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Lectures 5 & 6
Unemployment and the Labour Market
No. of
Workers
0
1
2
3
4
5
6
7
8
Production Function
160
140
Total Product
120
100
80
60
40
20
0
0
No of Workers
30
25
20
15
10
5
0
0
No. of Workers
60000
50000
40000
30000
20000
10000
0
0
No. of Workers
Y
Marginal Product of Labour = MPL = L
Competitive Markets
Assume that firm operates in a competitive market
It cannot set the wage it pays workers
It cannot set the price it receives for its product
Firm (i) will be willing to employ labour until:
Pi MPLi Wi
Wi
Pi
Fundamental Point
Since the MPL decreases as the firm employs more
workers, it must be the case that the real wage also has
to fall (as more workers are employed)
This implies that a firms demand for labour is a
decreasing function of the real wage.
10
Wi
Money
Wage
LDi = VMP
No. of Workers
11
P
P
12
Real
Wage
LDi MP
No. of Workers
13
Low
LDi
N1
N2
No. of Workers
14
Real
Wage
Pi MPLi
L
P
D
i
LDi
Pi MPLi
P
No. of Workers
15
Wi
P
Real
Wage
Pi MPLi
L
P
D
i
LDi
Pi MPLi
P
No. of Workers
16
Real Wage
(per hour)
5
5
5
5
5
10
0
0
No. of Workers
MPL or Labour Demand Curve
20
Supply of Labour
Suppliers of labour are workers and potential workers.
At any given wage people have to decide if they are willing to
work.
Supply of labour is the total number of people willing to
Wi
work at each real wage: P
LS
Wi
P
No. of Workers
22
LS
High
Low
N1
N2
No. of Workers
23
24
Real
Wage
W
P
LD
N*
Employment
25
Real
Wage
LD
LD
Employment
26
38.1
1.0
14.8
6.7
6.7
-9.2
-0.2
-5.2
16.1
25.7
12.5
15.4
+4.5
-0.2
+1.0
-1.9
Ds
real
wage
Su
real
wage
Ss
Ds
Du Du
Employment
Unskilled workers
Fall in wages and
employment
Employment
Skilled workers
Rise in wages and
employment
29
Unemployment
Definitions
Labour Force equals the total number of people
available for work.
Labour Force = Employed + Unemployed
30
ABS Definitions
Employed: Person worked full-time or part-time during the
past week (or was on leave from a regular job)
Unemployed: Person did not work during the preceding week
and made some effort to find work.
Not in Labour Force: Person did not work in the past week
and was not actively seeking work (e.g. retirees, unpaid
homemakers, full-time student).
Discouraged Workers: People who have given up looking for
work (and so are not counted as unemployed)
31
Important Ratios
Unemployment Rate =
(Unemployment/Labour Force)*100
Participation Rate =
(Labour Force/Working-age (15+) Population)*100
32
Labour Force:Data:Australia,Apr-2009,Jun-12,Jun-2015
Thousands (000)
Employed
10,799 11,500 11,769
- Part-time
3,126
3,435
3,612
- Full-time
7,673
8,066
8,156
+Unemployed
615
631(5.2) 756
=Labour Force
11,414 12,132 12,525
+Not in Labour Force
6,045
6,464
6,815
=Working-age (15+) Pop. 17,458 18,596 19,340
(65.2)
Unemployment Rate
100*(756/12,525) = 6.04%
Participation Rate
100*(12,525/19,340) = 64.8%
33
Participation rate
Dec-2014
Nov-2013
Oct-2012
Sep-2011
Aug-2010
Jul-2009
Jun-2008
May-2007
Apr-2006
Mar-2005
Feb-2004
Jan-2003
Dec-2001
Nov-2000
Oct-1999
Sep-1998
Aug-1997
Jul-1996
Jun-1995
May-1994
Apr-1993
Mar-1992
Feb-1991
Jan-1990
Dec-1988
Nov-1987
Oct-1986
Sep-1985
Aug-1984
Jul-1983
Jun-1982
May-1981
Apr-1980
Mar-1979
Feb-1978
% participation
67.0
65.0
64.0
63.0
62.0
6.0
61.0
60.0
59.0
57.0
% unemployed
66.0
10.0
8.0
4.0
2.0
58.0
0.0
Unemployment rate
34
Types of Unemployment
Frictional/Search
Short-term unemployment that is associated with
people searching for the right job.
Will be a feature of any dynamic economy
Tends to be beneficial rather than costly to an economy
35
Structural
Longer-term unemployment that can arise when the
distribution of skills of some workers does not match the
available jobs in the economy
Some workers may have a lack of skills or be subject to
discrimination and this prevents them from finding
stable long-term employment
Structural change in the economy may result in a loss of
jobs for certain types of specialised workers
36
Cyclical
Associated with periods of slowdowns in economic
activity, called recessions
37
Costs of Unemployment
Economic costs
output that is foregone since workforce is not fully
utilised
Psychological costs
long periods of unemployment can lead to loss of selfesteem, unhappiness and depression
Social costs
high unemployment can lead to increased crime and
associated social problems
38
Australia
Feb-2014
Feb-2013
Feb-2012
Feb-2011
Feb-2010
Feb-2009
Feb-2008
Feb-2007
Feb-2006
Feb-2005
Feb-2004
Feb-2003
Feb-2002
Feb-2001
Feb-2000
Feb-1999
Feb-1998
Feb-1997
Feb-1996
Feb-1995
Feb-1994
Feb-1993
Feb-1992
Feb-1991
Feb-1990
Feb-1989
Feb-1988
Feb-1987
Feb-1986
Feb-1985
Feb-1984
Feb-1983
Feb-1982
Feb-1981
Feb-1980
Feb-1979
Feb-1978
10.0
8.0
6.0
4.0
2.0
0.0
US
39
Jan-2014
Oct-2013
Jul-2013
Apr-2013
Jan-2013
Oct-2012
Jul-2012
Apr-2012
Jan-2012
Oct-2011
Jul-2011
Apr-2011
Jan-2011
Oct-2010
Jul-2010
Apr-2010
Jan-2010
Oct-2009
Jul-2009
Apr-2009
Jan-2009
Oct-2008
Jul-2008
Apr-2008
Jan-2008
Oct-2007
Jul-2007
Apr-2007
Jan-2007
12.0
10.0
US
8.0
Japan
Euro Area
6.0
UK
South Korea
Taiwan
4.0
Hong Kong
Australia
2.0
0.0
40
LS
wmin
we
LD
ND Ne NS
Employment
42
Those workers
who are employed at the
minimum wage are better-off than at the marketclearing wage
D
0
N
(
)
Labour Unions
Workers may negotiate on an individual basis with a firm
over wages and conditions
Alternatively workers may form labour unions to bargain
collectively with a firm.
Presence of unions tends to produce a wage outcome that is
above the market-clearing wage.
The figure for a minimum wage can be re-interpreted as the
outcome for a unionised industry, where wmin = wunion
44
Unemployment Benefits
Government transfer payment paid to the unemployed.
Provides a basic income to workers who are unemployed
and searching for work.
Can have a disincentive effect on a workers search effort.
Australia: Newstart Allowance (single, 22+, looking for work)
2010 payment is $456 per fortnight
2012 payment is $490 per fortnight
2014 payment is $519 per fortnight
45