Unemployed people
People without a paid job but actively looking for one
What does it mean when we say that labour markets are dynamic?
- There is always someone looking for a job. Searching is costly (eg. time, effort, need to do CVs), but want to make sure get a good job
- There is always a firm w/ an open vacancy. Filling vacancy is costly (eg. interviews) but want to make sure get a good employee
Types of unemployment
- Cyclical unemployment
- Natural rate of unemployment - the rate that would prevail if there are no business cycles / cyclical fluctuations
Under natural rate,
- Frictional unemployment
- by workers looking for a job. caused by time and effort taken to search for a job. Interviews, send CV etc.
- & due to sectoral shifts (takes time for workers to change sectors) - Structural unemployment
- due to labour market policies & institutions
- & due to wage rigidity (failure of wages to adjust to a level at which labor supply equals labor demand)
Real-wage rigidity reduces the rate of job finding and raises the level of unemployment.
3 causes of wage rigidity
- Minimum-wage laws
- Monopoly power of unions
- A firm may choose to pay its workers high wages to keep them happy and discourage them from forming a union. - Efficiency wages
- Firm operates more efficiently if it pays its workers a high wage, the firm may find it profitable to keep wages above the level that balances supply and demand
4 examples of policies and institutions that affect f and s
- If tax for a worker is higher, VALUE of the job is lower. Cost of worker is higher for firm -> lower INCENTIVE to open vacancy
- Generous unemployment benefits are an incentive to stay unemployed longer -> lower job finding rate (f)
- If easier to look for job -> higher job finding rate
eg. technological progress - If costly to fire worker -> lower job separation rate (s)
3 “active” labour market policies
ie. government programs to help workers search
- Govt employment agencies
eg. informs job openings, help w/ CV writing, interviewing skills…
- NOT effective - Public job training programs
- help workers displaced (fired) from declining industries get skills needed for job in growing industries
- there is evidence that this works - Conditional unemployment benefits
- conditional on you actively searching
- may increase length of search -> lower job finding rate
Employment Protection Legislation (EPL)
In many countries, policies that make firing workers more costly + notice period (1-3 months in UK)
Aims to protect workers from job insecurity & arbitrary decisions by employer.
- Lowers job separation rate & also job finding rate
- Ambiguous effect; depends on whether effect on s/f is stronger
