Ch 28. Unemployment

.title[
# Ch 28. Unemployment
]
.subtitle[
## Macroeconomics for Students of Accounting, Finance and Digital Applications
]
.author[
### Lyuben Ivanov, PhD; Georgi Ganev, PhD
]
.institute[
### Sofia University St Kliment Ohridski
]
.date[
### Apr 18, 2024
]

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.pull-right[
_The quality of a nation’s manpower resources is the single most important factor determining national competitiveness._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Lee Kuan Yew (1990)&nbsp;</span>
]

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<hr>

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# The Labor Resource

The labor resource is embedded in the very human person. It shares this characteristic with the human capital resource.

Using the labor and human capital resources in production
necessarily requires the participation of the person who embodies
and owns these resources.

But humans are purposeful beings, have agency and are capable of strategic behavior, therefore, they need
to be motivated to participate in the production process. In a market economy, 
the main source of motivation is the wage paid in exchange for labor.

The wage is determined in the labor market, one of the key markets for factors of production in the economy.

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# The Labor Market

The labor market is studied in the field of labor economics, an important and complicated field that belongs to microeconomics, so we will not go there in this course.

However, the utulization of the labor resource in the economy is a key macroeconomic issue so we need to have at least a passing understanding of the labor market.

Due to the complexity of the labor resource and the labor markets, we will focus our minds on the concepts of labor-force participation and unemployment and build from there.

The first thing you have to understand about unemployment is that unemployment is not the same as joblessness!

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<hr>

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# Employment Categories (USA)

<br>
<br>
<table class="none">
  <tr>
    <td style="text-align: center; vertical-align: middle;"><b>employed</b></td>
    <td> </td>
    <td> </td>
    <td>Those who worked as paid employees,
worked in their own business, or worked as unpaid workers in a family
member’s business. Both full-time and part-time workers are counted.
This category also includes those who were not working but who had jobs
from which they were temporarily absent because of, for example, vacation,
illness, or bad weather.</td>
  </tr>
</table>

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# Measuring Employment

What is exchanged on the labor market is a specific quantity of
human effort on the part of the seller.

Usually the number of people employed is considered a good
approximation of this quantity of effort, but it has some issues:
- Self-employed persons
- Free-lance persons
- Farmers (independent agricultural producers)
- People employed in the grey economy

Even those who are officially and observably employed do not exert
exactly equal amounts of effort – partial workdays/weeks, seasonal
employmen, etc.

So another measure of employment is the quantity of hours
worked.

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# Employment Categories (USA)

<br>

<table class="none">
  <tr>
    <td style="text-align: center; vertical-align: middle;"><b>unemployed</b></td>
    <td> </td>
    <td> </td>
    <td> Those who were not employed, were
available for work, and had tried to find employment during the previous
four weeks. It also includes those waiting to be recalled to a job from which
they had been laid off. </td>
  </tr>
  <tr>
  <td> </td>
  <td> </td>
  <td> </td>
  <td> </td>
  </tr>
  <tr>
    <td style="text-align: center; vertical-align: middle;"><b>not in the labor force</b></td>
    <td> </td>
    <td> </td>
    <td> Those who fit neither of the first
two categories, such as full-time students, homemakers, and retirees. </td>
  </tr>
</table>

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# Measuring Unemployment

For a large majority of the non-employed people in society non employment
is their own decision and they do not want to or do not have
the right to participate.

The “unemployed” are only a portion of the non-employed, who have two
distinguishing features: would like to work and are actively seeking work.

One way to estimate this portion of people is to rely on a formal signal, such
as registration with the employment bureaus (under the Employment
Agency).

Another way is to use a statistical sample and a questionnaire – the “labor force
survey” method.

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# Labor Force Survey (Bulgaria)

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# Some Important Formulas

<br>
<br>
`$$\begin{aligned}
\sf \text{Labor force} = \text{Number of employed} + \text{Number of unemployed}  \\ \\ \\
\sf \text{Unemployment rate}  = \sf \frac{\text{Number of unemployed}}{\text{Labor force}} \times 100 \\ \\ \\
\sf \text{Labor-force participation rate}  = \sf \frac{\text{Labor force}}{\text{Adult population}} \times 100 \\ \\
  \end{aligned}$$`

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<hr>

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# Labor Force Data (Bulgaria, 2022)

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# Labor Force Data (Bulgaria, 2023)

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# Labor Force Data (Bulgaria, 2023)
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  <iframe src="Unemployed and unemployment rates 2023.html" width="100%" height="530px" style="border: none"></iframe>
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<hr>

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# Unemployment Over Time (USA)

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# Cyclical Unemployment

Unemployment always fluctuates around some long-term
average level, which is called natural.

Its fluctuations around the natural level have a cyclical
character, i.e. they comprise of periods of some length during
which the level is continuously either below or above the
natural level.

The term “cyclical unemployment” aims at drawing attention to
the close link between cyclical unemployment and the overall
cycle in economic activity, which also comprises of periods of
some length involving either a significant increase, or
stagnation and decrease in economic activity.

The business cycle is the main cause for cyclical unemployment.

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# Natural Unemployment

There is no time horizon for which the average level of
unemployment is zero or even negligibly small.

The long-run average level, around which the unemployment
rate fluctuates, is called “normal”, or “natural”. These terms try
to convey the idea that the state of disequilibrium on the labor
market is actually its normal, or natural, state.

