© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 1 “Foundations of Economics” Unemployment

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 2 Introduction What do we mean by unemployment?

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 3 Employed, Not Employed and Unemployed Unemployment data –Statistics Canada –Labour Force Survey Monthly survey – 54,000 households

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 4 Employed, Not Employed and Unemployed Who is counted? –Non-institutional people 15 years of age or older Classifications –Employed –Unemployed –Not in the labor force

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 5 Labor Market Decisions Working-age Population Seeks employment (in the labor force) Does not seek employment (not in the labor force) Accepts employment (employed) Does not accept employment (unemployed)

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 6 Employed, Not Employed and Unemployed Unemployed –In the non-institutional population. –age 15 or older. –Without employment during survey week. –Made efforts to find employment during the last 4 weeks. –Be available for work.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 7 Employed, Not Employed and Unemployed Deriving Unemployment Data –Total population –under age 15 or institutionalized = non-institutional population –Minus those not in labor force = labour force –employed = unemployed

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 8 Unemployment Rates and Employment Rates Unemployment Rate (UR) = # unemployed / labor force Employment-to-Population Ratio (ER) = # employed / non-institutional population Labor Force Participation Rate (PR) = Labor Force / non-institutional population

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Employment and Unemployment –Figure 21.1 shows the labour force categories. In 2010: –Population: 34.1 million –Working-age population: 27.7 million –Labour force: 18.5 million –Employment: 17 million –Unemployment: 1.5 million Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Employment and Unemployment –Figure 21.2 shows the unemployment rate: 1960– –The unemployment rate increases in a recession. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Employment and Unemployment Figure 21.3 shows the labour force participation rate and employment-to-population ratio both trend upward rapidly before 1990 and slowly after1990. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 12 Labor Force Participation Rate

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 13 Unemployment

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 14 Unemployment Discouraged Workers –Individuals who have dropped out of the labour force and are no longer looking for a job because they believe the job market has little to offer them.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 15 Cost of Unemployment Unemployment results in a large loss of GDP. Unemployment also results in hardship and lost self-respect for those who are unemployed.

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment –Unemployment can be classified into three types:  Frictional unemployment  Structural unemployment  Cyclical unemployment Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment –Frictional Unemployment –Frictional unemployment is unemployment that arises from normal labour market turnover. –The creation and destruction of jobs requires that unemployed workers search for new jobs. –Increases in the number of people entering and reentering the labour force and increases in unemployment benefits raise frictional unemployment. –Frictional unemployment is a permanent and healthy phenomenon of a growing economy. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment –Structural Unemployment –Structural unemployment is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs. –Structural unemployment lasts longer than frictional unemployment. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment –Cyclical Unemployment –Cyclical unemployment is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak. –A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment “Natural” Unemployment Natural unemployment is the unemployment that arises from frictions and structural change when there is no cyclical unemployment. Natural unemployment is all frictional and structural unemployment. –The natural unemployment rate is natural unemployment as a percentage of labour force. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment –Full employment is defines as the situation in which the unemployment rate equals the natural unemployment rate. –When the economy is at full employment, there is no cyclical unemployment or, equivalently, all unemployment is frictional and structural. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Unemployment and Full Employment Real GDP and Unemployment Over the Cycle –Potential GDP is the quantity of real GDP produced at full employment. –Potential GDP corresponds to the capacity of the economy to produce output on a sustained basis. –Real GDP minus potential GDP is the output gap. –Over the business cycle, the output gap fluctuates and the unemployment rate fluctuates around the natural unemployment rate. Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko Figure 21.5 shows the output gap and … the fluctuations of unemployment around the natural rate. When the output gap is negative, unemployment exceeds the natural unemployment rate. Unemployment and Full Employment Copyright © 2013 Pearson Canada Inc., Toronto, Ontario

© 2006 Prentice Hall Business Publishing The Economic Way of Thinking, 11/e Heyne/Boettke/Prychitko 24 Labor Market Policies What can the government do to lower unemployment? –Reduce economic fluctuations. –Job skills training. –Abolish unemployment compensation. –Improve quality of information on the economy.