Lecturer: Shanza Khalid 28th October,

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Contents
 Identifying Unemployment
 Job Search
 Minimum-Wage Laws .
 Unions and Collective Bargaining
 The Theory of Efficiency Wages

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Introduction
• Losing a job can be the most distressing economic event in a person’s life.
• A job loss means a lower living standard in the present, anxiety about the future, and
reduced self-esteem.
• Unemployment is another determinant of a country’s standard of living. .

The term unemployment refers to a situation when a person who is actively
searching for employment is unable to find work.

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How is Unemployment Measured?
Measuring unemployment is the job of the Pakistan Bureau of Statistics
It is measured via survey and population of 16 years and above is considered

Three categories:
.
1. Employed: Includes those who worked as paid employees, worked in their own business, or
worked as unpaid workers in a family member’s business.
 Both full-time and part-time workers are counted.
 This category also includes those who were not working but who had jobs from which they
were temporarily absent because of, for example, vacation, illness, or bad weather.

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How is Unemployment Measured?
2. Unemployed:
This category includes those who were not employed, were available for work, and had tried to find
employment but were not successful. It also includes those waiting to be recalled to a job from which
they had been laid off.
.
3. Not in the labor force:
This category includes those who fit neither of the first two categories, such as full-time students,
homemakers, and retirees.

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How is Unemployment Measured?
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 x 100
Labor force

LABOR-FORCE PARTICIPATION RATE

The percentage of the adult population that is in the labor force.
Labor-force participation rate = Labor force x 100
Adult population
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How is Unemployment Measured?
There are 150.5 million employed people, and 7.8 million unemployed people.
Adult population is 252.4 million.

Find the Labor Force, Unemployment Rate and Labor Force Participation.

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Types of Unemployment

1. Frictional Unemployment
2. Structural Unemployment
3. Seasonal Unemployment
.
4. Cyclical Unemployment

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Types of Unemployment

FRICTIONAL UNEMPLOYMENT
• It is the unemployment that results from the time required in the process of matching workers
with jobs.
• It occurs when a worker move from one job to another and spends time to fine an ideal one.
.
• It is often thought to explain relatively short spells of unemployment.
• It exits even when there is full employment.

Example: Freshly graduated college students entering the labor market. 

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Types of Unemployment
Structural Unemployment
• It results from industrial reorganization often due to technological change.
• The number of jobs available in some labor markets may be insufficient to give a job to everyone who
wants one.
• This occurs when the labor demand is less than labor supply because there is a mismatch between the
.
skills that people have learned and the skills the job market requires.
• This tends to explain longer spells of unemployment.

For example, in the farming industry, much of the work is becoming mechanized, which means that fewer
farmers are needed and many are let go. When these farmers go to cities to find work, they may find no
other similar jobs in which to apply their skills.
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Types of Unemployment
Structural Unemployment

Structural Changes that

.
can cause structural
unemployment

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Types of Unemployment
CYCLIC UNEMPLOYMENT
Cyclical unemployment is the component of overall unemployment that results directly from cycles
of economic upturn and downturn. OR
The deviation of unemployment from its natural rate is called cyclical unemployment.
When economy is growing/more productive/progressing – less cyclic unemployment .

When the economy is in recession – more cyclic unemployment

NATURAL RATE OF UNEMPLOYMENT

The normal rate of unemployment around which the unemployment rate fluctuates.

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Types of Unemployment
SEASONAL UNEMPLOYMENT
• Seasonal unemployment is caused by different industries or parts of the labor market being
available during different seasons.
• For instance, unemployment goes up in the winter months, because many agricultural jobs end
once crops are harvested in the fall, and those workers are left to find new jobs. .

• Another Example: Eid jobs

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Types of Unemployment

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Why economies always experience some
unemployment?

There are 4 main reasons:

1. Job Search .

2. Minimum Wage Laws

3. Unions and Collective Bargaining
4. The Theory of Efficiency Wages

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Job Search
One reason economies always experience some unemployment is job search.

It is the main reason for the existence of Frictional Unemployment.

Job search is the process of matching workers with appropriate jobs.

.
If all workers and all jobs were the same, so that all workers were equally well
suited for all jobs, job search would not be a problem

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Job Search
Why Some Frictional Unemployment Is Inevitable
• Frictional unemployment is often the result of changes in the demand for labor among different
firms.
• Frictional unemployment is inevitable simply because the economy is always changing.
.
• When consumers decide that they prefer Ford to General Motors cars, Ford increases employment
and General Motors lays off workers.
• The former General Motors workers must now search for new jobs, and Ford must decide which
new workers to hire for the various jobs that have opened up.
• The result of this transition is a period of unemployment as it occurs due to sectoral shifts
(movement of workers among industries).

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Job Search
PUBLIC POLICY & JOB SEARCH
• Public Policy can play an effective role in reducing the time required for job search which can
further reduce the natural unemployment rate of the economy.
• Government programs try to facilitate job search in various ways.
1. Through government-run employment agencies, which give out information about job vacancies.
.
2. Through public training programs, which aim to ease workers’ transition from declining to growing
industries and to help disadvantaged groups escape poverty.

