LESSON 5
UNEMPLOYMENT
AND ITS NATURAL RATE
Lecture: Trinh Thu Thuy
School of Economics & Management (SEM)
Hanoi University of Science & Technology (HUST)
2020 - 2021
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Macroeconomics – Lesson 5
Unemployment &
1 Unemployment Rate
2
Labor Market and Its Indicators
3 Public Policy & Job Search
2 2
Unemployment and Its Natural Rate
Chapter Objectives
Employment and unemployment
Unemployment rate
Labor market and its indicators
Public policy and job search
Theory of efficiency wage
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Unemployment and Its Natural Rate
1. Why is Unemployment a Problem?
Unemployment is a problem for the economy because:
Output and incomes are lost.
Human capital depreciates.
Crime may increase.
Human dignity suffers.
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Unemployment and Its Natural Rate
Why is Unemployment a Problem?
Lost incomes domino effect
Loss in income loss in production loss in
consumption loss of investment lower standard of
living
Loss of human capital (skill, knowledge, experience).
Prolonged exposure to unemployment actually damages a
person’s job prospect lose human capital
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Unemployment and Its Natural Rate
2. Unemployment
Unemployment is the number of people of working age who
are without work, but who are available for work at current
wage rates. If the figure is to be expressed as a percentage, then
it is a percentage of the total labour force.
The labour force is defined as: those in employment
(including the self-employed, those in the armed forces and
those on government training schemes) plus those
unemployed.
o The labour force doesn’t include people who are out of working
age, students, pupils, invalids. People who are at working age
but unwilling to work doen’t belong to labour force
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Unemployment and Its Natural Rate
Some definitions
Working
Employment at a paid
Labor job
Working Force Full-time
Age Unemploy- or part-
Population ment time job
Population
Not in Labor
Force
Temporary layoff,
Not in
working age
looking for a job,
population People of or waiting for the
working age start date of a new
Regulated by who are not job.
the Labor Law employed or
unemployed
Working age
population: Full-time students, retirees, and
total # 15 and stay-at-home dads are out of the
over labor force. 7
Unemployment and Its Natural Rate
Some Definitions
Labor force (LF)
A part of working age population
Either employed or unemployed
Number of people in labor force = number of people employed +
+ number of people unemployed
LF = E + U
Employed (E)
working at a paid job, either full-time or a part-time job
Unemployed (U)
Must be available for work with three conditions:
temporary layoff with an expectation of recall (at any point of time)
looking for a job or work (in the past 4 weeks) or waiting for the start date of a
new job.
Have new job and going to be starting it within 4 weeks.
Not in the labor force:
People who are of working age who are not employed or unemployed
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Labor Market Indicators
Labor - force participation rate measures the percentage of working age
population who are in the labor force.
Labor-force =
Labor force x 100 %
participation rate (%) Working age population
Unemployment rate: the percentage of people in the labor force
who are unemployed or have no job
Number of unemployed
Unemployment rate (%) = x 100 %
Labor force
Employment rate: the percentage of people in the labor force who
are employed or have a job
Number of employed
Employment rate (%) = x 100 %
Labor force 9
Computing unemployment rate
u - Unemployment Rate): to be expressed by fraction
of unemployment with the total labour force. It can
be expressed by percentage as the formula below:
U
u 100%
L
U: Unemployed
L: Labour Force
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Labor Market Indicators
Involuntary part–time rate: % in labor force who work part–
time but want to work full-time.
# Involuntary
IPTR = x 100%
LF
Employment – to – population ratio: the percentage of
working age who are employed or have a jobs
Number of employed
ETR (%) = x 100 %
Working age population
•An indicator of the availability of jobs and the ability to match
skills of people to jobs.
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Labor Market Indicators
Example
A country has a working-age population of 22 million; 16 million
are employed, 2 million are unemployed, and 1 million of the
employed are working part – time, half of whom wish to work full
– time.
What is the unemployed rate?
