Chapter 27
Unemployment
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
8th Edition, McGraw-Hill, 2005
PowerPoint presentation by Alex Tackie and Damian Ward
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Some key terms
• Unemployment rate:
– the percentage of the labour force without a job
but registered as being willing and available for
work.
• Labour force
– those people holding a job or registered as being
willing and available for work.
• Participation rate
– the percentage of the population of working age
declaring themselves to be in the labour force.
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TOTAL POPULATION
Age ≥ 15 (Adult Population)
Age < 15
Non-Institutional (Civilian) Population
*Not in Labor Force
Institutional Population:
1. Army
2. Prisoners
3. Health Institutions
Labor Force
• Students
Retired
Homemakers
Rentier income earners
Disabled or sick
Miscellaneous other
Employed
Wage and salary earners
Business owners
Self-employed workers
Unpaid family workers
Unemployed
1. is not currently employed
2. actively seeking a job
3. ready to start work if offered
employment
Labour Force = Employed + Unemployed
Unemployment Rate U = Unemployed =
Unemployed
Labor Force Employed + Unemployed
Labor Force Participation Rate = Labour Force
Total Civilian Population
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Disguised Unemployment
• Discouraged Workers: Workers who
stopped looking for a job because they
have no hope of finding one.
• Underemployment: Workers who
have a job but looking for an additional
or other job, because worker is
dissatisfied with pay/conditions.
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The Labor Market in Turkey
Total Population 2009
71+ million
Minus Armed forces and Incarcerated
Civilian Non-institutional Pop.
Minus Pop. under 15
- (?) million
70. 542 million
- 20 million
Civilian Non-institutional Adult Pop. 51.686 million
Minus not in the Labor Force
-26.938 million
Civilian Labor Force
Employed
Unemployed
24.748 million
21.277 million
3.471 million
Slide #5
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The Labor Market in Turkey
The Labor Force Participation Rate=
LaborForce
24.748

 47.9% (2009)
Noninstitutional AdultPop.n 51.686
From 52% in 2001;
What has caused the participation rate to decrease
over time?
Slide #6
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The Labor Market in Turkey
Differences Across Workers
2009 Labor Force Participation Rates
Turkey
Males
Females
Urban Females
Rural Females
Slide #7
47.9%
70.5%
26.0%
22.3%
32.7%
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The Labor Market in Turkey
• The unemployment rate =
Unem ployed 3.471

x100  14.0% (2009)
LaborForce 24.748
Slide #8
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Unemployment Data: Turkey
Urban Unemployment
30
%
25
20
Male Unemployment
Rate
15
Female
Unemployment Rate
10
5
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
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Slide #9
Unemployment Data: Turkey
Urban Unemployment
30.0
25.0
20.0
Total
15.0
Male
Female
10.0
5.0
0.0
1
2
3
4
5
6
7
8
9
10
11
12
13
Slide #10
14
15
16
17
18
19
20
21
22
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Unemployment Data: Turkey
Rural Unemployment
RURAL-UR
9
8
7
6
5
TOTAL
MALE
4
3
2
1
0
Slide #11
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
FEMALE
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Unemployment Data: USA
Slide #12
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% p.a.
Unemployment in the UK
1950-2003
14
12
10
8
6
4
2
0
0
5
0
5
0
5
0
5
0
5
0
5
5
6
6
7
7
8
8
9
9
0
19
19
19
19
19
19
19
19
19
19
20
Source: Economic Trends Annual Supplement, Labour Market Trends
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Unemployment (%) in selected countries
16
14
12
10
% 8
6
4
2
0
1972
UK
1982
Ireland
1992
France
EU
2001
USA
2004
Turkey
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Labour market flows
It is tempting to see the labour market in static terms
LABOUR FORCE
Working
Unemployed
Non-participants
but...
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Labour market flows
LABOUR FORCE
Working
Retiring
Temporarily
leaving
Taking
a job
New hires
Recalls
Unemployed
Job-losers
Lay-offs
Quits
Discouraged
workers
Non-participants
Re-entrants
New entrants
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Types of unemployment
• Seasonal
arises due to cyclical nature of economic activity in some
sectors such as agriculture, tourism, construction.
• Frictional
– the irreducible minimum level of unemployment in a
dynamic society
• people between jobs
• the ‘almost unemployable’
• Structural
– unemployment arising from a mismatch of skills and job
opportunities when the pattern of demand and production
changes
• it takes time for ex-coal miners to retrain as international
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bankers
Types of unemployment (2)
Different Schools of Thought in Economics offer
different accounts of why Unemployment arises
• Keynesian View: Demand-deficient
unemployment
– occurs when output is below full capacity
– ‘Keynesian’ unemployment occurs in the
transitional period before wages and prices have
fully adjusted
• Neoclassical View: Classical unemployment
– created when the wage is deliberately maintained
above the level at which labour supply and labour
demand schedules intersect
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Keynesian unemployment
Real wage
AJ
A
E
w*
w2
G
LF
F
H
LD
LD’
Beginning at E, suppose
labour demand falls to LD’.
With sticky wages and prices
in the short-run, the economy
will move to equilibrium at A
and there will be unemployment
of AF. Of which EF will be
voluntary and AE will be
involuntary (ie Keynesian).
If labour demand remains at LD’,
the new equilibrium when wages
and prices have fully adjusted
will be at G.
Number of workers
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A ‘modern’ view of unemployment
• A similar categorisation is retained, but an
important distinction is to be noted between:
• Voluntary unemployment
– when a worker chooses not to accept a job at the
going wage rate.
• Involuntary unemployment
– when a worker would be willing to accept a job at
the going wage but cannot get an offer.
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The natural rate of unemployment
A neoclassical concept
• The natural rate of unemployment is the rate
of unemployment when the labour market is
in equilibrium.
• This is entirely voluntary.
• It includes:
– frictional unemployment
– structural unemployment
Yet one needs to question if unemployment
can ever be called natural? Voluntary?
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Unemployment Policies:
Different Schools of Thought in Economics offer different
policies to solve the Unemployment Problem
Neoclassical Economics → reduce wages to solve “classical unemployment”.
How?
•
Trade union reform: reducing the power of trade unions may limit distortions in
the labour market
•
Legal reforms: such as eliminating minimum wages
•
Tax reductions
Keynesian Economics → boost effective demand in the product market to
increase labor demand and solve “demand-deficient unemployment”
•
Investment
– higher investment may increase the demand for labour
• may be achieved via tax incentives or low interest rates
•
Solution to structural U: training and retraining measures
•
Solution to frictional U: improving the efficiency of the job search and worker
placement mechanisms
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Hysteresis
• The idea that a (short-run) fall in aggregate
demand can lead to a persistence of
unemployment even when the fall in
aggregate demand has been reversed.
• This could help to explain high and persistent
unemployment in Europe in the 1980s.
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Hysteresis (continued)
• Four channels:
– Insider-outsider distinction
• only those in work take part in wage bargaining & they
protect their own positions
– Discouraged workers
• people stop looking for jobs
– Search and mismatch
• firms and workers get used to low search
– capital stock
• low levels of investment in recession lead to permanently
low capital stock levels
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Summary
• Unemployment is a dynamic phenomenon.
• It impacts upon different groups differently.
• Different Schools of Thought in Economics
offer different accounts of why the problem
of unemployment arises and how to solve it.
• Modern view emphasises difference between
voluntary and involuntary unemployment.
• Hysteresis may help to explain unemployment
persistence.
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