978-1305971509 Chapter 28_15 Lecture Notes

WHAT’S NEW IN THE EIGHTH EDITION:

A new In the News feature on “Should the Minimum Wage Be Raised to $15 per Hour?” has

been added. The FYI feature in the previous edition on “Who Earns the Miniminum Wage”

has been updated and changed to a Case Study. A new question has been added to the

Problems and Applications section and all statistics and tables have been updated.

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

 the data used to measure the amount of unemployment.

 how unemployment can result from minimum-wage laws.

 how unemployment can arise from bargaining between /rms and unions.

450

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28 UNEMPLOYMENT

451 ❖ Chapter 28/Unemployment

 how unemployment results when /rms choose to pay e?ciency wages.

CONTEXT AND PURPOSE:

Chapter 28 is the fourth chapter in a four-chapter sequence on the level and growth of

output in the long run. In Chapter 25, we learned that capital and labor are among the

primary determinants of output and growth. In Chapter 26, we addressed how saving and

investment in capital goods aAect the production of output. In Chapter 27, we learned about

some of the tools people and /rms use when choosing capital projects in which to invest. In

Chapter 28, we see how full utilization of our labor resources improves the level of

production and our standard of living.

The purpose of Chapter 28 is to introduce students to the labor market. We will see how

economists measure the performance of the labor market using unemployment statistics.

We will also address a number of sources of unemployment and some policies that the

government might use to lower certain types of unemployment.

KEY POINTS:

 The unemployment rate is the percentage of those who would like to work who do not

have jobs. The Bureau of Labor Statistics calculates this statistic monthly based on a

survey of thousands of households.

 The unemployment rate is an imperfect measure of joblessness. Some people who call

themselves unemployed may actually not want to work, and some people who would like

to work have left the labor force after an unsuccessful search and therefore are not

counted as unemployed.

 In the U.S. economy, most people who become unemployed /nd work within a short

period of time. Nonetheless, most unemployment observed at any given time is

attributable to the few people who are unemployed for long periods of time.

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Chapter 28/Unemployment ❖ 452

 One reason for unemployment is the time it takes for workers to search for jobs that best

suit their tastes and skills. This frictional unemployment is increased as a result of

unemployment insurance, a government policy designed to protect workers’ incomes.

 A second reason our economy always has some unemployment is minimum-wage laws.

By raising the wage of unskilled and inexperienced workers above the equilibrium level,

minimum-wage laws raise the quantity of labor supplied and reduce the quantity

demanded. The resulting surplus of labor represents unemployment.

 A third reason for unemployment is the market power of unions. When unions push the

wages in unionized industries above the equilibrium level, they create a surplus of labor.

 A fourth reason for unemployment is suggested by the theory of e?ciency wages.

According to this theory, /rms /nd it pro/table to pay wages above the equilibrium level.

High wages can improve worker health, lower worker turnover, raise worker quality, and

increase worker eAort.

CHAPTER OUTLINE:

I. Unemployment can be divided into two categories.

A. The economy’s natural rate of unemployment refers to the amount of unemployment

that the economy normally experiences.

B. Cyclical unemployment refers to the year–to-year Guctuations in unemployment

around its natural rate.

II. Identifying Unemployment

A. How Is Unemployment Measured?

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453 ❖ Chapter 28/Unemployment

1. The Bureau of Labor Statistics (BLS) surveys about 60,000 households every

month.

2. The BLS places each adult (age 16 or older) into one of three categories:

employed, unemployed, or not in the labor force.

3. De/nition of labor force: the total number of workers, including both the

employed and the unemployed.

4. De/nition of unemployment rate: the percentage of the labor force that is

unemployed.

5. De/nition of labor-force participation rate: the percentage of the adult

population that is in the labor force.

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100

forceLabor

unemployedofNumber

ratentUnemployme

Labor force Number of employed Number of unemployed= +

Figure 1

Ask students which category they are in. Remind them that to be

considered to be unemployed, they must be without a job and looking for

work. Many students are not in the labor force, but may consider

themselves to be unemployed simply because they do not have a job.

