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Macroeconomics (ECON 1211) Lecturer: Dr B. M.

Nowbutsing Topic: Unemployment

1. Some Key Terms

Unemployment rate:

the percentage of the labour force without a job but registered as being willing and available for work those people holding a job or registered as being willing and available for work the percentage of the population of working age declaring themselves to be in the labour force
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Labour force

Participation rate

2.

Unemployment in the UK, 1983-2003

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3.

Unemployment (%) in Selected Countries


14 12 10 % 8 6 4 2 0 1972 UK Ireland 1982 France EU 1999 USA

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4. Labour Market Flows


It is tempting to see the labour market in static terms

Working

Unemployed

Out of the labour force

but...
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5. Labour Market Flows


New hires Recalls

Working
Job-losers Lay-offs Quits Retiring Temporarily leaving

Unemployed

Discouraged workers

Taking a job

Out of the labour force

Re-entrants New entrants

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6. More on Labour Market Flows


In 2003 unemployment in the Mauritius began at 54,000 During the year:

549,500 were in the labour force

The Unemployment rate in Mauritius in 2007 is 9.4%

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7.

The Composition of Unemployment

Different

groups in society are more vulnerable to unemployment, varying by:


age gender region ethnic origin

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8. Types of Unemployment

Frictional

the irreducible minimum level of unemployment in a dynamic society


people between jobs the almost unemployable

Structural

unemployment arising from a mismatch of skills and job opportunities when the pattern of demand and production changes

it takes time for sugar cane workers to retrain as international bankers


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8. Types of Unemployment (2)

Demand-deficient unemployment

occurs when output is below full capacity Keynesian unemployment occurs in the transitional period before wages and prices have fully adjusted

Classical unemployment

created when the wage is deliberately maintained above the level at which labour supply and labour demand schedules intersect
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9.

A modern View of Unemployment

A similar categorization is retained, but an important distinction is to be noted between: Voluntary unemployment

when a worker chooses not to accept a job at the going wage rate when a worker would be willing to accept a job at the going wage but cannot get an offer.
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Involuntary unemployment

10. The Natural rate of Unemployment


Real wage

AJ

LF

LD: labour demand LF: size of labour force AJ: the number of workers prepared to accept jobs AJ is to the left of LF because some members of the labour force are between jobs, others are LD waiting for better offers. Equilibrium is at w*, N*. The distance EF is the natural rate of unemployment.
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w*

Number of workers

N* N1

10. The Natural Rate of Unemployment

The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. This is entirely voluntary.
It includes:

frictional unemployment structural unemployment


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11. Classical Unemployment


AJ
A B C

LF

w2 w*

Suppose that union power succeeds in maintaining a real wage of w2. Equilibrium is at A
and unemployment is AC, of which BC is voluntary LD and AB is involuntary

Real wage

Number of workers

N2 N* N1

To the extent that this unemployment reflects a conscious decision by unions to restrict employment, it is voluntary unemployment.
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12. Supply-Side economics

entails the use of microeconomic incentives to alter


the level of full employment the level of potential output the natural rate of unemployment

In the long run the performance of the economy can only be changed only by affecting the level of full employment and the corresponding level of potential output.
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13. Tax Cuts and Unemployment


Real wage

AJ
A E B F C

LF

With an income tax, the gross wage paid by firms (w1) is higher than the take-home net pay of workers (w3). Equilibrium is at N1 AB is the amount of tax Unemployment is BC

w1 w2 w3

N1 N2

Number of workers

Without tax, equilibrium LD is at E. Unemployment is now EF.

EF is less than BC because of the relative slopes of LF & AJ but the differences may not be substantial.
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14. Other Supply-Side Policies

Trade union reform

reducing the power of trade unions may limit distortions in the labour market

Other labour supply policies

training and retraining measures


improving the efficiency of the labour market

such measures may affect frictional and structural unemployment

Investment

higher investment may increase the demand for labour

may be achieved via tax incentives or low interest rates


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15. Hysteresis

The idea that a (short-run) fall in labour demand may lead to a permanent fall in labour supply
This could help to explain high and persistent unemployment in Europe in the 1980s

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15. Hysteresis (continued)

Four channels:

Insider-outsider distinction

only those in work take part in wage bargaining & they protect their own positions

Discouraged workers

people stop looking for jobs

Search and mismatch

firms and workers get used to low search

capital stock

low levels of investment in recession lead to permanently low capital stock levels
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