employment and unemployment · 10.09.2017  · employment and unemployment, pattern •any pattern?...

Spring, 2017

Employment And UnemploymentInstructor: Xi Wang

RoadMap

• Introduction

• Concepts and Definition

• Pattern

• Explain

Does Employment Status Matter?

• Yes! Recall that Production=Expenditure=Income?

• For the income, 2/3 of it is labor income

Does Employment Status Matter?

• Yes! Recall that Production=Expenditure=Income?

• For the income, 2/3 of it is labor income

• It means that most of our income comes from our job!!!

• Employment Matters?

Does Employment Status Matter? Example

• What happens in The Great Depression

• Unemployed

Does Employment Status Matter? Example

• What happens in The Great Depression?

Dorothea Lange's Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, age 32, a mother of seven children, in Nipomo, California, March 1936

RoadMap

• Introduction

• Concepts and Definition

• Pattern

• Explain

Does Employment Status Matter?

• Employment Matters.

• How shall we measure unemployment or employment status of our economy?

• Typically, we use Unemployment rate-- You may wonder why no level of unemployment?(Give me two slides)

• Unemployment rate: denominator is unemployment level, numerator is level of labor force.

Employment and Unemployment, Measurement

• Labor force: Only those people who wants and is eligible to work, even though he may not have a job yet.

• Number of Unemployed +Number of Employed = Labor force

• Labor force+ not want to work(Not in labor force)= Potential workers

• Potential workers: civilian non-institutional population ages 16 and over; Hence children under 16 years of age, people on active duty in the military, and institutionalized people(in Jail or nursing house) are no Potential Workers.

Employment and Unemployment, Measurement

Employment and Unemployment, Measurement

• Why don't we just use quantity of

employed?

• Not comparable cross countries and

time

• Unemployment rate

EmployedUnemployedUnemployedForceLabor

Unemployed

ratent Unemployme

ratent Unemployme

Employment and Unemployment, Measurement

• How does unemployment rate move cross time?

WorkersPotentialForceLabor rateion participat forceLabor

Employment and Unemployment, Measurement

RoadMap

• Introduction

• Concepts and Definition

• Pattern

• Explain

Employment and Unemployment, Pattern

• Any Pattern?

• (1)When the overall economy suffers a recession—a period in which growth of GDP fal ls—the unemployment rate tends to r ise. So unemployment rate negatively correlated with GDP growth

• The Great Depression of the 1930s, for example. Recent crisis.

• (2) Unemployment rate is never close to zero, lower bound 2 percent.

Negatively correlated: I

Negatively correlated: II

Negatively correlated: II

Employment and Unemployment, Pattern

• (3)Who gets Unemployed?

• High educated and middle aged tend to have lower unemployed rate

RoadMap

• Introduction

• Concepts and Definition

• Pattern

• Explain: why do we have unemployment?

Labor Market, Demand

• Let's take labor as a kind of goods, let's see what happens in labor market.

• Review:• What is the fundermental Property of Demand Curve?

• Downward sloping!

• Why? Optimization process of consumers!

• Who is going to consume labor? Firm!

Labor Market, DemandNumber of

workers hired to operate drilling

point

Total Cost ($) Total Benefit ($) Net Benefit ($) Marginal Benefit ($/gallon)

0 0 0 0

1 4 8 4

2 8 15 7

3 12 21 9

4 16 26 10

5 20 30 10

6 24 33 9

7 28 35 7

8 32 36 4

• What is the fundermental Property of Demand Curve?

• Why do we have downward sloping demand curve for labor?

• Diminishing marginal product of labor : each additional worker creates less marginal output than the workers who were hired before

• Why? Since you will always hire along your ranking list!

Labor Market, Demand Shift

• Changing output prices

• Changing demand for the output good or service

• Changing technology

• Changing other input prices

Labor Market, Demand

• What is the general property of supply curve?

• Why?

