Lecture 4Unemployment and Labor Market

UNEMPLOYMENT

Under 16 years(70.5 Million)

A distribution of Total Population to Labor Force, Employment, and Unemployment

TotalPopulation

(296.6 Million)

Disable or Not inLabor Force

(76.8 Million)

Employed(141.7 Million)

Labor Force(149.3 Million)

Unemployed(7.6 Million)

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

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.

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.

Wage Rate ($ per hour)

Number Employed

DL

10

7

4

10 15 19

There is an inverse relationship between the wage rate and the number of people employed by the firm.

The Labour MarketLabour Demand Curve

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

Labour Supply CurveWage Rate ($ per hour)

Number employed

SL

5

5.50

35 45

The Labour MarketEquilibrium in Labour Market

Wage Rate ($ per hour)

Number employed

DL

SL

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

The Labour MarketWage Rate ($ per hour)

Number employed

DL

SL

6.00

Q1

DL1

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

The Labour MarketWage Rate ($ per hour)

Number employed

DL

SL1

6.00

Q1 Q2

SL1

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

SL2

MINIMUM-WAGE LAW CREATES UNEMPLOYMENTWhen the minimum wage is set above the equilibrium/market wage then it creates unemployment. Example: Minimum wage in garments industry

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Quantity ofLabor

0

Surplus of labor =Unemployment

Laborsupply

Labordemand

Wage

Minimumwage

LD LS

WE

LE

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.

The Phillips CurveWage 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

• 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.