When internal and external circumstances in which the
economy operates change, the natural level of unemployment
also may change.

One explanation as to why there is always at least some
unemployment in a market economy is that the normal state of
the labor market requires excess supply to function efficiently.

---

<hr>

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# Definition

<br>
<br>
<br>
<table class="none">
  <tr>
    <td style="text-align: center; vertical-align: middle;"><b>frictional unemployment</b></td>
    <td> </td>
    <td> </td>
    <td>unemployment that
results because it takes
time for workers to search
for the jobs that best suit
their tastes and skills</td>
  </tr>
</table>

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# The Concept

Due to the complexity, size and duration of transactions on the
resource markets, they are characterized with higher levels of
friction (difficulties in coordination, negotiation and completion
of transactions) than goods markets.

The allocation of each additional unit of supplied resource,
including labor, to its most appropriate use takes time, and
during this time there is an excess supply on the resource,
including labor, market.

The state of excess supply provides resource markets with very
valuable flexibility, which allows them to relatively quickly
allocate resources to market niches, which exhibit sudden and
large surge in consumer demand.

This flexibility is one of the
main pluses of frictional unemployment.

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# Unemployment Insurance

<br>
 
Many academic studies indicate that people whose unemployment
insurance payments have expired find new jobs much more quickly
than people who continue to receive them.

Shorter duration of unemployment insurance payments is associated with
increased incentives of unemployed people to find a job and thus
decreased frictional unemployment.

On the other hand, shortening the duration of unemployment
insurance payments increases the social cost of unemployment episodes.

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# Employment Bureaus

<br>

Government policy aiming at assisting finding a new job more quickly.

Creates a social infrastructure (employment bureaus), which is
known and available to both suppliers and demanders of labor.

Informs labor market participants, by gathering and transmitting information, precisely what
labor is supplied and demanded, thereby facilitating the quicker and
cheaper identification of appropriate partners.

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<hr>

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# Definition

<br>
<br>
<br>
<table class="none">
  <tr>
    <td style="text-align: center; vertical-align: middle;"><b>structural unemployment</b></td>
    <td> </td>
    <td> </td>
    <td>unemployment that
results because the
number of jobs available
in some labor markets is
insufficient to provide a job
for everyone who wants one</td>
  </tr>
</table>

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# Surplus of Labor Diagram

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# Minimum Wage

The minimum wage is essentially a price floor in the labor market. 
Every price floor, when binding, causes excess supply (in this case of
labor).

Minimum wage laws are quite general and the price floor they impose is
the same for all labor contracts.
In the qualified labor segment of the market the floor is not binding,
because equilibrium wage rates there are much higher than the
minimum wage.

The minimum wage is binding for participants in the non-qualified
labor segment of the market – for people with relatively less
knowledge, skills, experience. Empirical studies indicate that on this
segment the minimum wage is a major factor causing excess supply
of labor (unemployment).

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# Trade Unions

Historically trade unions have emerged in opposition to
monopsonistic behavior of employers in the labor market.
With time the market power of employers has eroded due to
improvements in the competitiveness of the economic environment
and changes in the efficient size of firms with technological
developments.

Thus in the segments of the economy where trade unions remain
strong, they become a monopolistic seller, impose a monopolistically
high price of labor (wages) and this price results in excess supply by
people willing to work at these wages.

The activities of trade unions lead to high wages for their members,
but to lower overall quantities of labor demanded by firms and to
unemployment (usually among workers who are not members of the
respective trade union).

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<hr>

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# Henry Ford's Assembly Line

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# Henry Ford's $5 a Day Wage

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<hr>

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# Effective Wage Theory

The argument for efficiency wages as a cause for structural unemployment
rests on the information problems of transacting in the labor market.

Firms experience two types of problems:
- Before hiring: to attract the most desirable candidates;
- After hiring: to guarantee the best possible effort of employees.

These problems are caused by the ability of the labor resource, people, to
behave strategically, which means they may:
- Apply for attractive employment positions without having adequate qualifications
for them;
- Shirk after they are employed.

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# Effective Wage Theory

In such a situation, firms deliberately choose to pay wages, which are higher
than the wages which would clear the market, because this allows them to:
- Ensure at least some of the candidates will be really good ones;
- Stimulate employees to apply the best possible effort.

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# Effective Wage Theory

Ex-ante (before hiring) benefits to firms which deliberately pay
wages higher than the market clearing ones:

- Higher prospective wages attract people with higher
productivity to apply for the jobs. This allows firms to select its
employees among a larger and more qualified set of applicants,
thus increasing the average expected quality of employees.

- Higher than market clearing wages mean that an eventual
termination of the labor contract will increase the duration of
unemployment relative to a situation when markets clear. This
decreases the incentives of employees to leave their jobs. Lower employee
turnover rates mean higher accumulation of so called specific
human capital in the firm, which increases labor productivity
and firm profitability.

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# Effective Wage Theory

<br>

Ex-post (after hiring) benefits to firms which deliberately
pay wages higher than the market clearing ones:

- Higher wages mean higher living standards of employees,
which reflects, among other things, on their health and
absenteeism. Healthier and less absent employees are
more productive.

- Higher than market clearing wages create a strong
incentive for employees to provide their best effort in
good faith, because the cost to them from being fired due
to lack of effort is grater both in terms of income lost and
in terms of longer expected unemployment duration than
if wages were market clearing.

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# Questions?

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# Thank You!

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