Lecture 4

UNEMPLOYMENT

References:
N.G. Mankiw, “Principles of Macroeconomics”, 3rd edition,
chapter 10, 11
NEU, “Economics”, chapter 14

September 2018
Content

1. Definition of Unemployment

2. Measurement of Unemployment

3. Classification of Unemployment
Unemployment in the Euro-Zone –
April 2012
 (c) Unemployment Rate
Percent of
Labor Force Recessions
12

10
Unemployment rate
8

0
1965 1970 1975 1980 1985 1990 1995
 A Look At Short-Run Economic Fluctuations

Percent of
Labor Force Recessions
12

10 Real GDP

8
U rate

0
1965 1970 1975 1980 1985 1990 1995
1. Definition of
unemployment

 Definition
 Unemployment
 Employment
 Labor force
 I. Definition
POPULATION

Children (under 15yrs) Adult (from 15yrs)

Labour Force Outside LF

Elderly House
wife/husband
Employed Unemployed
Disibles Retire

Students in education and training

 II. Measurement
Number of Unemployed
Unemployment rate = * 100 (%)
Labor Force

Working time Working days

= * 100 (%)
rate Total days ready to work

Labor force
LF-participation = * 100 (%)
rate Adult Population
The breakdown of the Population
US 2009
Actual rate and Natural rate of
Unemployment
III. Classification of Unemployment
1. Unemployment in long-run and short-run
 Long-run: Natural Unemployment
• Normal unemployment rate
• Inevitable / Unavoidable

 Short-run: Cyclical Unemployment

• Fluctuates around Natural Unemployment rate
• Varies with changes in economic cycle
Actual Unemployment rate
and Natural Unemployment rate
 Unemployment rate – US economy
Percent of Cyclical Actual
Labor Force Natural Unemployment Unemployment
Unemployment rate rate
12 rate

10
Unemployment rate
8

0
1965 1970 1975 1980 1985 1990 1995
2. Classification of Unemployment
2. Reasons of Unemployment
 Long-run:
1. Frictional/Temporary unemployed
2. Structural unemployed
3. Classical unemployed
 Short-run: Economic recession/depression
 Classical Unemployment

• Law of Minimum-Wage
• Labor Union and Collective Bargaining
• Theory of efficiency wage
 Wage rigidity prevent market clearing
Wage is kept above level at equilibrium w0
Wage
Unemployment Supply of Labour

W1

W0

Demand for labour

0 LD L0 LS Labour
 Effects of Labour Union
 Firm A has labor union and firm B has not
W W
Suplus of Labor LSA LSB

W1 LS’B

W0 W0

W2

LDA
LDB

0 LD L0 LS LA 0 L0 L’0 LB
 Theory of Efficiency Wage
Wage is kept above level at equilibrium W0
 Increase worker productivity
Wage
Unemployment Supply of Labour

W1

W0

Demand for labour

0 LD L0 LS Labour
Henry Ford’s strategy of high wage
 How high is the new wage?
 How does it influence total cost?
 How does it influence total revenue?
 Any suggestion for other firms?
Home work – prepare for Lecture 3
 What is money?
 Simply describe the banking system?
 Simply describe the financial system?
 Some basic concepts related?