Explain to students that the unemployment rate is a useful statistic

because it answers the following question: Of those in the economy who

Chapter 28/Unemployment ❖ 454

100x

populationAdult

forceLabor

rateionparticipatforceLabor 

6. Example: Data from January 2016. In that month, there were 150.5 million

employed people and 7.8 million unemployed people.

a. Labor Force = 150.5 + 7.8 = 158.3 million.

b. Unemployment Rate = (7.8/158.3) × 100 = 4.9%.

c. Because the adult population was 252.4 million, the labor-force participation

rate was:

Labor-Force Participation Rate = (158.3/252.4) × 100 = 62.7%.

ALTERNATIVE CLASSROOM EXAMPLE:

The country of Bada has collected the following information:

Population 240,000

Employed 180,000

Unemployed 30,000

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Make sure that students understand how to make these calculations.

Make sure that the formula is written on the board and refer to it often.

Table 1

455 ❖ Chapter 28/Unemployment

7. Table 1 shows unemployment and labor-force participation rates for various

sub-groups of the U.S. population.

a. Women of prime working age (25 to 54 years old) have lower rates of

labor-force participation than men, but once in the labor market, men and

women have similar rates of unemployment.

b. Prime-age blacks have similar labor-force participation rates as prime-age

whites, but they have much higher rates of unemployment.

c. Teenagers have much lower rates of labor-force participation and much higher

rates of unemployment than older workers.

8. Figure 2 shows the unemployment rate in the United States since 1960.

B. De/nition of the natural rate of unemployment: the normal rate of

unemployment around which the unemployment rate 1uctuates.

C. De/nition of cyclical unemployment: the deviation of unemployment from its

natural rate.

D. Case Study: Labor-Force Participation of Men and Women in the U.S. Economy

1. There has been a dramatic rise in the labor-force participation rates of women

since 1950.

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Discuss how the age composition of the labor force and other

demographic and social factors can cause the natural rate of

unemployment to vary over time. For 2015, economists at the

Congressional Budget O?ce have estimated a natural rate of 4.9%.

Figure 2

Chapter 28/Unemployment ❖ 456

2. Figure 3 shows this rise in the labor-force participation rate of women. The /gure

also shows that the labor-force participation rates for men have actually fallen by

a small amount over the same time period.

E. Does the Unemployment Rate Measure What We Want It To?

1. Measuring the unemployment rate is not as straightforward as it may seem.

2. There is a tremendous amount of movement into and out of the labor force.

a. Many of the unemployed are new entrants or re-entrants looking for work.

b. Many unemployment spells end with a person leaving the labor force as

opposed to actually /nding a job.

3. There may be individuals who are calling themselves unemployed to qualify for

government assistance, yet they are not trying hard to /nd work. These

individuals are more likely not a part of the true labor force, but they will be

counted as unemployed.

4. De/nition of discouraged workers: individuals who would like to work but

have given up looking for a job.

a. These individuals will not be counted as part of the labor force.

b. Thus, while they are likely a part of the unemployed, they will not show up in

the unemployment statistics.

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Figure 3

457 ❖ Chapter 28/Unemployment

Table 2

5. Table 2 presents other measures of labor underutilization calculated by the

Bureau of Labor Statistics.

Activity 1—Who Is Unemployed?

Type: In-class assignment

Topics: Unemployment categories

Materials needed: None

Time: 5 minutes

Class limitations: Works in any size class

Purpose

This assignment helps familiarize students with labor-force statistics.

Instructions

Ask the students to classify each of the following individuals in one of the

following categories: employed, unemployed, or not in the labor force.

1. Steve worked 40 hours last week in an o?ce supply store.

2. Last week, Elizabeth worked 10 hours as a computer programmer for the

National Video Company and attended night classes at the local college. She

would prefer a full-time job.

3. Roger lost his job at the R-gone Manufacturing Company. Since then he has

been trying to /nd a job at other local factories.

4.

Linda is a homemaker. Last week she was occupied with her normal household

chores. She neither held a job nor looked for a job.

F. How Long Are the Unemployed without Work?

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Chapter 28/Unemployment ❖ 458

1. Another important variable that policymakers may be concerned with is the

duration of unemployment.

2. Most spells of unemployment are short, but most unemployment observed at any

given time is long term.

