© 2007 Thomson South-Western

IDENTIFYING UNEMPLOYMENT How Is Unemployment Measured? –Categories of Unemployment The problem of unemployment is usually divided into two categories, the long-run problem and the short-run problem. The natural rate of unemployment The cyclical rate of unemployment

© 2007 Thomson South-Western How is Unemployment Measured? Natural Rate of Unemployment The natural rate of unemployment is unemployment that does not go away on its own even in the long run. It is the amount of unemployment that the economy experiences in the long-run.

© 2007 Thomson South-Western How Is Unemployment Measured? Cyclical Unemployment Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. It is associated with short-term ups and downs of the business cycle.

© 2007 Thomson South-Western How Is Unemployment Measured? Describing Unemployment: Three Basic Questions How does government measure the economy’s rate of unemployment? What problems arise in measuring the unemployment rate?

© 2007 Thomson South-Western How Is Unemployment Measured? Unemployment is measured: by the Bureau of Labor Statistics (BLS) in the US. by the Turkish Statistical Institute (TURKSTAT) in Turkey.

© 2007 Thomson South-Western How Is Unemployment Measured? Every three months, TURKSTAT conducts “Household Labor Force Surveys”. Based on the answers to the survey questions, TURKSTAT places each adult (population over the age 15) into one of three categories: Employed (includes “Underemployed” as well) Unemployed Not in the labor force

© 2007 Thomson South-Western How Is Unemployment Measured? Population = Children + Adult Population Adult Population = Employed + Unemployed + Not in the Labor Force

© 2007 Thomson South-Western How Is Unemployment Measured? Employed vs. unemployed A person is considered employed if s/he has spent some of the previous week working at a paid job. A person is unemployed if s/he is looking for a job, is on temporary layoff, or is waiting for the start date of a new job.

© 2007 Thomson South-Western How Is Unemployment Measured? A person is underemployed if s/he is looking for another job because: not working full time when s/he wants to not employed in his/her profession getting paid too little. A person who is not looking for a job, a full-time student, a housewife, a retiree, ill, old or disabled is not in the labor force.

© 2007 Thomson South-Western How Is Unemployment Measured? Labor Force The labor force is the total number of workers, including the employed and the unemployed. Labor Force = Employed + Unemployed.

© 2007 Thomson South-Western How Is Unemployment Measured? The unemployment rate is calculated as the percentage of the labor force that is unemployed.

© 2007 Thomson South-Western How Is Unemployment Measured? The underemployment rate is calculated as the percentage of the labor force that is underemployed.

© 2007 Thomson South-Western How Is Unemployment Measured? The labor-force participation rate is the percentage of the adult population that is in the labor force. Labor force participation rate Labor force Adult population  100 X

© 2007 Thomson South-Western How Is Unemployment Measured? Turkey’s figures show declining unemployment rates during

© 2007 Thomson South-Western Figure 2 U.S. Unemployment Rate Since Percent of Labor Force Natural rate of unemployment Unemployment rate

© 2007 Thomson South-Western Figure 3 U.S. Labor Force Participation Rates for Men and Women Since Labor-Force Participation Rate (in percent) Women Men

© 2007 Thomson South-Western Problems in Measuring the Unemployment Rate It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics. Other people may claim to be unemployed in order to receive unemployment insurance, even though they aren’t looking for work.

© 2007 Thomson South-Western Problems in Measuring the Unemployment Rate Existence of a large underground economy in Turkey. Large numbers appear to be “not in the labor force” but in fact they work.

© 2007 Thomson South-Western Why Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed. Quantity of labor Wage Labor Supply Labor Demand WEWE QEQE

© 2007 Thomson South-Western Why Are There Always Some People Unemployed? Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills.

© 2007 Thomson South-Western Why Are There Always Some People Unemployed? Structural unemployment is the unemployment that results because the quantity of labor demanded (# of jobs available) in some labor markets is always smaller than quantity of labor supplied. This is because the actual wage rate is kept above the equilibrium wage rate due to: Minimum wage laws Unions Efficiency wages

© 2007 Thomson South-Western Frictional Unemployment: JOB SEARCH Job search is the process by which workers find appropriate jobs given their tastes and skills. It results from the fact that it takes time for qualified individuals to be matched with appropriate jobs. Job search causes frictional unemployment.

© 2007 Thomson South-Western Frictional Unemployment: JOB SEARCH Job search is not due to a wage rate higher than equilibrium. Therefore job search does not cause structural unemployment.

