© 2007 Thomson South-Western
IDENTIFYING UNEMPLOYMENT
• How Is Unemployment Measured?
– Categories of Unemployment
• The problem of unemployment is usually divided into
two categories, the long-run problem and the short-run
problem.
• The natural rate of unemployment
• The cyclical rate of unemployment
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How is Unemployment Measured?
• Natural Rate of Unemployment
• The natural rate of unemployment is unemployment
that does not go away on its own even in the long
run.
• It is the amount of unemployment that the economy
experiences in the long-run.
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How Is Unemployment Measured?
• Cyclical Unemployment
• Cyclical unemployment refers to the year-to-year
fluctuations in unemployment around its natural
rate.
• It is associated with short-term ups and downs of
the business cycle.
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How Is Unemployment Measured?
• Describing Unemployment: Three Basic
Questions
• How does government measure the economy’s rate
of unemployment?
• What problems arise in measuring the
unemployment rate?
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How Is Unemployment Measured?
• Unemployment is measured:
• by the Bureau of Labor Statistics (BLS) in the US.
• by the Turkish Statistical Institute (TURKSTAT) in
Turkey.
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How Is Unemployment Measured?
• Every three months, TURKSTAT conducts
“Household Labor Force Surveys”.
• Based on the answers to the survey questions,
TURKSTAT places each adult (population over
the age 15) into one of three categories:
• Employed (includes “Underemployed” as well)
• Unemployed
• Not in the labor force
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How Is Unemployment Measured?
• Population = Children + Adult Population
• Adult Population = Employed + Unemployed +
Not in the Labor Force
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How Is Unemployment Measured?
• Employed vs. unemployed
• A person is considered employed if s/he has spent
some of the previous week working at a paid job.
• A person is unemployed if s/he is looking for a job,
is on temporary layoff, or is waiting for the start
date of a new job.
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How Is Unemployment Measured?
• A person is underemployed if s/he is looking for
another job because:
• not working full time when s/he wants to
• not employed in his/her profession
• getting paid too little.
• A person who is not looking for a job, a full-time
student, a housewife, a retiree, ill, old or disabled is
not in the labor force.
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How Is Unemployment Measured?
• Labor Force
• The labor force is the total number of workers,
including the employed and the unemployed.
Labor Force = Employed + Unemployed.
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How Is Unemployment Measured?
• The unemployment rate is calculated as the
percentage of the labor force that is
unemployed.
Number Unemployed
Unemployment Rate 
x100
Labor Force
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How Is Unemployment Measured?
• The underemployment rate is calculated as the
percentage of the labor force that is
underemployed.
Number Underemployed
Underemployment Rate 
x100
Labor Force
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How Is Unemployment Measured?
• The labor-force participation rate is the
percentage of the adult population that is in the
labor force.
Labor force participation rate
Labor force X

100
Adult population
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How Is Unemployment Measured?
• Turkey’s figures show declining unemployment
rates during 2002-2004.
© 2007 Thomson South-Western
Figure 2 U.S. Unemployment Rate Since 1960
Percent of
Labor Force
10
Unemployment rate
8
6
Natural rate of
unemployment
4
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
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Figure 3 U.S. Labor Force Participation Rates for Men and
Women Since 1950
Labor-Force
Participation
Rate (in percent)
100
80
Men
60
40
Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
© 2007 Thomson South-Western
Problems in Measuring the
Unemployment Rate
• It is difficult to distinguish between a person
who is unemployed and a person who is not in
the labor force.
• Discouraged workers, people who would like to
work but have given up looking for jobs after an
unsuccessful search, don’t show up in
unemployment statistics.
• Other people may claim to be unemployed in order
to receive unemployment insurance, even though
they aren’t looking for work.
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Problems in Measuring the
Unemployment Rate
• Existence of a large underground economy in
Turkey. Large numbers appear to be “not in the
labor force” but in fact they work.
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Why Are There Always Some People
Unemployed?
• In an ideal labor market, wages would adjust to
balance the supply and demand for labor,
ensuring that all workers would be fully
Labor Supply
employed. Wage
WE
Labor Demand
QE
Quantity of labor
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Why Are There Always Some People
Unemployed?
• Frictional unemployment refers to the
unemployment that results from the time that it
takes to match workers with jobs.
• In other words, it takes time for workers to search
for the jobs that are best suit their tastes and skills.
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Why Are There Always Some People
Unemployed?
• Structural unemployment is the unemployment
that results because the quantity of labor
demanded (# of jobs available) in some labor
markets is always smaller than quantity of labor
supplied. This is because the actual wage rate
is kept above the equilibrium wage rate due to:
• Minimum wage laws
• Unions
• Efficiency wages
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Frictional Unemployment: JOB SEARCH
• Job search is the process by which workers
find appropriate jobs given their tastes and
skills.
• It results from the fact that it takes time for
qualified individuals to be matched with
appropriate jobs.
• Job search causes frictional unemployment.
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Frictional Unemployment: JOB SEARCH
• Job search is not due to a wage rate higher
than equilibrium. Therefore job search does
not cause structural unemployment.
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Why Some Frictional Unemployment Is
Inevitable
• Frictional unemployment is inevitable because
the economy is always changing.
• Changes in the composition of demand among
industries or regions are called sectoral shifts.
