Labor market and

Unemployment



Co n t e n t s

Labor market and its structure. Models of
labor market
Measuring & Identifying Unemployment
Causes of unemployment
Types of unemployment. Frictional vs.
Structural. The Natural rate of unemployment
Costs of unemployment. Law of Okun
Government regulation of labor market

Labor market
Labor market means the relationship between
demand for labor force and supply of labor force
which determine the equilibrium wage rate and
provide the full employment of labor force.
Labor market is the most important market at macro
level:
Determining the level of employment of LF
Influencing on the well-being of population (W)
Influencing on the consumption (AD)
Determining the cost of production
Specific features of labor market:
SPECIFIC CONDITIONS OF FUNCTIONING
(labor contracts, working conditions)
COMPLICATED STRUCTURE (a lot of
segments)
THE MOST REGULATED (minimum wages,
duration of working day)
A LOT OF DETERMINANTS ( demographic,
social, physiological, economic)
A LOT OF PARTICIPANTS (trade-unions,
government, business firms, households, foreign
sector)

Demand for Labor is the sum of Demand for Labor
services from all industries at a given price in a given
period of time
Determinants
Wage rate
Demand for goods, produced by Labor services (demand
for labor is derived demand)
Prices and amount of available resources substitutes of
Labor (Capinal)
Prices and amount of complements of Labor (Capital,
Land)
Labor productivity and Marginal Product of Labor
Government regulation
Trade union regulation
Psychological factor

Supply of Labor is the sum of Supply of Labor
services of all workers at a possible price in a
given period of time
Determinants
Wage rate
Quantity of labor force (demografic factors:the
rate of birth, the rate of death, migration)
Opportunity cost of employment
Physical and intellectual capabilities of Labor
force
Availability of other income excluding wages
Social factor

Classical model of Labor market

Classical model of Labor market
Main characteristic features:
- Perfect competition
- P, flexible
Ld=f (MPL)
Ls =f (w/p) is the most important component
Equilibrium achieves automatically
In the long-run the full employment of LF
Equilibrium is stable.
In the short run changes in w/p are restoring
equilibrium
Unemployment is voluntary

Condition of equilibrium:
Ld = f (MPL) equal to Ls = f (W/P).


Classical model of labor market

L
S
L
D
L
L*
P
W

*

P
W

Main characteristic features:
Imperfect competition (trade unions, G,
Monopolies)
P, w were seen to be sticky
L
D
= f (effective demand or C + I ) is the most
important component
LS = f (L, w nominal), doesnt depend on the
price level
Equilibrium doesnt achieve automatically
In the short-run involuntary unemployment in
conditions of stability

Keynesian model of Labor market

Keynesian model of labor market
W/Pe is the equilibrium wages;
Le is the equilibrium number of labor force
W/Pr is the effective wages, determining by effective demand for
labor
Ls is the number of labor force
Ld is the effective demand for labor force
Ls Ld means the number of involuntary unemployed people












L
S
L

D
L
L
D
L
E
L
S

E
W/P


W/P
R

W/P
E


Labor market as a flow
Population labor force categories
Each adult is placed into one of three
categories:
Employed
Unemployed
Not in the labour force
The labour force is the total
number of workers, including both the
employed and the unemployed.

Labor market as a flow
Population labor force categories
The Labor force is essentially all people who are able and
willing to work.
The Labor force = Total population, excluding:
1. Those under 16 years of age
2. Not in Labor force are adults who are potential
workers, but for some reason are not employed and are not
seeking work :
- institutionalized people (for example, in prisons)
- homemakers
- students
- retired persons

Population labor force categories
To be counted as employed a person must have
either a full time job or a part-time job.
To be counted as unemployed a person must be
available for work and must be in one of three
categories:
without work but has made specific efforts to find
a job within the previous 2/4 weeks;
waiting to be called back to a job from which he
or she has been laid off;
waiting to start a new job within 30 days

