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Summary of Chapter 23: Unemployment
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Chapter 23: UnemploymentIdentifying Unemployment
What is unemployment?
Unemployment can be defined as ‘someone who does not have a job and who is available
for work.’ The notion of ‘being available for work’ requires further clarification. The wage rate
for jobs that are unfilled is a factor in whether people choose to make themselves available
for work. If too low, people may choose not to work. Thus, being unemployed also depends
upon whether you are willing to work at going wage rates. A more precise definition can be
the number of unemployed in an economy is the number of people of working age who are
able and available for work at current wage rates and who do not have a job.
How is Unemployment Measured?
There are two basic ways government agencies go about measuring the unemployment rate
in the economy:
The Claimant Count
One simple way is to count the number of people who are claiming unemployment benefit
payments from the government - the so-called claimant count. The government also has a
good idea of the total labor force in employment, since it is receiving income tax payments
from them. Adding to this the number of unemployment benefit claimants is a measure of the
total labor force, and expressing the claimant count as a proportion of the labor force is a
measure of the unemployment rate. There are a number of important drawbacks to the
claimant count method. Suppose the government gets tougher and changes the rules so
that fewer people are now entitled to unemployment benefits. The claimant count will go
down and so will the measured unemployment rate, even though there has been no change
in the number of people with or without work.
Labor Force Surveys
The second method of measuring unemployment is through the use of surveys. In many
countries, the government carries out Labor Force Surveys (LFS) based on the standardized
definition of unemployment from the International Labor Office. The ILO definition of an
unemployed person is someone who is without a job and who is willing to start work within
the next two weeks and either has been looking for work within the past 4 weeks or is
waiting to start a job. The LFS is carried out quarterly throughout Europe. Based on the
answers, the government places each adult in each surveyed household into one of three
categories.
1. A person is considered employed if he or she spent some of the previous week
working at a paid job.
2. A person is unemployed if he or she fits the ILO definition of an unemployed person.
3. A person who fits neither of the first two categories, such as a full-time student, is not
in the labor force (Economically Inactive)
Labor force can be defined mathematically:
, Labor Force=Number of employed+ Number of unemployed
Then the unemployment rate can be measured as a percentage:
Unemployment Rate=(Number of unemployed /Labor Force)∗100
The labor force participation rate measures the percentage of the total adult population of
the country that is in the labor force:
Labor Force Participation Rate=(Labor Force / Adult Population)∗100
The Causes of Unemployment
Frictional Unemployment
At any point in time in the economy, there are people who are between jobs. They might
have been made redundant or dismissed, are returning to work after a period of leave for
traveling, seeking work after leaving university, looking for work after having time off to raise
a family or wanting a career change. The unemployment that results from the process of
matching workers and jobs is called frictional unemployment. In some cases, people may
choose to remain unemployed because state benefit levels are relatively generous or tax
and benefits laws are such that taking a job would leave the individual worse off. This is
called voluntary unemployment. In contrast, involuntary unemployment occurs when people
want to work at going market wage rates but cannot find employment.
Structural Unemployment
When the quantity of labor supplied exceeds the quantity demanded and the number of jobs
available may be insufficient to give a job to everyone who wants one, structural
unemployment exists. Structural unemployment can explain long spells of unemployment.
There are a number of causes of structural unemployment:
Occupational and Geographic Immobility: Workers who lose their jobs in one industry may
find that jobs are available to require skills and experience they do not possess or are not in
the immediate region where they live. Where workers are unable to easily move from one
occupation to another, this is referred to as occupational immobility. Where workers are
unable to work because of the difficulties associated with moving to different regions, this is
termed geographical immobility.
Technological Change: Changes in technology are important drivers of long-run economic
growth but such change has winners and losers. The losers are those whose knowledge,
skills and experience are now redundant and as a result have to seek new employment.
Structural Change in the Economy: Over time structural changes affect the make-up of
economies. Structural changes can be caused by competition from abroad or by changes in
technology and changes in societal norms and trends.
Labor Market Imperfections
Minimum Wage Laws: Minimum wage laws are a price floor applied to the labor market.
Minimum wages can have an important effect on certain groups, particularly high
unemployment rates. When a minimum wage law forces the wage to remain above the level
that balances supply and demand, it raises the quantity of labor supplied and reduces the
quantity of labor demanded compared to the equilibrium level.
Unions and Collective Bargaining: Union density measures the proportion of the workforce
that is unionized, excluding people who can not, for legal reasons, be members of the union.
A union is a type of cartel. Like any cartel, a union is a group of sellers acting together in the
hope of exerting their joint market power. The process by which unions and firms agree on
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