G. Why Are There Always Some People Unemployed?

1. In an ideal labor market, wages would adjust so that the quantity of labor

supplied and the quantity of labor demanded would be equal.

2. However, there is always unemployment even when the economy is doing well.

The unemployment rate is never zero; it Guctuates around the natural rate.

a. De/nition of frictional unemployment: unemployment that results

because it takes time for workers to search for the jobs that best suit

their tastes and skills.

b. De/nition of structural unemployment: unemployment that results

because the number of jobs available in some labor markets is

insu8cient to provide a job for everyone who wants one.

c. Three possible reasons for structural unemployment are minimum-wage laws,

unions, and e?ciency wages.

H. FYI: The Jobs Number

1. When the Bureau of Labor Statistics announces the unemployment rate each

month, it also announces the number of jobs the economy gained or lost.

2. This information comes from a survey of 160,000 business establishments.

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459 ❖ Chapter 28/Unemployment

III. Job Search

A. De/nition of job search: the process by which workers 9nd appropriate jobs

given their tastes and skills.

B. Because workers diAer from one another in terms of their skills and tastes and jobs

diAer in their attributes, it is often di?cult for workers to match with the appropriate

job.

C. Why Some Frictional Unemployment Is Inevitable

1. Frictional unemployment often occurs because of a change in the demand for

labor among diAerent /rms.

a. When consumers decide to stop buying a good produced by Firm A and

instead start buying a good produced by Firm B, some workers at Firm A will

likely lose their jobs.

b. New jobs will be created at Firm B, but it will take some time to move the

displaced workers from Firm A to Firm B.

c. The result of this transition is a period of unemployment.

d. The same situation can occur across industries and regions as well.

e. Another source of unemployment is changing patterns of international trade.

2. This implies that, because the economy is always changing, frictional

unemployment is inevitable. Workers in declining industries will /nd themselves

looking for new jobs, and /rms in growing industries will be seeking new workers.

D. Public Policy and Job Search

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Chapter 28/Unemployment ❖ 460

1. The faster information spreads about job openings and worker availability, the

more rapidly the economy can match workers and /rms.

2. Government programs try to facilitate job search in various ways.

a. Government-run employment agencies give out information on job vacancies.

b. Public training programs can ease the transition of workers from declining to

growing industries and help disadvantaged groups escape poverty.

3. Critics of these programs argue that the private labor market will do a better job

of matching workers with employers and therefore the government should not be

involved in the process of job search.

E. Unemployment Insurance

1. De/nition of unemployment insurance: a government program that

partially protects workers’ incomes when they become unemployed.

2. Because unemployment insurance reduces the hardship of unemployment, it also

increases the amount of unemployment that exists.

3. Many studies have shown that more generous unemployment insurance bene/ts

lead to reduced job search eAort and, as a result, more unemployment.

IV. Minimum-Wage Laws

A. Unemployment can also occur because of minimum-wage laws.

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461 ❖ Chapter 28/Unemployment

1. If the minimum wage is set above the equilibrium wage in the labor market, a

surplus of labor will occur.

2. While minimum-wage laws are one reason unemployment exists in the U.S.

economy, they do not aAect everyone.

a. The vast majority of workers in the economy have wages well above the legal

minimum, so the law does not prevent most wages from adjusting to balance

supply and demand.

b. Minimum-wage laws therefore have the largest eAect on the least skilled and

least experienced members of the labor force, such as teenagers.

B. Anytime a wage is kept above the equilibrium level for any reason, the result is

unemployment.

1. Other causes of this situation include unions and e?ciency wages.

2. This situation is diAerent from frictional unemployment where the search for the

right job is the reason for unemployment.

