THE CAUSES & CATEGORIES
OF UNEMPLOYMENT
OBJECTIVES:
• What are the three different types of
unemployment?
• What factors determine the natural rate of
unemployment?
JOB CREATION/JOB DESTRUCTION
• Many reasons for job loss
• Structural changes in the economy
• Industries rise and fall as new technologies emerge and
consumer’s tastes change
• Poor management performance
• Bad luck at individual companies
• Job Creations
• Structural change in health care
• New medical technologies
• Aging of population increased the demand for medical
care
JOB CREATION/JOB DESTRUCTION
• Workers who spend time looking for
employment are engaged in job search
• Frictional unemployment is unemployment
due to the time workers spend in job search.
• Inevitable:
• Constant process of job creation and job destruction
• New workers always entering the labor market
2000
JOB CREATION/JOB DESTRUCTION
• Structural unemployment is unemployment
that results when there are more people
seeking jobs in a labor market than there
are jobs available at the current wage.
• Persistent surplus of job-seekers in a particular
labor market
STRUCTURAL UNEMPLOYMENT
The Effect of a Minimum Wage on the Labor Market
Wage
Rate
When the price of labor increases,
more workers are willing to supply
labor at the prevailing wage rate
W
F
W
E
QD
QE
QS
Quantity of
Labor
STRUCTURAL UNEMPLOYMENT
The Effect of a Minimum Wage on the Labor Market
Wage
Rate
Structural
unemployment
W
F
Minimum
wage
W
E
Structural unemployment occurs when
the wage rate is , for some reason,
persistently above WE
QD
QE
QS
Quantity of
Labor
STRUCTURAL UNEMPLOYMENT
• Minimum Wage is a government
mandated floor on the price of labor
• Federal Minimum Wage = $7.25
STRUCTURAL UNEMPLOYMENT
The Effect of a Minimum Wage on the Labor Market
Wage
Rate
Structural
unemployment
W
F
Minimum
wage
W
E
Legal flow on Wages, WF
Leads to a persistent surplus
in the labor market
QD
QE
QS
Quantity of
Labor
STRUCTURAL UNEMPLOYMENT
• Why impose minimum wages?
• Help ensure that people who work can earn
enough income to afford at least a
minimally comfortable lifestyle
LABOR UNIONS
• Labor unions can lead to structural
unemployment
• Labor Unions, by bargaining for all a firm’s
workers collectively (collective bargaining),
unions can often win higher wages from
employers than the market would have
otherwise provided when workers bargained
individually.
STRUCTURAL UNEMPLOYMENT
• Actions by firms can also lead to structural
unemployment
• Efficiency wages - wages that employers set
above the equilibrium wage rate as an
incentive for better performance.
STRUCTURAL UNEMPLOYMENT
• Side effects of government policies - public
policies designed to help workers who lose
their jobs; these policies can lead to
structural unemployment as an unintended
side effect.
NATURAL RATE OF UNEMPLOYMENT
• The natural rate of unemployment is the
normal unemployment rate around which
the actual unemployment rate fluctuates. It
is the unemployment rate that arises from
the effects of frictional plus structural
unemployment.
• Cyclical unemployment is a deviation in the
actual rate of unemployment from the
natural rate.
NATURAL RATE OF UNEMPLOYMENT
• Natural unemployment = Frictional
unemployment + Structural unemployment
• Actual unemployment = Natural
unemployment + Cyclical unemployment
NATURAL RATE OF UNEMPLOYMENT
• What causes the natural rate of
unemployment to change
• Characteristics of the labor force
• Changes in labor market institutions
• Changes in government policies
CHANGES IN LABOR FORCE
CHARACTERISTICS
• Unemployment rates tend to be lower
for experienced than for
inexperienced workers
CHANGES IN LABOR MARKET
INSTITUTIONS
• Labor Unions negotiating wages higher than
the equilibrium level
• Temporary employment agencies
• Monster.com
• Technological change
• Leads to increase in demand for skilled workers
CHANGES IN GOVERNMENT POLICIES
• High minimum wage can cause structural
unemployment
• Generous unemployment benefits
• Reducing unemployment:
• Job training
• Employment subsidies