a-recovery-feels-like/the-uncounted-unemployed

7. B ACK TO Defining Unemployment Measuring Unemployment A person is counted as unemployed if they… Are 16 years of age or older. Are not institutionalized (e.g., not in prison). Are not in the military. Are looking for work. unemployment rate The unemployment rate is the % of the labor force without a job

8. B ACK TO Defining Unemployment Unemployed worker: Unemployed worker: an adult who does not have a job but is looking for work. Labor force: Labor force: all workers, employed plus unemployed Labor force participation rate: Labor force participation rate: the percentage of adults in the labor force

9. In your country, there are 24 million people in the labor force. 21.5 million people are employed. What is the unemployment rate in your country? a)10.4% b)2.5% c)89.6% d)21.5%

10. B ACK TO Defining Unemployment How Good an Indicator Is the Unemployment Rate? Does not account for discouraged workers. Discouraged workers Discouraged workers : workers that have given up looking for work who would still like to have a job. (about 0.7% of the labor force, 2010) For long recessions the number of discouraged workers will be higher. Implication: In recessions that last a long time, the unemployment rate is not as good an indicator.

11. B ACK TO Defining Unemployment How Good an Indicator Is the Unemployment Rate? Doesn’t measure the quality of jobs or how well people are matched to their jobs. Examples: An overqualified worker, or one with a part-time job (who wants to work full-time) is counted as fully employed. Economists also look at other indicators: Labor force participation rate Number of full-time jobs Average wages

12. Which of the following individuals can be counted as unemployed? a)Darren, a ten-year-old child b)Nazma, a stay-at-home mom c)Moesha, a full-time college student d)None of the answers is correct.

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22. B ACK TO Defining Unemployment There are three types of unemployment: 1.Frictional 2.Structural 3.Cyclical

23. B ACK TO Frictional unemployment: Frictional unemployment: Short-term unemployment caused by difficulties of matching employee to employer. Scarcity of information creates frictional unemployment. Matching people to jobs takes time…. Frictional Unemployment

24. B ACK TO Usually doesn’t last very long. Is usually a significant fraction of total unemployment because: the U.S. economy is dynamic. “Creative Destruction”-Joseph Schumpeter. progress is about creating new jobs and destroying old jobs. it takes time to adjust to innovation and the job creation/destruction that ensues Frictional Unemployment

25. B ACK TO Structural Unemployment Structural Unemployment: Structural Unemployment: Persistent, long-term unemployment caused by long-lasting shocks or permanent changes in the economy. Causes: Large shocks that take a long time for the economy to restructure. Oil shocks New information technologies Globalization Restructuring jobs away from manufacturing and towards services

26. B ACK TO Structural Unemployment Structural unemployment, if it lasts long enough, brings significant human costs. At some point unemployment can become chronic. The longer a worker is out of work, his or her skills atrophy. Hiring managers are wary of hiring workers who have been unemployed for a long time. Who would you rather hire: a worker looking to switch jobs or a worker who has been unemployed for five years? Result: Unemployment can become a trap.

27. B ACK TO Duration of U.S. Unemployment, 2005 and 2010 An increase in duration of unemployment: Not a good thing. 20052010

28. B ACK TO Take a look… Even after an extension of unemployment benefits to 99 weeks, many of those about to go off the program are in a quandary. 60 Minutes talks to some of them in Silicon Valley. (13:05 minutes)

29. B ACK TO Structural Unemployment Labor Regulations and Structural Unemployment In the U.S. unemployment historically increases with a shock, then declines. (1980-1984 was a shock period) In Europe unemployment has increased with shocks but has not declined.

30. B ACK TO Structural Unemployment Unemployment rates in the U.S. and Europe differ because of different labor regulations. 1.Unemployment benefits: more generous in Europe. 2.Unemployment benefits last longer in Europe. 3.Minimum wages: higher in Europe 4.Unions? Stronger in Europe. The higher the minimum wage is above the market wage, the greater unemployment will be. Unions have the same effect.

31. B ACK TO Structural Unemployment Unemployment Benefit Replacement Rates in Europe vs. the United States, 1994

32. B ACK TO Structural Unemployment Union: Union: an association of workers that bargains collectively with employers over wages, benefits, and working conditions. Unions take many forms: some act to increase wages simply by restricting entry into a profession with licensing requirements.

33. B ACK TO Structural Unemployment Median Wage: Median Wage: the wage such that ½ of all workers earn wages below the median and ½ of all workers earn wages above the median. For a look at median wages in your state, click herehere

34. B ACK TO Structural Unemployment Effect of Minimum Wage on Unemployment Wage Quantity Of Labor Demand for labor Supply of Labor Minimum wage Market wage Market employment Employment with minimum wage Unemployment Result: Minimum wage causes unemployment Labor supplied with minimum wage

35. B ACK TO Structural Unemployment Potential Effect of Unions on Unemployment Wage Quantity Of Labor Demand for labor Supply of Labor Union wage Market wage Market employment Employment with Union Unemployment Result: Certain types of unions can cause unemployment Labor supplied with union wage

36. It's been said that “once you reach the top of the ladder of opportunity, the first thing to do is pull up the ladder behind you.” Let's consider this: If government makes it harder for people to enter certain industries like schoolteachers, and barbers, do wages tend to rise or fall for these professionals? a)This lowers the supply which will raise the wage for these workers. b)This lowers the supply which will lower wage for these workers. c)This raises the demand which will lower the wage these workers. d)This raises the demand which will raise the wage these workers.

