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Labor market andUnemployment
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o n e n s
Labor market and its structure. Models oflabor 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
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Labor market
Labor market means the relationship betweendemand 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 macrolevel:
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
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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)
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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
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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:therate 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
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Classical model of Labor market Classical model of Labor market
Main characteristic features:
- Perfect competition- P, ω – 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 restoringequilibrium
Unemployment is voluntary
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Condition of equilibrium:
Ld = f (MPL) equal to Ls = f (W/P).
Classical model of labor market
L
S
D
L*
P
W
*
P
W
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Main characteristic features:
Imperfect competition (trade unions, G,Monopolies)
P, w – were seen to be “sticky”
LD = f (effective demand or C + I ) is the mostimportant component
LS = f (L , w nominal), doesn’t depend on the
price level
Equilibrium doesn’t achieve automatically
In the short-run involuntary unemployment in
conditions of stability
Keynesian model of Labor market
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Keynesian model of labor marketW/Pe is the equilibrium wages;
Le is the equilibrium number of labor force
W/Pr is the effective wages, determining by effective demand forlabor
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
SLDL
L D L E LS
E
W/P
W/P R
W/P E
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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 totalnumber of workers, including both theemployed and the unemployed.
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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
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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.
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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
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Unemployment is the state in whichindividuals available to work are without
job and are currently seeking a job.
Today it is one of the most pressing
problems of modern economies
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Unemployment rate in differentcountries:
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
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Measuring Unemployment There are also different ways national statistical agencies
measure unemployment. These differences may limit thevalidity 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 ofunemployed 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%
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Does the unemployment rate measure whatwe want it to?
It is difficult to distinguish between a person who isunemployed and a person who is not in the labourforce.
Discouraged workers , people, who would like towork but have given up looking for jobs after anunsuccessful search, don’t show up in unemploymentstatistics.
Other people may claim to be unemployed in order toreceive financial assistance, even though they aren’tlooking for work.
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How long are the unemployed withoutwork?
Most spells of unemployment are short.
Most unemployment observed at any given
time is long-term. Most of the economy’s unemployment
problem is attributable to relatively fewworkers who are jobless for long periods of
time.
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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
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Why Are There Always Some People
Unemployed? In an ideal labour market, wages would adjust to
balance the supply and demand for labour, ensuringthat all workers would be fully employed
Frictional Unemployment means the situation thanindividuals will take time to find and secure anothersuitable 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 offrictional unemployment.
The more developed an economy is, higher is the probability of getting a job faster and lower is the
probability of frictional unemployment.
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Job Search
the process by which workers findappropriate jobs given their tastes and skills.
results from the fact that it takes time forqualified 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 thanequilibrium.
It is caused by the time spent searching forthe “right” job.
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Structural Unemployment is the result of technologicalchanges, when the structure of working places is notcorresponding 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 anindustry.
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Seasonal Unemployment
There are certain kinds of unemployment that tendto concentrate in a particular time of the year.
Seasonal unemployment is most common inindustries like tourism, hotel, in the agriculture.
Cyclical Unemployment characterizes thevariations 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.
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The Natural rate of unemployment
Natural rate of unemployment (NAIRU) meansthe unemployment rate in conditions of full
employment of labor force and economic stability.
The economy’s natural rate of unemployment
refers to the amount of unemployment that theeconomy normally experiences.
u* = u f r + u str,
Today, U*≈
6% - 8% u - u* = u cycl ical
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The Natural rate of unemployment
The NAIRU (u*) means the full employment oflabor 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 thatis remaining without the job monthly
U is the number of unemployed
E is the number of employed
Benefits arising from unemployment
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Benefits arising from unemployment
a small amount of frictional unemployment allowsemployers to find the employees most suited to the
jobs offered;
frictional unemployment allows workers to find
the jobs that better fit their tastes, talents andneeds;
hard working; unemployment thus promote labor
productivity and profitability;
additional labor force;
limiting the abuse of the environment;
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Okun’s law
Law states that for every 2% GDP falls relative to
potential GDP, unemployment rises 1% relative tonatural rate of unemployment. When the economy
operates at productive capacity, it will experience
the Natural rate of unemployment:
Y-Y*/ Y*= - β(U – U*)
U* – Natural rate of unemployment (NAIRU)
U – real unemployment rate β – Okun’s coefficient characterizes the change in
Real GDP over Potential GDP ( β ≈ 2-3)
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G t l ti f L b k t
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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 ofunemployment (passive Governmental policy)
Active Governmental policy:
Training program
Support of small business
Stimulative Fiscal policy
Stimulative Monetary policy
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Passive Governmental policy:
Labor exchange
minimum wage Law
Unemployment insurance(unemployment benefits program)
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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
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Unemployment insurance
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Unemployment insurance
Unemployment insurance is a government
program that partially protects workers’ incomeswhen 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.
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Laid-off Danes who have worked 52 weeks over theprevious 3 years are eligible to receive 90% of theiraverage earnings for up to 4 years.
Unemployed job seekers in Norway and Finland arealmost as well off.
In Norway the unemployed receive 87.6% of theirprevious salaries for 500 days.
In Finland they receive 85.1% of their previoussalaries for one year.
In Sweden, Israel, Japan and Germany, theunemployed 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.
M E t i th S di i
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Many European countries, the Scandinavian ones
in particular, have voluntary unemployment
insurance – albeit government-subsidized – and low
unemployment rates. Denmark’s unemployment stands at 3.1%
Norway has 2.5% unemployment.
Of course, neither of these countries is rapidlygrowing. 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 concernto the European economy.
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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, oneof 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 employer’s taxable payroll; some states’
tax is levied as high as 10%, though, and Alaska,
New Jersey and Pennsylvania require workers to
pay tax also.
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Based on reports from the OECD,countries with low employee turnover
rates, as the result of heavy labormarket regulation, often with highbenefits, are the most difficultworkforces for reentry ( Effect ofHysteresis).
But in the end, the best markets for theunemployed are those with available
jobs.
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Minimum wage laws
When the minimum wage is set above the
level that balances supply and demand, itcreates unemployment.
Minimum wage laws raise the quantity oflabour supplied and reduce the quantity
demanded. Efficiency Wages
Efficiency wages are above-equilibrium
wages paid by firms in order to increaseworker productivity.
The theory of efficiency wages states thatfirms operate more efficiently if wages are
above the equilibrium level.
Efficiency Wages
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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.
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Monthly average wage $PPP
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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