ECO 120 - Global Macroeconomics Taggert J. Brooks

The Causes and Categories of Unemployment Module 13 The Causes and Categories of Unemployment

The Natural Rate of Unemployment Workers who spend time looking for employment are engaged in job search. Frictional unemployment is unemployment due to the time workers spend in job search. Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage.

The Nature of Unemployment Distribution of the Unemployed by Duration of Unemployment 2000 and 2010

Unemployment Duration Median Duration of Unemployment in Weeks. Generally short (< 16 weeks)

Unemployment duration continues to be very high Unemployment duration continues to be very high. Some economists attribute that to the extension of unemployment benefits to as many as 99 weeks in some cases. The truth lies somewhere in between. The housing market and other structural rigidities are also contributing to the problem. Current mean duration is 33 weeks and median is 20 weeks.

Seasonal Unemployment Seasonal unemployment is caused by seasonal shifts in labor supply and demand Examples: construction, agriculture, life guards

Seasonal Unemployment

Seasonal Unemployment

Structural Unemployment The Effect of a Minimum Wage on the Labor Market Wage Rate Structural unemployment W F Minimum wage W E Figure Caption: Figure 13.2: The Effect of a Minimum Wage on the Labor Market When the government sets a minimum wage, WF, that exceeds the market equilibrium wage rate, WE, the number of workers, QS, who would like to work at that minimum wage is greater than the number of workers, QD, demanded at that wage rate. This surplus of labor is considered structural unemployment. Quantity of Labor Q Q Q D E S

Structural Unemployment Minimum wages - a government-mandated floor on the price of labor. In the U.S., the national minimum wage in 2009 was $7.25 an hour. Unions - by bargaining for all a firm’s workers collectively (collective bargaining), unions can often win higher wages from employers than the market would have otherwise provided when workers bargained individually.

Structural Unemployment Efficiency wages - wages that employers set above the equilibrium wage rate as an incentive for better performance. Side effects of government policies - public policies designed to help workers who lose their jobs; these policies can lead to structural unemployment as an unintended side effect.

The Natural Rate of Unemployment The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates. The natural rate of unemployment is the unemployment rate that arises from the effects of frictional plus structural unemployment. Cyclical unemployment is a deviation in the actual rate of unemployment from the natural rate.

The Natural Rate of Unemployment Natural unemployment = Frictional unemployment + Structural unemployment Actual unemployment = Natural unemployment + Cyclical unemployment

Changes in the Natural Rate of Unemployment Estimates of the natural rate of unemployment show that the U.S. natural rate rises and falls over time. The factors that affect the natural rate of unemployment include: Changes in labor force characteristics Changes in labor market institutions Changes in government policy

Changes in the Natural Rate of Unemployment The Changing Makeup of the U.S. Labor Force, 1948–2009 Figure Caption: Figure 13.3: The Changing Makeup of the U.S. Labor Force, 1948–2009 In the 1970s the percentage of the labor force consisting of women rose rapidly, as did the percentage under age 25. These changes reflected the entry of large numbers of women into the paid labor force for the first time and the fact that baby boomers were reaching working age. The natural rate of unemployment may have risen because many of these workers were relatively inexperienced. Today, the labor force is much more experienced, which is one possible reason the natural rate has fallen since the 1970s. Source: Bureau of Labor Statistics.

Changes in the Natural Rate of Unemployment The Changing Makeup of the U.S. Labor Force, 1948–2009 Figure Caption: Figure 13.3: The Changing Makeup of the U.S. Labor Force, 1948–2009 In the 1970s the percentage of the labor force consisting of women rose rapidly, as did the percentage under age 25. These changes reflected the entry of large numbers of women into the paid labor force for the first time and the fact that baby boomers were reaching working age. The natural rate of unemployment may have risen because many of these workers were relatively inexperienced. Today, the labor force is much more experienced, which is one possible reason the natural rate has fallen since the 1970s. Source: Bureau of Labor Statistics.