• Optimization of Supplyer!

• Who is providing labor to our market? What is their Optimization process?

Labor Market, Supply, Two dimension: How Many?

• How many hours you would like to work given the wage?

• Is there any concern when you decide how many hours to work?

• Yes! More working time means less family time, less Trips, less parties

• So you need to balance the time of work

and Leisure. Since We are Lazy!!!

Labor Market, Supply, Two dimension : How Many?

• Let's use an illustrating way to look at labor supply:

• What is the normal demand curve looks like? Downward sloping! Since?

• Diminishing marginal Benefit

• Now, for example. You have 24 hours per day, you need 8 hours sleep, 1 hour for meals.

Labor Market, Supply, Two dimension : How Many?

• Now, for example. You have 24 hours per day, you need 8 hours sleep, 1 hour for meals

• Hence you have 15 hours to work at most!

• What if you decide to work 7 hours? What if you decide to consume 8 hours leisure?

• What is the price of leisure?

Labor Market, Supply, Two dimension : Yes or No?

• If the working hour is not negotiable! 8 hours, take it or leave it

• Reservation Wage;

• It is almost impossible to adjust Working hours!

Labor Market, Supply Shift

• Changing tastes

• Changing opportunity cost of time

• Changes in population

Equilibrium，Do We have unemployment?

Labor Market, Equilibrium

• There will be no unemployment in Equilibrium, If we only use simple Demand and supply analysis.

• As we emphasized serveral times, Model is only a simplification

• If we cannot explain unemployment, we must have oversimplified something

Labor Market, Why there is unemployment, Friction Part

• (1) Some workers who are only willing to work for a wage above the market-clearing wage, Think about our reservation case.

• (2) Or Worker need to find where the jobs locate, we need to do job-hunting. ----Information friction

• (3) Firms need different labor.---Matching friction

• Frictional unemployment is the unemployment resulting from imperfect information about available jobs and from the time-consuming process of job search.

Labor Market, Why there is unemployment, Market Part

• Wage rigidity, downward wage rigidity

• Since Labor Contract,

Minimum Wage law

Union(the threat of going on strike)

Labor Market, Why there is unemployment, Market Part

• Price will lie above equilibrium Price

• Quantity of labor supplied persistently exceeds the quantity of labor demanded----Structural unemployment(SU)

• Mismatching friction also results in SU.

• This part is not from information friction.

Natural unemployment rate

• The natural rate of unemployment is the rate around which the actual rate of unemployment fluctuates

• Mean

• Cyclical unemployment is defined as the deviation of the unemployment rate from its natural rate.

• Example: if n.r.u=6%, now our u.r=8% then c/u=8%-6%=2%

Natural unemployment rate, Full employment

• Recall our pattern of unemployment, never hit zero

• In a market-based economy, there will always be some unemployment, it may comes from structual unemployment or frictional unemployment (Recall definition?)--- These unemployment is healthy, so we tend to think that nature unemployment is the best status. --- Full employment means natural unemployment rate is attained.

• Cyclical unemployment? Recall the pattern of unemployment? Negatiely correlated with GDP growth!

• (informational) Frictional Unemployment: short run in nature; consists of those temporarily between jobs. i.e Job searching

• Structural Unemployment: results from deep-rooted conditions & fundamental changes in our economy. i.e job dismatching

• Cyclical Unemployment: this is the type that arises as a result of our economic instability/business cycles. Difference between current unemployment rate and Natrual rate

Kinds of unemployment rate, Summary

Natural unemployment rate

• The natural rate of unemployment is the rate around which the actual rate of unemployment fluctuates

• Mean

• Cyclical unemployment is defined as the deviation of the unemployment rate from its natural rate.

Cyclical unemployment rate

• The natural rate of unemployment is the rate around which the actual rate of unemployment fluctuates

• Mean

• Cyclical unemployment is defined as the deviation of the unemployment rate from its natural rate.