Moldova(III Quarter 2013)
Labor Force-1328,2th. Employed -
1276,8 th. or 6,1%
Unemployed 51,4 th. Or 3,9%
Not in Labor force( 15 years old and)
- 55,5% from adult population,
including:
Discouraged 14,9 th.
Migrants - 364,2th.
Employed
Unemployed
Not in labor force
Employed
Unemployed
Not in labor force
Entrant
s
(primar
y entry)
Retir
ees
Reetr
ans



Inflow / outflow approach of the labor market

Unemployment is the state in which
individuals available to work are without
job and are currently seeking a job.
Today it is one of the most pressing
problems of modern economies
Unemployment rate in different
countries:
EU 12 (January 2014) Germany 5,2
Bosnia -27,2(2011) France 10,8
Bulgaria 12,9 Austria 4,8
Estonia -10,8 Japan 3,9
Latvia 12 USA 6,7 January2014
Slovakia -14 Moldova 3,9
Greece 28 (2013) (III quarter2013)
Italy - 12,7
Measuring Unemployment
There are also different ways national statistical agencies
measure unemployment. These differences may limit the
validity of international comparisons of unemployment data.
The unemployment rate is calculated as the percentage of the
labour force that is unemployed.
Labor force = Number of employed and number of
unemployed people: L = E + U
Unemployment rate =Number of unemployed/ Labour force
X lOO% or
u = U/ (E+U) X 100%
The labour force participation rate is the percentage of the
adult population that is in the labour force:
Adult population /Labour force X 100%


Does the unemployment rate measure what
we want it to?


It is difficult to distinguish between a person who is
unemployed and a person who is not in the labour
force.
Discouraged workers, people, who would like to
work but have given up looking for jobs after an
unsuccessful search, dont show up in unemployment
statistics.
Other people may claim to be unemployed in order to
receive financial assistance, even though they arent
looking for work.

How long are the unemployed without
work?

Most spells of unemployment are short.
Most unemployment observed at any given
time is long-term.
Most of the economys unemployment
problem is attributable to relatively few
workers who are jobless for long periods of
time.

Causes of unemployment
Classical school: high wage rate
Marxist school: high organic structure of capital in
conditions of scientific-technical progress
Neoclassical school: refuse to work at lower wages;
Lower MP of Labor
Keynesian school: Lower effective demand (C+I)
Modern theories:
a) high minimum wages, unemployment compensations
b) monopolism (monopson) on Labor market
c) trade union regulation
d) technological progress





Why Are There Always Some People
Unemployed?
In an ideal labour market, wages would adjust to
balance the supply and demand for labour, ensuring
that all workers would be fully employed
Frictional Unemployment means the situation than
individuals will take time to find and secure another
suitable job.
In other words, it takes time for workers to search for the
jobs that are best suit their tastes and skills.
It is the voluntary short-run unemployment (causes:
imperfect information, disincentives)
The problem of frictional unemployment can be solved
with the perfect information about job vacancies. However,
imperfect information may aggravate the problem of
frictional unemployment.
The more developed an economy is, higher is the
probability of getting a job faster and lower is the
probability of frictional unemployment.
Job Search
the process by which workers find
appropriate jobs given their tastes and skills.
results from the fact that it takes time for
qualified individuals to be matched with
appropriate jobs.
This unemployment is different from the
other types of unemployment.
It is not caused by a wage rate higher than
equilibrium.
It is caused by the time spent searching for
the right job.

