Chapter 28

1. Chapter 28 Unemployment and its Natural Rate

2. A Roadmap for Chapter 28 • Background • Long Run vs. Short Run Unemployment • Unemployment - Generally Speaking • Determinants of Long-Run Unemployment

3. Why Unemployment is Important? • People whoareunemployed not contributingtoeconomy’sproduction. • A country that keeps its workers as fully employedas possible achieve a higher level of GDP than theone who leaves many of them idle

4. Why Unemployment is Important? • Adult population (15-64 years) covers the economically active agegroup in thepopulation • Long-run vs. Short-run problem.

5. Labour Force • The total number of workers, including both the employed and the unemployed • Labour force = Number of employed + number of unemployed

6. Unemployment Rate • The percentage of the labour force that is unemployed • Unemployment rate

7. The labour force participation rate: Labour force participation • The percentage of the adult population that is in the labour force

8. labour-Force Participation Rate (in percent) 100 Men 80 60 40 Women 20 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Labour Force Participation Rate

9. Employed labour Force (139.9million) (154.2 million) Adult Population (235.9 million) Unemployed (14.3 million) Not in labour force (70.1 million) Figure 1 US Population and Unemployment, 2009

10. Unemployment in the Long-Run • Natural Rate of Unemployment: is the rate of unemployment that the economy experiences even during normal times, that is, even when the economy is not in a recession • It is also called economy’s long-run rate of unemployment

11. Unemployment in the Short-Run • Cyclical Unemployment: year to year fluctuations in unemployment around its natural rate. • Occurs during recessions.

12. UnemploymentLong Run vs Short Run? The Natural Rate of Unemployment • the long-run rate of unemployment • the rate of unemployment when the economy is at “full employment” • According to your book, about 5.5% (see next slide)

13. Unemployment Rate since 1960

14. What is Unemployment? • Compiled by a random monthly survey of 60,000 households • To be counted as part of the labour force, you must either: • have a job • not have a job, but is able to work andwilling to work (actively searching)

15. Who is Unemployed?

16. Problems With Our Measure of Unemployment? def: Discouraged workers • people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics. • Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. • Some people work (homemakers) but aren’t paid in a formal labour market, and so aren’t counted as being part of the labour force

17. Is 0% Unemployment ever possible? Types of Unemployment - Frictional Unemployment - Structural Unemployment - Disguised Unemployment - Cyclical Unemployment

18. Frictional unemployment Definition: unemployment that results becauseforworkers tosearchforthejobsthat are best suit their tastes and skills. • Companies and sectors grow, shrink, go bankruptevery day in every economy • People migrate to other cities or regions for personalas well as economic reasons • People change jobs for many, even irrational reasons • At any moment in time, there are many peopletemporarily unemployed in the economy

19. Structural unemployment Definition: is the unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one. • The 15-64 years age group members (adults) whocan not find employment simply because there arenot enough factories, offices, fields, • Macroeconomic policies have no impact onstructural unemployment in the short run: unemploymentpersists even during rapid growth

20. Disguised unemployment (gizli işsizlik) • Many people, especially in agriculture and urbanservices seem to be working • But they have very low productivity, creating verylittle value added and therefore earn low levels of income • This is due to the lack of jobs with high productivityin the economy, itself due to the capital constraint

21. Cyclical unemployment • Cyclical unemployment happens when economicactivity slows down as result of a recession or a an economic crisis • As demand for goods and services fall, people whowere producing them loose their jobs • Many people became unemployed in Turkey during2001 and 2008because of the economic crisis

22. w SL Unemployment Wmin W* DL L LD L* LS Why do above market wages cause unemployment? • If the wage is kept above the equilibrium (w*), then the quantity of labour supplied (LS) will exceed the quantity of labour demanded (LD) and some workers will be unable to find work • This is structural unemployment, and can be caused by: • Minimum wages • Unions • Efficiency wages

23. What determines the natural rate of unemployment? • Minimum wages • Minimum wages cause some unemployment • As minimum wage rises above equilibrium, the natural rate rises • Labour Unions • As unions seek to raise wages above equilibrium, they’ll produce a similar effect on the natural rate as minimum wages • Efficiency Wages • When employers pay above market wages to reduce turnover and increase worker productivity, they increase the natural rate • Job Search • In general, it’s not possible to move from one job to another without some lost time – workers are therefore temporarily unemployed during the interim

24. Conclusion • Unemployment is a major economic as well aspolitical and social issue in all economies • Labour force consists of the employed and theunemployed • The unemployment rate is the percentage ofpeoplewho would like to work but don’t havejobs • There are four different kinds of unemployment:structural, disguised, cyclical and frictional • Most unemployment in Turkey is structural Wage and salary earners constitute only 49 percentof the labour force in Turkey