ECN 202

Principles of Macroeconomics
Instructor: Nabila Maruf
Independent University, Bangladesh
Lecture Note: 4
Chapter 15: Unemployment
Spring 2018

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Unemployment
The problem of Unemployment is usually divided into
two categories:
Long-run problem
Short-run problem

Natural Rate of Unemployment

Unemployment that does not go away even in the long-
run
The amount of unemployment that the economy
normally experiences
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Unemployment
Cyclical Unemployment
The year-to-year fluctuations in unemployment around
its natural rate
Closely associated with the short-run ups and downs of
economic activity

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Identifying Unemployment
How is Unemployment Measured?
Bureau of Labor Statistics (BLS) each adult (age 16 and
older) into one of the three categories:
 Employed
 Unemployed
 Not in the labor force

Employed
 All those who work

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Identifying Unemployment
Unemployed
 Those who were not employed.
 Were available for work
 Tried to find work during previous four weeks

Not in the labor force

 Those who don’t fit either of the first two categories
 Such as full-time student, homemaker or retiree

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Identifying Unemployment
Labor Force
The total number of workers, including both the
employed and the unemployed.
Labor force = Number of Employed + Number of
Unemployed

Unemployment Rate
The percentage of the labor force that is unemployed
Unemployment Rate = Number of Unemployed 100
Labor Force

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Identifying Unemployment
Labor-force participation rate
The percentage of the adult population that is in the labor
force

Labor-force participation Rate = Labor Force 

100
Adult Population

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Identifying Unemployment

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Identifying Unemployment
Unemployment Rate of Bangladesh (Source: LFS 2010)

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Identifying Unemployment
Natural rate of unemployment
The normal rate of unemployment around which the
unemployment rate fluctuates.

Cyclical unemployment
The deviation of unemployment from its natural rate.

Does the Unemployment Rate Measure What We Want It

To?
Difficult to distinguish between unemployed and not in the
labor force
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Identifying Unemployment
Discouraged Workers
 Individuals who would like to work but have given up looking for
a job

How Long Are the Unemployed without Work?

Most spells of unemployment are short, and most
unemployment observed at any given time is long-term

Why Are There Always Some People Unemployed?

 In an ideal labor market, wages would adjust to balance the
quantity of labor supplied to the quantity of labor demanded.
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Identifying Unemployment
In reality, unemployment rate never falls to zero.
It fluctuates around the natural rate of unemployment.
There are four ways to explain unemployment in the
long run:
 Job Search
 Minimum-Wage Laws
 Unions
 Efficiency Wages

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Identifying Unemployment
Frictional Unemployment
 Unemployment that results because it takes time for
workers to search for the job that best suit their taste and
skills.
 Explains relatively short spells of unemployment.

Structural Unemployment
 Unemployment that results because the number of jobs
available in some labor markets is insufficient to provide a
job for everyone who wants one.
 Explains longer spells of unemployment

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Identifying Unemployment
Job Search
The process by which workers find appropriate jobs
given their tastes and skills.

Why Some Frictional Unemployment is

Inevitable?
The economy is always changing
Sectoral shifts – changes in the composition of demand
among industries or regions.
It takes time for workers to find job in new sectors.

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Identifying Unemployment
Public Policy and Job Search
Faster the information spreads, faster the economy can
match jobs and workers.
Internet, public policy can play role.
Government programs try to facilitate job in various
ways:
 Government-run employment agencies
 Public training programs
 Unemployment Insurance – A government program that

partially protects workers’ income when they become

unemployed.

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Identifying Unemployment
Minimum-Wage Laws
Forces wages to remain above the level that balances supply
and demand

Raises quantity of labor supplied and reduces quantity of

labor demanded

There is surplus of labor  Unemployment

Affects least skilled and least experienced workers mainly

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Identifying Unemployment

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Identifying Unemployment
General Lesson from Minimum-wage law diagram:
If the wage is kept above the equilibrium level for any
reason, the result is unemployment.

Difference between frictional unemployment and

Structural Unemployment:
Frictional Unemployment
 due to job search
 Not due to failure of wages to balance

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Identifying Unemployment
Structural Unemployment
 Wages above equilibrium
 Waiting for jobs to open up

Unions and Collective Bargaining

Union – A worker association that bargains with
employers over wages benefits and working conditions.

The Economics of Unions

 A union is a type of cartel.

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Identifying Unemployment
 Collective Bargaining – The process by which unions and
firms agree on the terms of employment.

 Strike – The organized withdrawal of labor from a firm by a

union.

 Unions creates two conflicting groups of workers – insiders

and outsiders.

 Insiders reap benefit of union and outsiders bear cost.

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Identifying Unemployment
Are Unions Good or Bad for the Economy?
Critics’ View
 Inefficient – high union wages reduce employment in
unionized firms below the efficient, competitive level.
 Inequitable – Some workers benefit at the expense of others.

Advocates’ View
 If firms have high market power
 Can exploit workers

 Unions help to ensure higher wage and proper working

condition.

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Identifying Unemployment
 Unions create happy and productive work force

In the End

 No consensus between economists
 Unions beneficial in some circumstances and adverse in

others.

The Theory of Efficiency Wages

Efficiency Wages
 Above equilibrium wages paid by firms to increase worker
productivity.
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Identifying Unemployment
There are several types of efficiency-wage theory.
Four are:
Worker Health
 Better paid  better nutrition  higher productivity

Worker Turnover
 Higher the wage, fewer is the turnover
 High turnover increases firms production cost

Worker Quality
 Firms with higher wages attracts high quality workers

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Identifying Unemployment
Worker Effort
 Reduces worker incentive to shirk
 May not find another job with high wage

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Exercise
• Which of the following would most likely
reduce frictional unemployment?
• Eliminating the minimum wage
• Increasing unemployment insurance benefits
• A new law banning labor unions
• More workers posting their resumes at Monster.com,
and more employers use Monster.com to find suitable
workers to hire.
• Sectoral shifts becoming more frequent.
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