What is the involuntary part-time rate?
What is the labor force rate?
What is the employment-to-population rate?
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Labor Market Indicators
• Number of people employed is 16 million
• Number of people unemployed is 2 million
• Number of working part – time is 1m, hafl of whom wish to work full - time
• Labor Force: LF = # employed + # unemployed
• LF = 16 m + 2 m = 18 m
Unemployment rate:
# unemployed 2
UR (%) = x 100 % = x 100% = 11.1 %
Labor force 18
# involuntary part-time rate: # involuntary = 0.5m
0.5
IPTR = x 100% = 2.8 % LF = 18m
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Labor force participation rate: Working age pop. = 22m
18 LF = 18m
LFPR = x 100% = 81.8 %
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Employment-to-population ratio: # employed = 16m
16 Working age pop. = 22.
ETP = x 100% = 72.7 % 13
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Other definitions of Unemployment
(not actually considered in the official definition)
Discouraged searchers/ workers
o a person who is either currently neither looking for work;
o neither working nor looking for work
o indicated that they actually want a job, is available for work
o has actually looked for work in the recent past, but has stopped due
to repeated failure.
o They haven’t actually made effort to find jobs in the past 4 weeks.
Long – term future starts
o This is somebody with a job who starts more than 4 weeks in the
future.
Involuntary part – time – workers
o Who want a full job and can’t find them, but they are
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Discouraged workers
individuals who would like to work but have given up
looking for a job
Job search
the process by which workers find appropriate jobs
given their tastes and skills
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Unemployment
Remember !
Easy to distinguish: a full-time job >< not working at all.
Harder to distinguish: unemployed and not in the labor force.
Statistics on unemployment are difficult to interpret.
Discouraged workers: individuals who would like to work but
have given up looking for a job.
Job search: the process by which workers find appropriate jobs
given their tastes and skills.
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Labor Market
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Natural Rate of Unemployment
3. Natural rate of unemployment the normal rate of
unemployment around which the unemployment rate fluctuates.
Figure. Natural rate of unemployment in U.S.A
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4. Classification of Unemployment and Its causes
Cyclical Unemployment
Frictional unemployment
Structural Unemployment
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Classification of Unemployment
4.1 Cyclical Unemployment
Year-to-year fluctuations in
unemployment around its natural
rate.
• The deviation of unemployment
from its natural rate
• Closely associated with the
short-run ups and downs of
economic activity
Higher or lower – than normal
unemployment due to the
business cycle
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Classification of Unemployment
Cyclical Unemployment
The long-run problem and the short-run problem.
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4. Classification of Unemployment and Its causes
4.2 Frictional unemployment:
Occurs when people leave their jobs, either voluntarily or
because they are sacked or made redundant and are then
unemployed for a period of time while they are looking for a
new job.
They may not get the first job they apply for, despite a
vacancy existing. The employer may continue searching,
hoping to find a better-qualified person.
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• Likewise, unemployed people may choose not to take the
first job they are offered. Instead, they may continue
searching, hoping that a better job will turn up.
• The problem is that information is imperfect. Employers
are not fully informed about what labour is available;
workers are not fully informed about what jobs are
available and what they entail. Both employers and
workers, therefore, have to search: employers searching
for the right labour and workers searching for the right
jobs.
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Classification of Unemployment
4.2 Frictional unemployment
The unemployment for normal labor turnover
Entering/leaving the labor force
Employed
In between jobs
Not in Labor Force
Unemployed
Frictional unemployment:
Takes time for workers to search for the jobs that best suit their
tastes and skills
Employment can be different from various regions (different
jobs, different number).
Sectoral shifts: Changes in the composition of demand among
industries or regions unemployment
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4.3 Structural Unemployment
Refers to unemployment arising because there is a
mismatch of skills and job opportunities when the pattern of
demand and production changes.
oExamples in the UK include unemployment resulting from
a decline in the production of textiles, shipbuilding, cars,
coal and steel. Those workers who become structurally
unemployed are available for work but they have either the
wrong skills for the jobs available or they are in the wrong
location.