© 2007 Thomson South-Western Why Some Frictional Unemployment Is Inevitable Frictional unemployment is inevitable because the economy is always changing. Changes in the composition of demand among industries or regions are called sectoral shifts. Ex: From agriculture towards manufacturing and services in Turkey. It takes time for workers to search for and find jobs in new sectors.

© 2007 Thomson South-Western Public Policy and Job Search Internet helps better information flow. Government programs can reduce the time it takes unemployed workers to find new jobs. These programs include the following: Government-run employment agencies. Ex: Turkish Job Placement Agency- Türkiye İş Kurumu Public training programs. Unemployment insurance.

© 2007 Thomson South-Western Public Policy and Job Search Unemployment insurance is a program that makes payments for a limited time to insured workers after they become unemployed. Aim is to protect workers. Unemployment insurance fund is supported by current workers, employers and the government.

© 2007 Thomson South-Western Public Policy and Job Search Unemployment insurance improves the chances of workers being matched with the jobs that better fit their skills and preferences. So may increase labor productivity. may increase the amount of frictional unemployment. Because of less pressure to find a job, unemployed workers may reduce their job search effort.

© 2007 Thomson South-Western Structural Unemployment Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to explain longer durations of unemployment. Why is there Structural Unemployment? Minimum-wage laws Unions Efficiency wages

© 2007 Thomson South-Western MINIMUM-WAGE LAWS When the minimum wage is set above the level that balances supply and demand, it creates unemployment. Minimum wage law (MWL) is not the most important cause of structural unemployment because most wages are above the minimum wage. Therefore MWL is not binding for many workers. It is binding only for low skilled labor.

© 2007 Thomson South-Western MINIMUM-WAGE LAWS In Turkey, –gross minimum wage: 562,50 YTL –net minimum wage: 403,02 YTL –159,48 YTL difference includes income tax (15%), social security premium (14%), unemployment insurance (1%) –cost to employer: 683,44 YTL –120,94 YTL difference includes social security premium (19,5%), unemployment insurance (2%)

© 2007 Thomson South-Western Figure 4 Unemployment from a Wage Above the Equilibrium Level Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage LDLD LSLS WEWE LELE

© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A union is a worker association that bargains with employers over wages, benefits and working conditions. A union is a type of cartel attempting to exert its market power. Union density is equal to union members / labor force. 59% in Turkey, 30% in UK, 15% in US, 79% in Sweden, 88% Denmark.

© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING The process by which unions and firms agree on the terms of employment is called collective bargaining.

© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A strike will be organized if the union and the firm cannot reach an agreement. –A strike occurs when the union organizes a withdrawal of labor from the firm.

© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING A strike makes some workers better off and other workers worse off. Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs.

© 2007 Thomson South-Western UNIONS AND COLLECTIVE BARGAINING By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members. Union workers earn 10 to 20 percent more than nonunion workers.

© 2007 Thomson South-Western Are Unions Good or Bad for the Economy? Critics argue that unions cause the allocation of labor to be inefficient and inequitable. Wages above the competitive level reduce the quantity of labor demanded and cause unemployment. Employer lays off some of the workers to avoid bankruptcy. Unionized workers benefit at the expense of workers in non-unionized sectors.

© 2007 Thomson South-Western Are Unions Good or Bad for the Economy? Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers. They claim that unions are important for helping firms respond efficiently to workers’ concerns. In summary, it is a political debate.

© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. The theory of efficiency wages states that workers operate more efficiently if wages are above the equilibrium level.

© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES A firm may prefer higher than equilibrium wages for the following reasons: 1.Worker health: Better paid workers eat a better diet, get better health services and thus are more productive. 2.Worker turnover: A higher paid worker is less likely to look for another job. 3.Worker effort: Higher wages motivate workers to put forward their best effort.

© 2007 Thomson South-Western THE THEORY OF EFFICIENCY WAGES 4.Worker quality: Higher wages attract a better pool of workers to apply for jobs. EX: painting job. Two workers, one high quality: Erdem; one low quality: Cem. Erdem’s reservation wage is 10 YTL/hour, Cem’s is 2YTL/hour. Assume I cannot measure quality. Then if I offer 6 YTL/hour, only Cem will accept the job. Erdem will refuse. Asymmetric information causes high quality applicant to refuse. To prevent this, I offer 11 YTL/hour. Then I have 50% chance to get high quality applicant.