Structural Unemployment is the result of technological
changes, when the structure of working places is not
corresponding with the structure of labor force (causes:
economic change, globalization, capital replacement)

Structural unemployment arises when the
qualification of a person is not sufficient to meet
his job responsibilities.
Structural unemployment is often thought to
explain longer spells of unemployment.
Why is there Structural Unemployment?
Higher the mobility of labor across different jobs,
lower will be the structural unemployment.
depends on the changes in the structure of an
industry.
Seasonal Unemployment
There are certain kinds of unemployment that tend
to concentrate in a particular time of the year.
Seasonal unemployment is most common in
industries like tourism, hotel, in the agriculture.
Cyclical Unemployment characterizes the
variations in the levels of unemployment over the
business cycle (causes: recession, economic crisis)
Cyclical unemployment refers to the year-to-year
fluctuations in unemployment around its natural
rate.
It is associated with short-term ups and downs of
the business cycle.

The Natural rate of unemployment
Natural rate of unemployment (NAIRU) means
the unemployment rate in conditions of full
employment of labor force and economic stability.
The economys natural rate of unemployment
refers to the amount of unemployment that the
economy normally experiences.
u* = u
fr
+ u
str,

Today, U* 6% - 8%
u - u*= u cyclical


The Natural rate of unemployment
The NAIRU (u*) means the full employment of
labor force that determine the potential GDP (Y*)
Mathematically the equation of the NAIRU can be
expressed as:
f x U = s x E, or U/(U+E) = s/(f+s), where
f is the job funding or the part of unemployed
that is funding the job vacation monthly
s is the job separation or the part of workers that
is remaining without the job monthly
U is the number of unemployed
E is the number of employed

Benefits arising from unemployment

a small amount of frictional unemployment allows
employers to find the employees most suited to the
jobs offered;
frictional unemployment allows workers to find
the jobs that better fit their tastes, talents and
needs;
hard working; unemployment thus promote labor
productivity and profitability;
additional labor force;
limiting the abuse of the environment;

Cost of unemployment
economic

Lost Output (Real GDP)
The gap between Real GDP and Potential GDP
(Okuns law)
Non-used labor force, lower Labor potential
Lost tax revenue
Increased Benefit Payments
Unequal distribution of unemployment costs
Lower income of population, lower consumption

Okuns law
Law states that for every 2% GDP falls relative to
potential GDP, unemployment rises 1% relative to
natural rate of unemployment. When the economy
operates at productive capacity, it will experience
the Natural rate of unemployment:
Y-Y*/ Y*= - (U U*)

U* Natural rate of unemployment (NAIRU)
U real unemployment rate
Okuns coefficient characterizes the change in
Real GDP over Potential GDP ( 2-3)

Cost of unemployment

social
Lack of experience, skills
Lack of self actualization
Public and political consequences (social
revolution and so on)
Stress, bad peoples health
Isolation and alienation from society
Crime.


Government regulation of Labor market:
the totality of economic, administrative, juridical and
organizational means
Major goals:
to determine the full employment of labor force (active
Governmental policy)
to minimize the negative consequences of
unemployment (passive Governmental policy)
Active Governmental policy:
Training program
Support of small business
Stimulative Fiscal policy
Stimulative Monetary policy
Passive Governmental policy:
Labor exchange

minimum wage Law

Unemployment insurance
(unemployment benefits program)

Minimum wages USA - $7,25 per hour
Australia $6.37 per hour, or $622.20 per week
Austria- 1,000 per month
Belgium - $1,925per month, $11.69 per hour for workers
21 years of age and over
Canada- ranges from $9.95 to C$11.00 per hour
France - 1,445.38 per month, 9.53 per hour
Greece -683.76 per month in 12 payments
Japan - ranges from $8.17 to $10.6 per hour
Luxembourg - 1,921.03 per month, 11.1042 per hour
for unskilled workers
Moldova -1400 Moldovan lei in the private sector; 900 lei
per month in the public sector
Spain- 752.85 per month in 12 payments, 645.30 per
month in 14 payments

Public Policy and Job Search
Government programs can affect the time it takes
unemployed workers to find new jobs.
These programs include the following:
Government-run employment agencies ( the labor
exchange)
Public training programs
Unemployment insurance
Government-run employment agencies give out
information about job vacancies in order to match workers
and jobs more quickly.
Public training programs aim to ease the transition of
workers from declining to growing industries and to help
disadvantaged groups escape poverty.

