UNEMPLOYMENT AS AN ECONOMIC PHENOMENON
DESISLAVA NIKOLOVA (IME)
This project has been funded with support from the Youth in Action Program of the European Commission, managed in Bulgaria by the National
Centre “European Youth Programmes and Initiatives”. This publication reflects the views only of the author, and the Commission, the Youth in
Action Program and the National Centre “European Youth Programmes and Initiatives” cannot be held responsible for any use which may be
made of the information contained therein.
Unemployment - definitions
 In order to be counted as unemployed, one should not be
employed and also meet several criteria:
1/ to be out of work
2/ to be actively searching for work (usually, if one has looked
for a job in the past 4 weeks, he/she meets the criterion)
3/ to be available to start work
Unemployment rate = Unemployed/Labour Force
The sum of those unemployed and those employed form the
labour force of a nation, also known as the economically active
population.
Unemployment - reasons
 On the demand side:
1/ labour costs on top of wages – social security contributions,
other direct and indirect costs (working time, work
conditions)
2/ severance pays
3/ labour union power – e.g. collective labour contracts,
coordination of layoffs with unions
4/ minimum wages, minimum insurance incomes (BG)
5/ economic cycle
Unemployment – reasons (2)
 On the supply side:
1/ Inadequate education and skills (not responding to business
needs)
2/ High “reservation wages” – reservation wages are individual
thresholds for each individual, in a given time and for a given job
3/ Unemployment benefits – the higher unemployment benefits are,
and the longer one is entitled to these, the lower the incentive to
start a job
4/ Generous social safety net – e.g. long maternity leaves/high
maternity benefits, generous social aids, vast opportunities for
early retirement and disability pensions, etc.
5/ Demography
6/ High income taxes and labour taxes paid by the employees
Unemployment – types
 Natural unemployment (M. Friedman and E. Phelps, 1960s): the
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hypothetical equilibrium rate, at which the labour market clears, i.e.
demand meets supply at a particular wage
Frictional /search unemployment – the time period between jobs
when a worker is searching for, or transitioning from one job to another.
It is voluntary unemployment
Cyclical unemployment – due to economic cycle
Structural unemployment – as a result of the structure of the
economy; the unemployed lack the skills and training needed for the
new structure
Long-term unemployment (usually most of it is structural): lasting
for longer than one year (Eurostat). It is an important indicator of social
exclusion. US Bureau of Labor Statistics: 27 weeks or longer.
Some authors: natural unemployment=sum of frictional and cyclical
unemployment
EU-27: Growth and Unemployment
12
10
8
6
4
2
-4
-6
GDP Growth
Unemployment Rate
2010
2009
2008
2007
2006
2005
2004
2003
2002
-2
2001
0
Related concepts
 Underemployment – people who work less hours than they
wish to, or take up less-paid, low-skilled jobs
 Hidden unemployment – not shown in official statistics (incl.
underemployed, early retirees, inactive and discouraged people)
 Discouraged workers - a person who wants and is available for
a job but who is not currently looking due to low prospects for
finding one; usually long-term unemployed become discouraged
 Misery index – sum of unemployment and inflation; gained
popularity as an indicator of economic distress during the U.S.
presidential election of 1980.
Since 1980 the misery index has declined but the contribution of
unemployment increased sharply during the Great Recession.
Unemployment theory (1)
 Philips curve: William Phillips: Relation between Unemployment and
the Rate of Change of MoneyWage Rates in the UK, 1861-1957 (1958).
 Later, the inverse relationship was extended to price inflation and
unemployment (P. Samuelson, R. Solow) on the basis of
observations for other countries
 But: how do you explain stagflation then? US: oil price shocks in
the 1970es
 M. Friedman: The Phillips curve relationship was only a short-run
phenomenon. In the long run, workers and employers will take
inflation into account, resulting in pay rises at rates near inflation.
Unemployment theory (2)
 Philips curve is vertical in the long run (=NAIRU, non-
accelerating inflation rate of unemployment model);
unemployment can move away from its natural rate only
temporarily due to rational expectations
 More recent research: moderate trade-off between low levels
of inflation and unemployment (Akerlof, Dickens, Perry)
If inflation is reduced from 2 to 0%, unemployment will
grow permanently by 1.5pp. Explanation – money illusion
(i.e. higher tolerance for real wage cuts than nominal ones).
Philips curve
Human cost of unemployment (1)
 Mao and Loungani (2010): Apart from economic losses, human
cost of unemployment significant, too
1/ Layoffs associate with loss of earnings not just during the
jobless episode but far into the future (Sullivan and von Wachter,
2009). Losses are higher if one remains jobless during a
recession.
 Studies of the US and Europe: even 15 to 20 years after a job
loss during a recession, earnings of those who lost their jobs are
20% lower than those of comparable workers who kept their jobs.
 The adverse effects on lifetime earnings are most pronounced for
young people, especially after college graduation: in recession they
tend to take worse jobs than they would otherwise, which leads to
“cyclical downgrading.”
Human cost of unemployment (2)
2/ Human toll not limited to monetary losses: health and
life loss, too
 Layoffs are associated with a higher risk of heart attack and
other stress-related illnesses in the short term. In the long
term, the mortality rate of laid-off workers is higher.
 For the US, increased mortality rate persists up to 20 years
after the job loss, leads to 1-1.5-year lower life expectancy.
3/ Job loss can reduce the academic achievement of
children of the unemployed: one study found that such
children were 15% more likely to repeat a grade.
Human cost of unemployment (3)
/ In the long term, fathers’ income loss also reduces the earnings
prospects of their children (Canada: annual earnings 10%
lower)
5/ Lower parental income has been correlated with children’s
significantly higher mortality later in life, even after
controlling for the children’s own income and education
(Sweden).
 All the above costs rise with the period of unemployment
 Chance of finding a job decreases sharply the longer one is out of
job: an unemployed for more than 6 months has only a 1-in-10
chance of finding a job in the subsequent 30 days (US).