Econ 2, Foldvary

Chapter 15, Mankiw

One is unemployed if one is able to work at prevailing wage rates, and is either actively seeking employment or has been hired for employment, but is not currently employed.

Types of unemployment

Frictional: engaged in temporary job search. About 1% of the labor force.

Pseudo-unemployment or phantom unemployment: a lack of strong incentives due to unemployment transfers and aid.
Government unemployment insurance provides payments of about half the usual wage for those laid off. 26 weeks plus possible extensions.
Supposed to be actively seeking work, but it is easy to falsely report.
This reduces incentives to work, creating more unemployment.

Seasonal unemployment: off during the slack season

Cyclical unemployment: during depressions

Sectoral unemployment: due to shifts in industry output

Structural or chronic unemployment: long-run unemployment

Structural unemployment due to the structure of government laws, regulations, and taxation.

All unemployment other than frictional is economically unnecessary and comes from interventionist barriers that prevent labor from having access to land and capital goods.

Most of the unemployment is by those who are jobless for a long time.

Why chronic unemployment?
Interventions that create barriers between labor and employment.
Example: minimum wage laws create an excess supply, unemployment.

Also, taxation, excessive regulations, that raise the cost of labor.
It also creates other unemployment other than frictional.

Restrictions and taxes on enterprise prevent the alternative of becoming self-employed.

Europe has more severe labor restrictions, such as on firing workers, and greater unemployment insurance, also has double the unemployment rate of the U.S.

Full employment: the existence only of frictional unemployment.

The so-called "natural" rate of unemployment is just the average level of unemployment.

The designation "natural" does not imply that it stays the same or that it does not respond to changes in government policy (Mankiw, p. 310).

In the US, unemployment is measured by the Bureau of Labor Statistics.
They conduct a survey of 60,000 households: the Current Population Survey.
The BLS divides the population into two categories: in or out of the labor force.

The labor force is divided into those employed and those unemployed.

One is counted as employed if one is 16 years of age or older, and worked part time or full time for wages.
Students investing in human capital are economically employed, but are not counted as such.
Home production is not counted as employment.

Those categorized as not in the labor force include discouraged workers, who have not been searching during the past 4 weeks, even though they would accept a job if offered.

The unemployment rate = employed / labor force, now (Jan. 2008) about 4.9%, seasonally adjusted.
The government data are here.
The California unemployment rate is 5.9%.

If discouraged workers and others who would work were counted, the rate is 8.9% (see p. 315).

The labor-force participation rate = labor_force / adult_population
2/3 are in the labor force

During the past few decades, the percentage of women in the labor force has risen from 33 to 60 percent.

Labor Unions

A union is a worker association that bargains with employers.

16% of US workers belong in unions.

The economic effect of unions depends on the laws governing them.

In most states, labor unions are monopolies.

An employer is forced to employ only union labor, and

the union can restrict its membership.

The union is a cartel of the workers, acting like a monopoly.

The union bargains for all the workers; called collective bargaining.

If the firm does not agree to the union's demands, the union can vote to strike.

A strike is a stoppage of workers.

The firm can also "lock out" workers, such as during a slow-down.

Firms often give in and offer wages that are higher than the non-union rate.

Union workers get 10 to 20% more wages than similar non-union labor.

Some unions also impose inefficient labor methods that raise the cost of labor.

A union monopoly has two effects.

1) Some workers are unemployed waiting to get into the union.

2) Other workers shift to non-union jobs, increasing the labor supply there, lowering the wage.

So the gain in union wages is at the expense of more unemployment and lower non-union wages.

The overall wage level does not rise, and may fall.

If unions are in a "right to work" state where they don't have a monopoly, where a firm may hire non-union labor, the effects are much less severe.

The best policy for labor: an unrestricted and untaxed market for labor, with no barriers between labor and employment.