CH7- The labour Market:
PART 1- Overview of the labour market.
chain effects: Z → Y→ N → UN → W → Prodn costs → P → W …..
Medium Run: we relax the assumption of fixed or constant P,
: relax the assumption of no supply side constraints.
This chapter provides an overview of:
PART 1: labour market
PART 2: wages & price determination
A Tour of the Labour Market

Fig 7.1: Population, Labour-force, N & UN in S.A. (2018)
Population = institutional + noninstitutional civilian population (CP)
Institutional CP = <16+penal + mental + homes + armed forces
Noninstitutional CP = labour force + out of labour force
Labour Force = employed + unemployed
Out of Labour Force = discouraged + students + retired?(>64)
+ disabled + are able to but do not want work
Based on the narrow definition of unemployed.
A person who works full-time or part-time and receives remuneration in wages, salary, commission, tips, piece-rates (payment for each item produced) or pay in kind. (The last one appears ambiguous!)
Using the narrow definition of unemployed, unemployed people are those who took active steps to find work and are available to work. (The South African Quarterly Labour Force Survey Guide
provides a more concise definition for unemployed persons. For purposes of this course only, the definition provided in this footnote is adequate. For other purposes, you may be expected to use the
concise definition.)
𝐿𝑎𝑏𝑜𝑢𝑟𝐹𝑜𝑟𝑐𝑒

22.589

Participation rate = 𝑁𝑜𝑛𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙𝐶𝑖𝑣𝑖𝑙𝑖𝑎𝑛𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑋100%= 37.985 𝑋100% = 59.5%

