Chapter 14:
UNEMPLOYMENT
AND ITS NATURAL RATE
Problem of unemployment
 The
long-run unemployment or the natural
rate of unemployment is the amount of
unemployment that the economy normally
experiences
 The Short-run unemployment or cyclical
unemployment refers to the year-to-year
fluctuations in unemployment around its
natural rate
 We focus on the natural rate of
unemployment
Outline
 Measurement
of unemployment rate
 Interpretations of unemployment data
 Explain the determinants of natural rate of
unemployment
Measurement of unemployment
 Source
is the Labour Force Survey
 Each surveyed household is classified as



Employed
Unemployed
Not in the labour force
 Labour
force= # employed+ # unemployed
 Unemployment rate is the percentage of
labour force that is unemployed
Measurement of unemployment

Labour-Force Participation Rate (LFPR) is the
percentage of adult population that is in the
labour force
 Unemployment rates: Variation by region, by
age, and by gender
Measurement of unemployment
Participation
rate
Source: Statistics Canada, CANSIM, table 282-0002
Labour Force Participation Rates by
Gender: 1976-2002
Source: Statistics Canada, CANSIM, table 282-0002
Unemployment rates by gender, 1976-2001
Unemployment rates for age group: 15-24 years and for
all 15+
CANADA: AVERAGE WEEKS UNEMPLOYED, BOTH SEXES ( 15
YEARS AND OVER), 2002
Jan
15
Feb
16.3
Mar
17.9
Apr
17.3
May
15.9
Jun
17.3
Jul
15.6
Aug
15.6
Sep
15.9
Oct
16
Nov
15.9
Dec
15.8
Unemployment Rates by Region
Source: Statistics Canada, CANSIM, table 282-0055
Problems with the measurement of
unemployment

Movements into and out of labour force are
common
 Behaviour of EI beneficiaries
 Discouraged workers
 Duration of unemployment


Most spells of unemployment are short, and most
unemployment at any given time is long-term
Low LFPR
Types of unemployment

Natural rate of unemployment is the rate of
unemployment to which the economy tends to
return in the long-run
 Frictional unemployment results because of
the time it takes workers to search for jobs
that suit their skills and tastes
 Structural unemployment results because the
number of jobs available in some labour
markets is insufficient to provide a job to
every worker who wants one
Types of unemployment

Natural rate of unemployment is the rate of
unemployment to which the economy tends to
return in the long-run
 Frictional unemployment results because of the
time it takes workers to search for jobs that suit
their skills and tastes
 Structural unemployment results because the
number of jobs available in some labour markets
is insufficient to provide a job to every worker
who wants one
Natural and observed rate of unemployment, 1976-2001
Unemployment and causes
 Frictional


Job search: the process by which workers find
appropriate jobs given their tastes and skills
Public policy and job search: EI
 Causes



unemployment
of Structural unemployment:
Minimum-wage laws: above equilibrium wage
Unions and collective bargaining: type of cartel
Efficiency wages are above equilibrium wages
paid by firms to increase worker productivity
The theory of efficiency wages
 Why




do firms want to pay higher wages?
Worker health
Worker turnover
Worker effort
Worker quality
 Worker-quality
variant of efficiency wage
theory illustrates the principles of adverse
selection and moral hazard