37. B ACK TO Structural Unemployment Employment Protection Laws The U.S. uses the employment at-will doctrine. Employment at-will doctrine: Employment at-will doctrine: an employee may quit and an employer may fire for any reason. Many exceptions: race, religion, sex, sexual orientation, national origin, age, or handicap status. (It is the most basic U.S. employment law)

38. B ACK TO Structural Unemployment World Bank “rigidity of employment index” the higher the index, the greater the hiring and firing costs

39. SEE THE INVISIBLE HAND 39 Can you spot the differences? Unemployed teens (outsiders) want France to adopt At-Will employment to make it easier for firms to hire: riot in 2005... Then France proposed the changes, and employed teens (insiders) rioted against the changes in 2006. France capitulated. Bottom line: it’s not easy to change employment law.

40. B ACK TO Structural Unemployment In summary, European labor regulations: create valuable insurance for workers with a full-time job. make labor markets less flexible and dynamic. increase the duration of unemployment. increase unemployment rates among young, minority, or otherwise “riskier” workers. Is miminum wage a force for good or a force for bad? Yes.

41. B ACK TO Structural Unemployment Labor Regulations to Reduce Structural Unemployment Europe has begun to change its labor laws. Reducing unemployment benefits Active labor market policies Adopting Active labor market policies: work tests, job search assistance and job retraining programs focus on getting unemployed workers back to work. Allowing exceptions to collective bargaining agreements.

42. B ACK TO Summary: Structural Unemployment Factors that Affect Structural Unemployment Large, long-lasting shocks like: > Oil shocks > Shift from manufacturing to services > Globalization and global competition > Fundamental technology (computers/Internet) Labor regulations > Unemployment benefits > Minimum wages > Powerful unions > Employment protection laws

43. B ACK TO Summary: Structural Unemployment Milkman Service Station Attendant Elevator Operator Bank Tellers Store Cashiers Store Greeters Car Hops Pony Express Riders Town Cryer ("Two o'clock and all is well!") Cooper (Not much demand for wooden barrels nowadays.) The Old Lamp Lighter (of long long ago) http://www.npr.org/templates/story/story.php?storyId=12 4251060 Polaroid camera film makers Typesetters Airbrush touch-up artists Telephone switchboard operator Typewriter manufacturer Soda jerk Manufacturers of floppy disks and ZIP drives/disks Manufacturers of eight tracks and players Supervisor of Elections Hang Man Muleskinners

44. B ACK TO Cyclical Unemployment Cyclical Unemployment: Cyclical Unemployment: unemployment correlated with the business cycle Lower growth is usually correlated with higher unemployment for two reasons: 1.When GDP falls, firms lay off workers. 2.Idle labor and capital → economic growth is not being maximized → ↓ ability of the economy to create more jobs.

45. Jasmine has recently moved to Florida because she loves the warm climate there. Because she is new to the area, she will need to spend a few weeks looking for a new job. This is an example of: a)frictional unemployment. b)cyclical unemployment. c)structural unemployment. d)underemployment.

46. B ACK TO Cyclical Unemployment Unemployment increases during a recession

47. B ACK TO Cyclical Unemployment Faster growth in Real GDP decreases unemployment

48. B ACK TO Cyclical Unemployment What causes cyclical unemployment? Non “Keynesians”: Caused by real shocks that require a reallocation of resources. Cyclical unemployment is just another example of frictional and structural unemployment. “ Keynesians”: Caused by deficiencies in aggregate demand. For now: consider it a mismatch between the aggregate level of wages and the level of prices.

49. B ACK TO Percent Job Losses in Post WWII Recessions What’s going on now? The 2007 recession has seen higher unemployment rates lasting for a longer period of time than any previous recession since the Great Depression.

50. B ACK TO Cyclical Unemployment Natural Unemployment Rate: The Natural Unemployment Rate: Structural plus frictional unemployment. Note: Total unemployment changes much quicker than the natural unemployment rate.

51. B ACK TO Labor Force Participation Measuring the labor force participation rate The % of the adult (16+) non-institutionalized civilian population who are working or actively looking for work. Example, U.S. 2009: Labor Force Participation Rate Labor Force Participation Rate

52. B ACK TO According to the accompanying labor data, the unemployment rate is _________ and the labor force participation rate is __________. a)7%; 60.4% b)0.7%; 99.3% c)5.6%; 69.4% d)7.5%; 75%

53. B ACK TO Labor Force Participation What determines the labor force participation rate? 1.Lifecycle Effects and Demographics Baby Boomers: Baby Boomers: people born during the high birth- rate years, 1946-1964 Implication: As the U.S. labor force ages, the participation rate will fall

54. B ACK TO Labor Force Participation Labor force participation varies significantly across countries. Males, age 55-64, 1998 data from OECD Statistics

55. B ACK TO Labor Force Participation 2.Differences in Incentives Taxes and Benefits Taxes discourage work and benefits encourage non-work. Many countries penalize workers who work past the normal early retirement age. Netherlands in the 1990s: Working past the age of 60 meant losing one year of government retirement benefits.

56. B ACK TO Labor Force Participation Labor force participation declines with higher taxes. Males, age 55-64, 2005 data from OECD Statistics

57. B ACK TO Labor Force Participation 2.Differences in Incentives Incentives and the rise in female labor force participation: 1948 -2008: number of women aged 25-54 in the paid labor force increased from 35% to 75%. What caused this? Cultural factors Rise of feminism Growing acceptance of equality Move from a manufacturing to a service economy.

58. B ACK TO Female Labor Force Participation

59. B ACK TO Female Labor Force Participation, Professions

60. B ACK TO Labor Force Participation Differences in Incentives How “the pill” increased female labor force participation: lowered the: cost of earning a professional degree. uncertainty about the consequences of sex. Result: the pill lowered the costs and increased the incentive of women to invest in a long-term education.