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Classification of Unemployment
4.2 Structural Unemployment
Changes in technology change skills needed to perform
jobs
Changes in location of jobs
“Sunset” industries
Structural unemployment:
the number of jobs available in some labor markets is insufficient to
provide a job for everyone who wants one
the quantity of labor supplied exceeds the quantity demanded due to
the wage is above the labor equilibrium.
three possible reasons for an above-equilibrium wage: minimum-
wage laws, unions, and efficiency wages.
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4.4 Other unemployment
Demand-deficient Unemployment is also referred to Keynesian
unemployment. Demand-deficient unemployment occurs when
aggregate demand falls and wages and prices have not yet adjusted
to restore full employment. Aggregate demand is deficient because it
is lower than full-employment aggregate demand which implies that
output is less than full employment output.
Classical Unemployment describes the unemployment created when
the wage is deliberately maintained above the level at which the
labour market clears. It can be caused either by the exercise of trade
union power or by minimum wage legislation which enforces a wage
in excess of the equilibrium wage rate.
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5. Natural unemployment rate
Natural = structural + frictional
No cyclical unemployment
Natural = full
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Example
In a country with a working-age population of 30 million, 18
million are employed, 2 million are unemployed, and 2
million of the employed are working part-time, half of whom
wish to work-full time. If 1 million of those unemployed are
cyclically unemployed, what is natural unemployment rate?
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Natural unemployment In a country with a working-age
population of 30 million, 18
Natural = structural + frictional million are employed, 2 million
are unemployed, and 2 million of
No cyclical unemployment the employed are working part-
Natural = full time, half of whom wish to work-
full time. If 1 million of those
unemployed are cyclically
unemployed, what is natural
unemployment rate?
Naturally unemployed = total – cyclical
Naturally unemployed = 2m – 1m
Naturally unemployed = 1m
1m
Natural rate = x 100 % = 5%
18m + 2m
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Public Policy for Unemployment
5. Public Policy and Job search
Spread information on job opening and worker availability.
Internet, newspaper, Newspaper ads, Internet job sites, college placement offices,
headhunters, and word of mouth all help spread information about job openings and
job candidates.
Public Policy: Government programs facilitate job search in various ways
give out information about job vacancies through government-run employment
agencies
public training program to transit workers from declining to growing industries and
to help disadvantaged groups escape poverty.
keeping the labor force more fully employed and reduce the inequities
Unemployment insurance: a government program to protects workers’
incomes when they become unemployed.
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Public Policy for Unemployment
Public Policy and Job search
Minimum wage law: wage is kept above the equilibrium level
for any reason, the result is unemployment.
Union: is a worker association that bargains with employers
over wages, benefits, and working conditions.
Collective bargaining - the process by which unions and firms
agree on the terms of employment.
Organize Strike - the organized withdrawal of labor from a firm
by a union
Efficiency wage: above-equilibrium wages paid by firms in
order to increase worker productivity
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Labor market
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Theory of Efficiency Wage
Efficiency wages: above-equilibrium wages paid by firms in order to increase worker
productivity
Worker health: link b/w wage and health
better paid better nutrition and better health higher productivity.
Worker turnover: link b/w wage and turnover
higher paid less workers choose to leave the firm reduce turnover among firm’s
workers by paying them a high wage.
Worker effort: link b/w wage & worker’s efforts
raise wages above the equilibrium level, providing an incentive for workers not to shirk
their responsibilities.
Worker quality: link b/w wage & worker quality
Higher wage attracts better workers or qualified workers.
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Key concepts
labor force discouraged workers
unemployment rate job search
labor-force participation rate unemployment insurance
natural rate of unemployment union
cyclical unemployment collective bargaining
frictional unemployment strike
structural unemployment efficiency wages
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