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Figure 4

Chapter 28/Unemployment ❖ 462

C. Case Study: Who Earns the Minimum Wage?

1. In 2015, the Department of Labor released a study of which workers reported

earnings at or below the minimum wage in 2014.

a. Of those workers paid an hourly rate, about 4% reported wages at or below

the federal minimum, which is about 2% of all workers.

b. Minimum-wage workers are more likely to be female, 5% of women compared

to 3% of men.

c. Minimum-wage workers tend to be young, with about 15% of 16 to 19-year–old

hourly workers earning the minimum wage but only 3% of hourly workers

aged 25 and over.

d. Minimum-wage workers tend to be less educated. Of those workers ages 16

and over, 7% with no high school diploma earned the minimum wage or less,

compared to 4% with a high school education, and 2% with a college degree.

e. Minimum-wage workers are more likely to be working part time.

f. The industry with the highest proportion of workers with reported hourly

wages at or below the minimum wage was leisure and hospitality.

g. The proportion of workers earning the prevailing minimum wage has changed

substantially over time, trending downward from 1979 to 2006 then increasing

again. The increase is partially attributable to an increase in the minimum

wage.

D. In the News: Should the Minimum Wage Be Raised to $15 an Hour?

1. Public outcry is growing to raise the minimum wage with the goal of reducing

income inequality and improving quality of life for the poor.

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463 ❖ Chapter 28/Unemployment

2. In this Los Angeles Times article, economist David Neumark explains why raising

the minimum wage to $15 an hour is not likely to achieve those goals and he

recommends policy alternatives.

V. Unions and Collective Bargaining

A. De/nition of union: a worker association that bargains with employers over

wages and working conditions.

B. Unions play a smaller role in the U.S. economy today than they did in the past.

However, unions continue to be prevalent in many European countries.

C. The Economics of Unions

1. De/nition of collective bargaining: the process by which unions and 9rms

agree on the terms of employment.

2. Unions try to negotiate for higher wages, better bene/ts, and better working

conditions than the /rm would oAer if there were no union.

3. De/nition of strike: the organized withdrawal of labor from a 9rm by a

union.

4. Economists have found that union workers typically earn 10% to 20% more than

similar workers who do not belong to unions.

5. This implies that unions raise the wage above the equilibrium wage, resulting in

unemployment.

a. Unions are often believed to cause conGict between insiders (who bene/t from

high union wages) and outsiders (who do not get the union jobs).

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Chapter 28/Unemployment ❖ 464

b. Outsiders will either remain unemployed or /nd jobs in /rms that are not

unionized.

c. The supply of workers in nonunion /rms will increase, pushing wages at those

/rms down.

D. Are Unions Good or Bad for the Economy?

1. Critics of unions argue that unions are a cartel, which causes ine?ciency because

fewer workers end up being hired at the higher union wage.

2. Advocates of unions argue that unions are an answer to the problems that occur

when a /rm has too much power in the labor market (for example, if it is the only

major employer in town). In addition, by representing workers’ views, unions help

/rms provide the right mix of job attributes.

VI. The Theory of E?ciency Wages

A. De/nition of e8ciency wages: above-equilibrium wages paid by 9rms in

order to increase worker productivity.

B. E?ciency wages raise the wage above the market equilibrium wage, resulting in

unemployment.

C. There are several reasons why a /rm may pay e?ciency wages.

1. Worker Health

a. Better-paid workers can aAord to eat better and can aAord good medical care.

b. This is more applicable in developing countries where inadequate nutrition

can be a signi/cant problem.

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465 ❖ Chapter 28/Unemployment

2. Worker Turnover

a. A /rm can reduce turnover by paying a wage greater than its workers could

receive elsewhere.

b. This is especially helpful for /rms that face high hiring and training costs.

3. Worker Quality

a. OAering higher wages attracts a better pool of applicants.

b. This is especially helpful for /rms that are not able to perfectly gauge the

quality of job applicants.

4. Worker EAort

a. Again, if a /rm pays a worker more than he or she can receive elsewhere, the

worker will be more likely to try to protect his or her job by working harder.

b. This is especially helpful for /rms that have di?culty monitoring their workers.

5. Case Study: Henry Ford and the Very Generous $5-a-Day Wage

a. Henry Ford used a high wage (about twice the going rate) to attract better

employees.

b. After instituting this higher wage policy, the company’s production costs

actually fell due to reduced turnover, absenteeism, and shirking.

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Chapter 28/Unemployment ❖ 466

in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise

on a password-protected website or school-approved learning management system for classroom use.

When discussing the material in this chapter, you may /nd that students

want to begin discussing possible policies to deal with unemployment.

Keep the focus on institutional responses such as unemployment

insurance, job training, and government-sponsored employment agencies.