1. Lecture 4 Unemployment and Labor Market

2. UNEMPLOYMENT Under 16 years (70.5 Million) A distribution of Total Population to Labor Force, Employment, and Unemployment Total Population (296.6 Million) Disable or Not in Labor Force (76.8 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)

3. Definition: If a person is capable of working and he is actively looking for a job but cannot find a job then he is called unemployed. Labor force : It is the sum of the employed and unemployed people able to work. Unemployment rate : It is defined as the percentage of the labor force that is unemployed. Unemployment Rate = Number of Unemployed Labor Force  100

4. Types of Unemployment 1) Structural Unemployment: Unemployment caused as a result of the decline of industries and the inability of employees to move into jobs being created in new industries. Example: Introduction of computer in office work. 2) Frictional Unemployment: Unemployment caused when people move from job to job. A person can remain unemployed when he is looking for a better job. In such case he might get a job but doesn’t work there because he wants to get a better job. 3)Seasonal Unemployment: Unemployment caused because of the seasonal nature of employment. Example: tourism, etc. 4)Cyclical Unemployment: The unemployment that arise due to business cycle. Example: During recession many people loss their jobs because of the fall of labour demand in the economy.

5. Labor Demand In an economy labor demand comes from firms and government. Demand of Labour: The amount of people/labour demanded by firms at different wage rates. There is an inverse relationship between the wage rate and the number of people demanded by the firms.

6. Wage Rate ($ per hour) Number Employed DLDL 10 7 4 1519 There is an inverse relationship between the wage rate and the number of people employed by the firm. The Labour Market Labour Demand Curve

7. Labour Supply Supply of Labour: The amount of people offering their labour at different wage rates. We can devote our time to either labour or leisure. So how much labour an individual is going to supply depends on the opportunity cost of labour which is leisure – Wage rate must be sufficient to overcome the opportunity cost of leisure

8. Labour Supply Curve Wage Rate ($ per hour) Number employed SLSL 5 5.50 3545

9. The Labour Market Equilibrium in Labour Market Wage Rate ($ per hour) Number employed DLDL SLSL 6.00 30 The market wage rate for a particular occupation therefore will occur at the intersection of the demand and supply of labour. Here equilibrium wage rate is $6 and equilibrium employment is 30

10. The Labour Market Wage Rate ($ per hour) Number employed DLDL SLSL 6.00 Q1 D L1 Q2 7.50 A rise in the demand for labour would force up the wage rate as there would be excess demand for labour. Excess Demand

11. The Labour Market Wage Rate ($ per hour) Number employed DLDL S L1 6.00 Q1Q2 S L1 Excess Supply An increase in the supply of labour would lead to a fall in the wage rate as there would be an excess supply of labour. 5.00 S L2

12. MINIMUM-WAGE LAW CREATES UNEMPLOYMENT When the minimum wage is set above the equilibrium/market wage then it creates unemployment. Example: Minimum wage in garments industry Copyright©2003 Southwestern/Thomson Learning Quantity of Labor 0 Surplus of labor = Unemployment Labor supply Labor demand Wage Minimum wage LDLD LSLS WEWE LELE

13. The Phillips Curve The Phillips Curve shows relationship between the rate of growth of money wages / inflation and unemployment. Rate of growth of money wages linked to inflationary pressure. The Phillips Curve shows the trade-off between inflation and unemployment. Controlling inflation and reducing unemployment are the two prime goals of the govt. But there is an inverse relation between inflation and unemployment that means if the govt. wants to reduce unemployment the inflation rate goes up. Phillips curve shows this inverse relation between inflation and unemployment and that's why it a downward sloping curve.

14. The Phillips Curve Wage growth % (Inflation) Unemployment (%) The Phillips Curve shows an inverse relationship between inflation and unemployment. It suggested that if governments wanted to reduce unemployment it had to accept higher inflation as a trade-off. 1.5% 6%4% 2.5% PC1

15. Full employment: Full employment is a situation is when the economy is employing all of its available resources. Here the only type of unemployment that exists in the economy is the frictional unemployment. Full employment" can be considered as the attainment of the ideal unemployment rate, where the structural unemployment (which reflects labour-market inefficiency) do not exist. Only some frictional unemployment would exist, where workers are temporarily searching for new jobs. This simply means that the capital goods and capital resources are at their highest and most efficient utilization within the economy.