Unemployment insurance

Unemployment insurance is a government
program that partially protects workers incomes
when they become unemployed.
Offers workers partial protection against job
losses.
Offers partial payment of former wages for a
limited time to those who are laid off.
Unemployment insurance increases the amount of
search unemployment.
It reduces the search efforts of the unemployed.
It may improve the chances of workers being
matched with the right jobs.


Laid-off Danes who have worked 52 weeks over the
previous 3 years are eligible to receive 90% of their
average earnings for up to 4 years.
Unemployed job seekers in Norway and Finland are
almost as well off.
In Norway the unemployed receive 87.6% of their
previous salaries for 500 days.
In Finland they receive 85.1% of their previous
salaries for one year.
In Sweden, Israel, Japan and Germany, the
unemployed can claim benefits worth between 66%
and 90% of their last salaries.
In the U.S., benefits in some states are as low 27%
of income for average earners.
Many European countries, the Scandinavian ones
in particular, have voluntary unemployment
insurancealbeit government-subsidizedand low
unemployment rates.
Denmarks unemployment stands at 3.1%
Norway has 2.5% unemployment.
Of course, neither of these countries is rapidly
growing. Denmark is chugging along at 1.1% and
even with its booming oil wealth.
Norway is growing at 3.1%, making
unemployment and payments a secondary concern
to the European economy.

Most countries phase out benefits at 6 months,
though some, like Switzerland, provide full
benefits for up to 260 days.
In countries like Denmark, for example, the fees
paid by workers to unemployment funds are about
$700 per year, though all workers pay an 8% tax
to the government to cover social programs, one
of which is unemployment payments.
In the USA, unemployment insurance is paid for
through federal taxes of 0.8% and state taxes of
5.4% on employers taxable payroll; some states
tax is levied as high as 10%, though, and Alaska,
New Jersey and Pennsylvania require workers to
pay tax also.
Based on reports from the OECD,
countries with low employee turnover
rates, as the result of heavy labor
market regulation, often with high
benefits, are the most difficult
workforces for reentry ( Effect of
Hysteresis).
But in the end, the best markets for the
unemployed are those with available
jobs.

Minimum wage laws
When the minimum wage is set above the
level that balances supply and demand, it
creates unemployment.
Minimum wage laws raise the quantity of
labour supplied and reduce the quantity
demanded.
Efficiency Wages
Efficiency wages are above-equilibrium
wages paid by firms in order to increase
worker productivity.
The theory of efficiency wages states that
firms operate more efficiently if wages are
above the equilibrium level.


Efficiency Wages

A firm may prefer higher than equilibrium wages
for the following reasons:
Worker Health: Better paid workers eat a better
diet and thus are more productive.
Worker Turnover: A higher paid worker is less
likely to look for another job.
Worker Effort: Higher wages motivate workers
to put forward their best effort.
Worker Quality: Higher wages attract a better
pool of workers to apply for jobs.

Conclusion
The unemployment rate consist a big
problem that need to be solve and to
reduce the process of this
unemployment.In case of R.M
gouvernament need to attract more
investments and to invest in different
project that will facilate our economy.
Monthly average wage $PPP
69 India $295
65 Moldova $438
57 China $656
56 Ukraine $686
54 Bulgaria $750
47 Romania $954
46 Belarus $959
39 Lithuania $1,109
37 Russian Federation $1,215
21 Greece $2,300
20 Spain $2,352
13 Germany $2,720
12 Canada $2,724
Monthly average wage $PPP
1 Luxembourg $4,089
2 Norway $3,678
3 Austria $3,437
4 United States $3,263
5 United Kingdom $3,065
6 Belgium $3,035
7 Sweden $3,023
8 Ireland $2,997
9 Finland $2,925
10 South Korea $2,903