THE CAUSES & CATEGORIES OF UNEMPLOYMENT

OBJECTIVES: What are the three different types of unemployment? What factors determine the natural rate of unemployment?

JOB CREATION/JOB DESTRUCTION Many reasons for job loss Structural changes in the economy Industries rise and fall as new technologies emerge and consumer’s tastes change Poor management performance Bad luck at individual companies Job Creations Structural change in health care New medical technologies Aging of population increased the demand for medical care

JOB CREATION/JOB DESTRUCTION 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. Inevitable: Constant process of job creation and job destruction New workers always entering the labor market

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JOB CREATION/JOB DESTRUCTION 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. Persistent surplus of job-seekers in a particular labor market

STRUCTURAL UNEMPLOYMENT The Effect of a Minimum Wage on the Labor Market Quantity of Labor W Wage Rate W F E Q D Q E Q S When the price of labor increases, more workers are willing to supply labor at the prevailing wage rate

STRUCTURAL UNEMPLOYMENT The Effect of a Minimum Wage on the Labor Market Quantity of Labor W Wage Rate W F E Q D Q E Q S Structural unemployment Minimum wage Structural unemployment occurs when the wage rate is, for some reason, persistently above W E

STRUCTURAL UNEMPLOYMENT Minimum Wage is a government mandated floor on the price of labor Federal Minimum Wage = $7.25

STRUCTURAL UNEMPLOYMENT The Effect of a Minimum Wage on the Labor Market Quantity of Labor W Wage Rate W F E Q D Q E Q S Structural unemployment Minimum wage Legal flow on Wages, WF Leads to a persistent surplus in the labor market

STRUCTURAL UNEMPLOYMENT Why impose minimum wages? Help ensure that people who work can earn enough income to afford at least a minimally comfortable lifestyle

LABOR UNIONS Labor unions can lead to structural unemployment Labor 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 Actions by firms can also lead to structural unemployment Efficiency wages - wages that employers set above the equilibrium wage rate as an incentive for better performance.

STRUCTURAL UNEMPLOYMENT 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.

NATURAL RATE OF UNEMPLOYMENT The natural rate of unemployment is the normal unemployment rate around which the actual unemployment rate fluctuates. It 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.

NATURAL RATE OF UNEMPLOYMENT Natural unemployment = Frictional unemployment + Structural unemployment Actual unemployment = Natural unemployment + Cyclical unemployment

NATURAL RATE OF UNEMPLOYMENT What causes the natural rate of unemployment to change Characteristics of the labor force Changes in labor market institutions Changes in government policies

CHANGES IN LABOR FORCE CHARACTERISTICS Unemployment rates tend to be lower for experienced than for inexperienced workers

CHANGES IN LABOR MARKET INSTITUTIONS Labor Unions negotiating wages higher than the equilibrium level Temporary employment agencies Monster.com Technological change Leads to increase in demand for skilled workers

CHANGES IN GOVERNMENT POLICIES High minimum wage can cause structural unemployment Generous unemployment benefits Reducing unemployment: Job training Employment subsidies