EC 102.01Midterm 1 – July 11 Monday, 17:00NH 301 : ACAR – ISIKNH 305: INAM – YILDIZCh1, Ch3 (Sec 1,3,4), Ch5, Ch6 (Sec 3,4), Ch7

Midterm 2 – July 21 Thursday at 13:00 (no class on that date!)Venue will be announced!

OutlineChapter 7 – Employment and Unemployment

Section 1 – Measuring Employment and UnemploymentSection 2 – Types of UnemploymentSection 3 – Theories of UnemploymentSection 4 –Employment, Unemployment and

Well-Being

Employment and Unemployment

Rate of unemployment – an important macroeconomic performance measure

Some level of unemployment is unavoidable in a changing economic context !

High levels imply inefficient utilization of resources in the economy

BUT detrimental effects on the individual’s well being and social cohesion in longer term.

Society’s perception on “what you do”

Measuring Employment and Unemployment

Based on Household Labour Force Survey carried out nationwide on a monthly basis.

Civilian non-institutionalized population over the age of 15.

Civilian: not in active military duty! (“sivil”)Non-institutionalized: not residing in mental

hospitals, nursing homes, orphanage, prison, jail, juvenile corrective facilities.

Over the age of 15: “eligible”/able to participate in the labour market

Measuring Employment and Unemployment“Last week did you do any work for pay or profit?”YES – employed even if you worked only for a couple

of hours for a casual job“Did you work 15 hours or more in a family

business?” – unpaid family labour (care, housework etc. do not count, need to be considered as economically active!

NO – two more questions:“Have you been actively searching for a job?”“Are you available to start a job?”

Measuring Employment and Unemployment

If YES to both => Unemployed; NO to either => NiLFLabour Force = Employed + UnemployedNot in Labour Force (NiLF) = people who describe

themselves as housewives, students, disabled, retired/pensioner.

Rate of Unemployment = (Unemployed/LF) x 100Percentage of LF who currently do not hold paid jobs

but immediately available and/or actively looking for paid jobs.

Measuring Employment and Unemployment

Measuring Employment and Unemployment

Measuring Employment and UnemploymentEntrance to/ Exit from Unemployment- Job losers: left their last job involuntarily- Job leavers: voluntarily quit their jobs- Reentrants: used to be in the labour force sometime ago,

now rejoined after a period away- Entrants: just joined for the first time

On the average about half of unemployed are job losers; at times of recession....

Discouraged workers: included in the NiLF, desire and indeed are available for a job but may have given up looking for work – “because of this official rate underestimates actual unemployment”

Types of UnemploymentCauses are of concern rather than numbers per se !Three-way categorization: frictional, structural, cyclicalFrictional – reflects people’s transitions btw jobs.

Some amount is inevitable, generally tends to be short-term, people tend to find good matches to their own skills.

Structural – mismatch between the kinds of jobs being offered and the skills, experience etc. of LF. New technologies, “creative destruction” in Schumpeterian terms, governments tried various policies to alleviate structural employment

Types of UnemploymentCyclical – due to macroeconomic fluctuations;

recessions/booms; tend to move in the same direction with business cycles; of course jobless recovery is also possible – GDP grows too slow to provide jobs for new entrants!

Economists mostly concerned with cyclical unemployment; structural unemployment affects some sectors of the economy; some amount of frictional unemployment seems inevitable – major goal of economic policies: avoiding or minimizing cyclical unemployment.

Theories of UnemploymentClassical – markets behave as idealized S/D models,

characterized by perfect competition. Labour market is structured as such, equilibrium level of wages and quantity of labour is determined by market forces.If somehow unemployment occurs in such a market, this is primarily because of interference with the market forces/dynamics (e.g. legal minimum wage set above equilibrium level)

Business regulations, labour related regulations, union activities, public safety net all distort market!

Theories of UnemploymentImperfect Labour Markets – Classical-Keynesian

synthesis; given enough time markets may be able to adjust.

“sticky-wages” – more Keynesian view, wages may stay above equilibrium for some time; too slow...due to psychological resistance to cuts, long-term contracts

“insider-outsider” – insider workers may have the power to prevent outsiders from competing with them and lowering their wages.

“efficiency wage” – paying higher-than-necessary wages may improve employee productivity

Theories of UnemploymentAggregate Demand – purely Keynesian perspectiveThe economy as a whole is not just one market

functioning smoothly – made up of several markets with own peculiarities.

Focus on the level of aggregate demand – aggregate employment depends on the level of AD. Spending stimulates firms to produce, production generates incomes, incomes provides actors the ability to spend – vicious cycle.

Identify the cause of cyclical unemployment as insufficient demand for labour in many individual labour markets; AD should be stimulated to boost employment

Employment and UnemploymentIs there a “natural” rate of unemployment?Hypothesized to occur even in the absence of

business cycle fluctuations.The unemployment rate is argued to fluctuate

around a “natural” rate where booms tend to reduce unemployment below natural rate and recessions make it rise above.

More like a trend line, averaged over time.

Employment and UnemploymentNon-accelerating inflation rate of unemployment

(NAIRU) – lowest rate of unemployment to be maintained without causing the economy to overheat

Phillips Curve – depicting the relation between inflation rate and unemployment rate.

NAIRU – over the rate inflation sharply increases for lower levels of unemployment

Natural rate ~ NAIRU

Employment and UnemploymentNo such world!Purely classical point of view: economy will tend to

an equilibrium position (natural rate) whenever it is pushed away.

Natural rate – if any – fluctuates, not a straight line at all.

Trends in Employment and UnemploymentEmployment rates: total

Trends in Employment and UnemploymentUnemployment rates: total

Employment, Unemployment and Well-BeingChanging nature of work and dynamics,

challenges to the conventional thinkingChanging Labour ForceChallenges to the full employment for “male

breadwinner” discourse of post WWII eraChanging composition of LF – participation of

womenLFPR = (LF/civilian non insti. popu.)*100Fraction of potential paid workers who are either

in paid jobs or seeking/available for paid work

Employment, Unemployment and Well-Being

Employment, Unemployment and Well-BeingChanging Nature of Work“flexibility” – fashionable!

- flexible to suit to people’s needs and constraints- easing terms and conditions for employers

Flexicurity – EU terminology; flexibility+securityALMPs to facilitate LFP and maintain social

inclusion“informality” - lacking formal conditions such as

social security coverage, work contract etc. “hours of work” – changing pattern of weekly hours

of work; mostly not paid for overtime.

Employment, Unemployment and Well-BeingAverage hours actually worked per year per person

in employment

Adaman,Bugra,Insel (2004) research – 1200 workersAverage weekly hours worked: 59 hrs – informal, 49

hrs – formal.