Unemployment rate =
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
6.209
𝑋100% =
𝑋100%= 27.5%
𝐿𝑎𝑏𝑜𝑢𝑟𝐹𝑜𝑟𝑐𝑒
22.589
Narrow vs Broad definition of UN rate?
Fig 7.3: Plots the unemployment rate based on both the strict measure and the expanded/ broad measure.
The broad unemployment rate is calculated as follows:
(𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑆𝑡𝑟𝑖𝑐𝑡 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑟𝑎𝑔𝑒𝑑 𝑤𝑜𝑘𝑒𝑟𝑠)
𝑋 100%
(𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 + 𝐷𝑖𝑠𝑐𝑜𝑢𝑟𝑎𝑔𝑒𝑑 𝑊𝑜𝑟𝑘𝑒𝑟𝑠)
Absorption Rate or employment rate =
𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑋100%
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐴𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
16.38
𝑋100% = 43%
37.985
The Large Flows of Workers
•A given ut may reflect an active labour market i.e. one with many separations and hires OR
the opposite: a sclerotic L-mkt (?) with few separations, few hires and a stagnant pool of unemployed.
•UN classifications (why?)
Frictional UN
Cyclical UN
Structural UN
•Fig 7.2: Avg quarterly Flows between Employment, Unemployment & Nonparticipation in S.A. (2000-2018)
“On average, there are 159 000 separations each quarter in South Africa (out of an employment pool of 12.32 million):
32 000 workers move directly from one job to another (shown by the circular arrow at the top of the figure). Another 74
000 move from employment to unemployment (shown by the arrow from employment to unemployment). And 53 000
move from employment to out of the labour force (shown by the arrow from employment to out of the labour force).”
A second measure i.e. the average duration of unemployment is another indication of whether a labour market is active
or sclerotic.
It is defined as the inverse of the proportion of unemployed leaving unemployment each month.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑂𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑𝐿𝑒𝑎𝑣𝑖𝑛𝑔𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
≈ 𝐼𝑁𝑉𝐸𝑅𝑆𝐸 𝑜𝑓
𝑋100
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Q: Why is the average duration of unemployment the inverse of those leaving unemployment?
A: Assume that unemployment in an economy is fixed at 15mil and 5mil exit each month then, the average unemployed
person will leave unemployment after 3 months. Alternatively assume each person remains unemployed for 3 months,
Unemployment is fixed at 15mil people. Then at any given time a third have been unemployed for 1 month another third for
2 months and a final third for 3 months. Each month the latter third exit i.e. 5mil people leave out of 15mil which means the
proportion of unemployed leaving unemployment is 1/3 which gives us an average duration of unemployment of 3 months.
Use the data in the figures to calculate the main labour market rates for country A and B and then compare them
to determine which country has a less active or more sclerotic labour market.
MONTHLY LABOUR FLOWS FOR COUNTRY A
 Unemployment Rate
=
=
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑥 100%
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑥 100%
(# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + # 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑)
Country A:
4
(4+8)
Country B:
9
(9+18)
𝑥 100% = 33.33%
𝑥 100% = 33.33%
 Participation Rate
=
=
=
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
𝑥 100%
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐴𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
(# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + # 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑)
𝑥 100%
(𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 + 𝑂𝑢𝑡 𝑜𝑓 𝑡ℎ𝑒 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒 )
#𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + # 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
#𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + #𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 𝑂𝑢𝑡 𝑜𝑓 𝑡ℎ𝑒 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
Country A:
(4+8)
[(4+8)+8]
Country B:
(9+18)
[(9+18)+18]
𝑥 100% = 60%
𝑥 100% = 60%
𝑥 100%
 Absorption Rate
# 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑥 100%
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐴𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
Country A:
8
20
𝑥 100% = 40%
Country B:
18
45
𝑥 100% = 40%
The above standard labour market indicators are identical for both countries, and
therefore provide very little information about the which of the two labour markets are
more active or more sclerotic.
One difference is that the broad unemployment rate for country B is larger than country
A.
 Broad Unemployment Rate
=
(# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 +# 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑟𝑎𝑔𝑒𝑑 𝑊𝑜𝑟𝑘𝑒𝑟𝑠)
(𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒+ # 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑟𝑎𝑔𝑒𝑑 𝑊𝑜𝑟𝑘𝑒𝑟𝑠)
Country A:
(4 +2)
(12+ 2)
𝑥 100% = 42.86%
Country B:
(9 +13)
(27+ 13)
𝑥 100% = 55%
𝑥 100%
In order to determine which market is more active or more sclerotic, we need to
compare additional measures
 The first, is the flows out of unemployment:
1) Proportion of unemployed who find employment. It is larger for country A than
for country B
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑡ℎ𝑎𝑡 𝑓𝑖𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
𝑥 100%
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Country A:
0.8
4
𝑥 100% = 20%
Country B:
0.6
9
𝑥 100% = 6.67%
2) Proportion of unemployed who leave the labour force. It is larger in country B than
for country A.
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑤ℎ𝑜 𝑙𝑒𝑎𝑣𝑒 𝑡ℎ𝑒 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Country A:
Country B:
0.4
4
1.5
9
𝑥 100%
𝑥 100% = 10%
𝑥 100% = 16.67%
Furthermore for country B:
The proportion of workers leaving the labour force (16.67%), is greater than the
proportion finding work (6.67%). This may represent the large number of job seekers to
have become discouraged workers. This indicates a less active or more sclerotic labour
market.

The second, is the average duration of unemployment,
The average duration of unemployment is greater in country B than in country A implying that on average, people remain
unemployed longer in country B than in country A, another indication that country B has a less active or more sclerotic
labor market compared to country A.
Country A:
Country B:
1
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑡ℎ𝑎𝑡 𝑓𝑖𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡+# 𝑙𝑒𝑎𝑣𝑒 𝑡ℎ𝑒 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
1
# 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑡ℎ𝑎𝑡 𝑓𝑖𝑛𝑑 𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡+# 𝑙𝑒𝑎𝑣𝑒 𝑡ℎ𝑒 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
# 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
=
=
1
0.8+0.4
4
1
0.6+1.5
9
= 1 0.3 = 3.33 𝑚𝑜𝑛𝑡ℎ𝑠
= 1 0.23 = 4.28 𝑚𝑜𝑛𝑡ℎ𝑠