Critique: Government should not intervene and it is better to let the private market match workers
and jobs.

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Job Search
UNEMPLOYMENT INSURANCE
• A program designed to offer workers partial protection against job loss.

• It increases the amount of frictional unemployment, without intending to do so.

• Not Eligible: The unemployed who quit their jobs, were fired for cause, or just entered the labor
force are not eligible. .

• Benefits are paid only to the unemployed who were laid off because their previous employers no
longer needed their skills.

• The terms of the program vary over time and across states, but a typical worker covered by
unemployment insurance in the United States receives 50 percent of his former wages for 26
weeks.

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Job Search

Benefit: Reduces the hardship of unemployment

Drawback: Increases unemployment in the following ways:

1. People respond to incentives. Because unemployment benefits stop when a worker takes a
new job, the unemployed devote less effort to job search and are more likely to turn down
unattractive job offers. .

2. In addition, because unemployment insurance makes unemployment less troublesome,

workers are less likely to seek guarantees of job security when they negotiate with
employers over the terms of employment.

• Conflicted views regarding unemployment insurance

• Not a bad policy

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Minimum Wage Laws
• One of the reasons for the existence of structural unemployment is the Minimum Wage Laws (MWL)

• According to MWL, Wages are set above

equilibrium level which leads towards surplus
of labor. .
• Now workers are unemployed because they are
waiting for jobs to open up.
• Minimum-wage laws matter most for the least
skilled and least experienced members of the
labor force, such as teenagers.

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Unions and Collective Bargaining
• A union is a worker association that bargains with employers over wages, benefits, and working
conditions.

• 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 the terms of employment is called collective
bargaining.

• Over the time the strength of unions have decreased.

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Unions and Collective Bargaining
• When a union bargains with a firm, it asks for higher wages, better benefits, and better working
conditions than the firm would offer in the absence of a union.

• If the union and the firm do not reach agreement, the union can organize a withdrawal of labor from
the firm, called a strike. .

• Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree
to pay higher wages than it otherwise would.

• Economists who study the effects of unions typically find that union workers earn about 10 to 20
percent more than similar workers who do not belong to unions.
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Unions and Collective Bargaining
• When a union bargains with a firm, it asks for higher wages, better benefits, and better working
conditions than the firm would offer in the absence of a union.

• If the union and the firm do not reach agreement, the union can organize a withdrawal of labor from
the firm, called a strike. .

• Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree
to pay higher wages than it otherwise would.

• Economists who study the effects of unions typically find that union workers earn about 10 to 20
percent more than similar workers who do not belong to unions.
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Unions and Collective Bargaining
When a union raises the wage above the
equilibrium level  Labor Supply > Labor Demand  unemployment.

Workers who remain employed at the higher wage are better off, but those who were previously
employed and are now unemployed are worse off.
.
Are Unions Good or Bad for the Economy?
Unions are bad because Unions are good because
Unions causes inefficient outcomes 1. A union balances the firm’s market power and
like unemployment and some workers protect the workers from being at the mercy of the
benefit at the expense of others. firm’s owners.
2. Unions are important for helping firms respond
efficiently to workers’ concerns and keep a happy
and productive workforce.

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Unions and Collective Bargaining
When a union raises the wage above the
equilibrium level  Labor Supply > Labor Demand  unemployment.

Workers who remain employed at the higher wage are better off, but those who were previously
employed and are now unemployed are worse off.
.
Are Unions Good or Bad for the Economy?
Unions are bad because Unions are good because
Unions causes inefficient outcomes 1. A union balances the firm’s market power and
like unemployment and some workers protect the workers from being at the mercy of the
benefit at the expense of others. firm’s owners.
2. Unions are important for helping firms respond
efficiently to workers’ concerns and keep a happy
and productive workforce.

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The Theory of Efficiency Wages

• According to this theory, firms operate more efficiently if wages are above the equilibrium level.
• It may be profitable for firms to keep wages high even in the presence of a surplus of labor.
• There are 4 types of Theory of Efficiency Wages:
1. Worker Health .
2. Worker Turnover
3. Worker Quality
4. Worker Effort

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The Theory of Efficiency Wages

1. Worker Health
• Better-paid workers eat a more nutritious diet, and workers who eat a better diet are
healthier and more productive.
• A firm may find it more profitable to pay high wages and have healthy, productive .
workers than to pay lower wages and have less healthy, less productive workers.

2. Worker Turnover
The more a firm pays its workers, the less often its workers will choose to leave thereby, reducing the
Worker Turnover.

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The Theory of Efficiency Wages

3. Worker Quality
• When a firm pays a high wage, it attracts a better pool of workers to apply for its jobs and thereby
increases the quality of its workforce.
• If the firm responded to a surplus of labor by reducing the wage, the most competent applicants— .
who are more likely to have better alternative opportunities than less competent applicants— may
choose not to apply.

4. Worker Effort
High wages make workers more eager to keep their jobs and thus motivate them to put forward their
best effort.
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The Theory of Efficiency Wages

HENRY FORD AND THE VERY GENEROUS $5-A-DAY WAGE – Case Study

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