UNEMPLOYMENT Society in general and Economists in particular are interested in the problem of unemployment because of its economic and non-economic effects on people and the society

Why Should We be Concerned about Unemployment? t Economic Effects: –The opportunity cost of Unemployment is measured in terms of lost GDP; and –Lower standards of living of the unemployed t Non-Economic Effects: –The human suffering and misery that are associated with unemployment; and –The increase in social problems such as crime

The Okun’s Law “Increases in the unemployment rate should be associated with decreases in real GDP” Arthur Okun

Types of Unemployment t Frictional Unemployment: –associated to normal turnover in the labor market and the mismatch between workers skills and the available jobs; and t Real-Wage Rigidity and Wait Unemployment: –the failure of wages to adjust to clear the labor market.

Causes of Real-Wage Rigidity t Minimum-Wage Laws: –the government prevents wages from falling to the equilibrium level; t Unions and Collective Bargaining: –the monopoly power of labor unions holds wages above the equilibrium level; and t Efficiency Wages: –high wages make workers more productive.

Public Policy and Unemployment Any policy aimed at lowering the natural rate of unemployment must either reduce the rate of job separation (s) or increase the rate of job finding (f). Similarly, any policy that affects the rate of job separation or job finding also changes the natural rate of unemployment Unemployment Rate (U / L) = s / (s + f)