Unemployment Lecture 7 1

– the Great Depression, 25 % of labor force unemployed (US), unemployment viewed as something to be avoided at almost any cost, Keynesian type of economic policy 1970s – the period of relatively low unemployment, return to classical approach, natural rate of unemployment 1975 and1982s – the high unemployment again as the result of restrictive monetary policy and an adverse supply shock but still lower than in 1930s Is the unemployment predominately short term or rather it is accounted for by people who are unemployed for a long time? 2

Unemployment – case of Poland Central planning economy: unemployment does not exist. Hidden unemployment (25%) High unemployment rate as the effect of transformation process 3

Unemployment rate in Poland (%) and some other countries (1995) Poland 1990 Poland 1991 Poland 1992 Poland 1993 Poland 1994 Poland 1995 Poland US 1995UK 1995Hungary 1995 France 1995 Finland 1995 Spain 1995 Japan

Definition and measurement Active on labor market (persons in the labor force): working + unemployed A person reported as unemployed: he/she does not work in analyzed period but is looking for a job People being out of the labor force: the rest of population being 15+ years old: students, retiring, sick, disabled persons The unemploment rate: the ratio of the number of unemployed persons to the number of persons in the labor force as a percentage 5

More facts on unemployment in Poland The unemployment rate:   %  %  %  % UE-25 average - 7.3%  %  %  %  % Large regional differences ( sub-regions: szydłowiecki -38.6%, radomski-31.5%, wałbrzyski-34.8%, Poznań-4.7%, Warsaw- 4.9%, Sopot-5.2% The ratio of persons in the labor force to the whole population 15+ years old: Poland 55.4%, UE 67.7%, US 75% 6

Different types of unemployment Job search and frictional unemployment : it takes time to match workers and jobs, the flow of information about job candidates and job vacancies imperfect Structural unemployment – structure of labor demand does not match labor supply (long-run) Keynesian type of unemployment: labor demand to low Classical unemployment caused by rigid wages (trade unions, over-regulated labor market) 7

Labor market equilibrium EF (a) – Natural (voluntary) unemployment AB (b) – un-voluntary unemployment AB (c)– LD (labor demand) > AJ (labor supply) 8

The natural rate of unemployment The natural rate of unemployment is the unemployment rate at which economy is said to be in pracitcally full employment situation or the lowest rate of unemployment that an economy can sustain over the long run L = E + U fU = sE, f- the fraction of unemployed persons who find the job each month; s- the rate of separation, the fraction of employed persons who lose their job each month fU = sE (labor market in equilibrium) E = L – U, fU = s(L-U), divided by L fU/L = s(1-U/L) U/L = s/s+f Any policy aimed at lowering the natural rate of unemployment must either reduce the rate of job separation or increase job finding 9

Private cost of unemployment Lost income because of being out of work Benefits of voluntary unemployment like more leisure, unemployment benefits, unemployment insurance could be larger than unemployment cost. Case of job migration. Un-voluntary unemployment (cyclical): private cost very high. 10

Social cost of unemployment Unemployment benefits may be may be an incentive to increase voluntary unemployment and to waiste resources Cyclical unemployment: cost of waiste resources especially high Social cost of cyclical unemployment in US : production lower by $2000 billion. 11

The duration of unemployment Possibility APossibility B During the year, each worker is out of job 5% of the time, ca 2.5 weeks During the year, 95 % of workers are never unemployed: 5% are unemployed for the entire year Duration of unemployment 2.5 weeks Duration of unemployment 1 year Unemployment rate 5% 12

Reasons for unemployment 1) Low rate of jobs finding (unemployment insurance, high income tax) 2)Wage rigidity 3)low level of the demand 13

How to diminish unemployment rate? Lower income tax an incentive to search for job and to increase skills ? AD – income tax, W1 – wage + tax, W2-net wage, W-no tax wage, N1= employment at income tax AD 14

Public policy and unemploymen t- mixed results Governmental agencies disseminate information on job vacancies Public retraining programs Unemployment insurance: reduces the rate of job finding and increases frictional unemployment: workers can collect a fraction of their wages for a certain period after loosing their jobs (US 50% of former wage for 26 weeks, some European programs more generous) When unemployed ineligible for unemployment insurance, the probability of finding new job rises Unemployment insurance reduces workers’ uncertainty about their income and leads to better matching workers and jobs 15

3 reasons of wage rigidity 1)Minimum-wage laws raise wage above its equilibrium level (common for unskilled and with no experience workers, especially teenagers) Some studies indicate that a 10% increase in the minimum wage reduces teenager employment by 1 to 3 %. (exempting young workers from the regular minimum wage?) 2)The monopoly power of unions- the wages of unionized workers determined not by supply-demand equilibrium but by collective bargaining. Final agreement raises wages above equilibrium level and allows the firm decide on number of workers The result: decrease in the number of workers hired and wait unemployment (caused by wage rigidity and job rationing) Unions can influence the wages of outsiders as well (threat of unionization) The conflict between insiders and outsiders, the role of centralization of wage bargaining 3)Efficiency wages: high wages make workers more productive 16

Union membership as a precentage of employment (1991) Sweden84 Denmark75 Italy47 UK41 Australia34 Canada33 Germany33 Netherlands28 Switzerland28 Japan26 US16 France11 Poland11 17

Hysteresis and natural rate of unemployment Natural rate of unemployment challenged Aggregate demand may affect output and employment in the long-run Recession might leave permanent scars on the economy by altering the natural rate of unemployment (long lasting influence of history on natural rate) Unemployed workers loosing valuable job skills, their availability to find a job lower, the desire to find a job reduced Unemployed (outsiders) loosing their influence on wage-setting process. Insiders care more about high real wages and less about high employment Real wages permanently pushed above equilibrium level and the wait unemployment higher than before recession 18

Conclusion Unemployment = wasted resources Neither search (frictional) unemployment nor wait unemployment (caused by wage rigidity) or structural unemployment can be easily reduced Government cannot easily make search period very short nor bring wages closer to equilibrium level Government may reduce unemployment by making wages more flexible, spending money on better information on jobs available or job-training programs (reducing natural rate of unemployment) Government may keep output and employment from fluctuating much 19