Ex: From agriculture towards manufacturing
and services in Turkey.
• It takes time for workers to search for and find
jobs in new sectors.
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Public Policy and Job Search
• Internet helps better information flow.
• Government programs can reduce the time it
takes unemployed workers to find new jobs.
• These programs include the following:
• Government-run employment agencies. Ex: Turkish
Job Placement Agency- Türkiye İş Kurumu
• Public training programs.
• Unemployment insurance.
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Public Policy and Job Search
• Unemployment insurance is a program that
makes payments for a limited time to insured
workers after they become unemployed. Aim is
to protect workers.
• Unemployment insurance fund is supported by
current workers, employers and the
government.
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Public Policy and Job Search
• Unemployment insurance
• improves the chances of workers being matched
with the jobs that better fit their skills and
preferences. So may increase labor productivity.
• may increase the amount of frictional
unemployment. Because of less pressure to find a
job, unemployed workers may reduce their job
search effort.
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Structural Unemployment
• Structural unemployment occurs when the
quantity of labor supplied exceeds the quantity
demanded.
• Structural unemployment is often thought to
explain longer durations of unemployment.
• Why is there Structural Unemployment?
• Minimum-wage laws
• Unions
• Efficiency wages
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MINIMUM-WAGE LAWS
• When the minimum wage is set above the level
that balances supply and demand, it creates
unemployment.
• Minimum wage law (MWL) is not the most
important cause of structural unemployment
because most wages are above the minimum
wage. Therefore MWL is not binding for many
workers. It is binding only for low skilled
labor.
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MINIMUM-WAGE LAWS
• In Turkey,
– gross minimum wage: 562,50 YTL
– net minimum wage: 403,02 YTL
– 159,48 YTL difference includes income tax (15%),
social security premium (14%), unemployment
insurance (1%)
– cost to employer: 683,44 YTL
– 120,94 YTL difference includes social security
premium (19,5%), unemployment insurance (2%)
© 2007 Thomson South-Western
Figure 4 Unemployment from a Wage Above the Equilibrium
Level
Wage
Labor
supply
Surplus of labor =
Unemployment
Minimum
wage
WE
Labor
demand
0
LD
LE
LS
Quantity of
Labor
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UNIONS AND COLLECTIVE
BARGAINING
• A union is a worker association that bargains
with employers over wages, benefits and
working conditions.
• A union is a type of cartel attempting to exert
its market power.
• Union density is equal to union members /
labor force. 59% in Turkey, 30% in UK, 15%
in US, 79% in Sweden, 88% Denmark.
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UNIONS AND COLLECTIVE
BARGAINING
• The process by which unions and firms agree
on the terms of employment is called collective
bargaining.
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UNIONS AND COLLECTIVE
BARGAINING
• A strike will be organized if the union and the
firm cannot reach an agreement.
– A strike occurs when the union organizes a
withdrawal of labor from the firm.
© 2007 Thomson South-Western
UNIONS AND COLLECTIVE
BARGAINING
• A strike makes some workers better off and
other workers worse off.
• Workers in unions (insiders) reap the benefits
of collective bargaining, while workers not in
the union (outsiders) bear some of the costs.
© 2007 Thomson South-Western
UNIONS AND COLLECTIVE
BARGAINING
• By acting as a cartel with ability to strike or
otherwise impose high costs on employers,
unions usually achieve above-equilibrium
wages for their members.
• Union workers earn 10 to 20 percent more than
nonunion workers.
© 2007 Thomson South-Western
Are Unions Good or Bad for the
Economy?
• Critics argue that unions cause the allocation of
labor to be inefficient and inequitable.
• Wages above the competitive level reduce the
quantity of labor demanded and cause
unemployment. Employer lays off some of the
workers to avoid bankruptcy.
• Unionized workers benefit at the expense of
workers in non-unionized sectors.
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Are Unions Good or Bad for the
Economy?
• Advocates of unions contend that unions are a
necessary antidote to the market power of firms
that hire workers.
• They claim that unions are important for
helping firms respond efficiently to workers’
concerns.
• In summary, it is a political debate.
© 2007 Thomson South-Western
THE THEORY OF EFFICIENCY WAGES
• Efficiency wages are above-equilibrium wages
paid by firms in order to increase worker
productivity.
• The theory of efficiency wages states that
workers operate more efficiently if wages are
above the equilibrium level.
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THE THEORY OF EFFICIENCY WAGES
•
A firm may prefer higher than equilibrium
wages for the following reasons:
1. Worker health: Better paid workers eat a better diet, get
better health services and thus are more productive.
2. Worker turnover: A higher paid worker is less likely to
look for another job.
3. Worker effort: Higher wages motivate workers to put
forward their best effort.
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THE THEORY OF EFFICIENCY WAGES
4. Worker quality: Higher wages attract a
better pool of workers to apply for jobs.
EX: painting job. Two workers, one high quality: Erdem;
one low quality: Cem. Erdem’s reservation wage is 10
YTL/hour, Cem’s is 2YTL/hour. Assume I cannot
measure quality. Then if I offer 6 YTL/hour, only Cem
will accept the job. Erdem will refuse. Asymmetric
information causes high quality applicant to refuse. To
prevent this, I offer 11 YTL/hour. Then I have 50%
chance to get high quality applicant.
© 2007 Thomson South-Western