ECON 100 Lecture 24 Wednesday, December 10

Announcements PS#10 is posted on course webpage.

Describing Unemployment Three Basic Questions How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work?

Unemployment: Definitions and measurement

Labor Force Statistics The adult population (15 or older) is divided into 3 groups: employed: paid employees, self-employed, and unpaid workers in a family business. unemployed: not working now but have looked for work during previous 3 months. (4 weeks in Europe and US) not in the labor force: everyone else in the adult population. Labor force is 1 + 2: It is the sum of the employed and unemployed workers. (Labor force = employed + job searchers).

The two very important statistics are Unemployment rate (the “u-rate”): % of the labor force that is unemployed u-rate # of unemployed labor force = 100 x Labor force participation rate: % of the adult population that is in the labor force labor force participation rate labor force adult population = 100 x Labor force = the sum of the employed and unemployed. (employed + job searchers) .

Most recent unemployment figures for Turkey August 2014

http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=16013

TUIK, Household Labour Force, August 2014 Unemployment rate realized as 10.1% Labour force participation rate realized as 51.2% LFPR is 72.1% for males and 30.9% for females.

Labor Force Statistics Turkey August 2014 0. Adult population 57,098,000 Employed 26,313,000 Unemployed 2,944,000 1+2 Labor force 29,257,000 Not in the Labor force 27,841,000

Unemployment rate 2013 - 2014

Unemployment rate 1988 – 2012

Unemployment in Europe, 1970–2011

France

UK

Germany

U.S.

TUIK, Household Labour Force, August 2014 Unemployment rate realized as 10.1% Labour force participation rate realized as 51.2% LFPR is 72.1% for males and 30.9% for females.

Labor force participation, Turkey, 1999 - 2006 Year LFPR Agriculture

Labor force participation rates, selected countries, 2005

TUIK definitions employment Who is counted as employed? Unemployed? Not in the labor force?

EMPLOYED (İSTİHDAM): İşbaşında olanlar ve işbaşında olmayanlar grubuna dahil olan kurumsal olmayan çalışma çağındaki nüfus, istihdam edilen nüfustur. EMPLOYMENT: Non-instructional working age population included in the group of persons at work and persons not at work specified below are the employed population.

İşbaşında olanlar: Ücretli, maaşlı, yevmiyeli, kendi hesabına, işveren ya da ücretsiz aile işçisi olarak referans dönemi içinde en az bir saat bir iktisadi faaliyette bulunan kişilerdir. What is “kurumsal olmayan çalışma çağındaki nüfus”? What is “referans dönemi”? Persons at work: Persons engaged in any activity during the reference period for at least one hour as a regular employee, casual employee, employer, self employed or unpaid family worker.

KURUMSAL OLMAYAN NÜFUS: Üniversite yurtları, yetiştirme yurtları (yetimhane), huzurevi, özel nitelikteki hastane, hapishane, kışla vb. yerlerde ikamet edenler dışında kalan nüfustur. KURUMSAL OLMAYAN ÇALIŞMA ÇAĞINDAKİ NÜFUS: Kurumsal olmayan nüfus içerisindeki 15 ve daha yukarı yaştaki nüfustur. NON-INSTITUTIONAL POPULATION: All the population excluding the residents of dormitories of universities, orphanage, rest homes for elderly persons, special hospitals, prisons and military barracks etc. NON-INSTITUTIONAL WORKING AGE POPULATION: Population 15 years of age and over within the non-institutional population.

Referans dönemi REFERENCE PERIOD: The first week of each month starting with Monday and ending with Sunday is used as the reference period.

İSTİHDAM: İşbaşında olmayan ama istihdam edilmiş kabul edilenler. İşbaşında olmayanlar: İşi ile bağlantısı devam ettiği halde, referans haftası içinde çeşitli nedenlerle işinin başında olmayan kendi hesabına ve işverenler istihdamda kabul edilmektedir. Ücretli ve maaşlı çalışan ve çeşitli nedenlerle referans döneminde işlerinin başında bulunmayan fertler; ancak 3 ay içinde işlerinin başına geri döneceklerse veya işten uzak kaldıkları süre zarfında maaş veya ücretlerinin en az % 50 ve daha fazlasını almaya devam ediyorlarsa istihdamda kabul edilmektedir Üretici kooperatifi üyeleri ile mesleki bilgilerini artırmak amacıyla belirli bir menfaat (ayni ya da nakdi gelir, sosyal güvence, yol parası, cep harçlığı vb.) karşılığında çalışanlar (çırak, stajyer vb.) istihdamda kabul edilmektedirler.

Persons not at work: All self-employed and employers who had a job but not at work in the reference week for various reasons are considered as employed. Regular employees with a job but did not work during the reference period for various reasons are considered as employed only if they have an assurance of return to work within a period of 3 months or if they receive at least 50% of thei r wage or salary from their employer during their absence. The members of producer cooperatives and apprentices or stajyers who are working to gain any kind of benefit (income in cash or in kind , social security, traveling cost, pocket money etc.) are considered to be employed.

Definition of Unemployed İŞSİZ: Referans dönemi içinde istihdam halinde olmayan kişilerden iş aramak için son üç ay içinde iş arama kanallarından en az birini kullanmış ve 2 hafta içinde işbaşı yapabilecek durumda olan kurumsal olmayan çalışma çağındaki tüm kişiler işsiz nüfusa dahildirler. Üç ay içinde başlayabileceği bir iş bulmuş ya da kendi işini kurmuş ancak işe başlamak ya da işbaşı yapmak için çeşitli eksikliklerini tamamlamak amacıyla bekleyenler de işsiz nüfus kapsamına dahildirler PERSONS UNEMPLOYED: The unemployed comprises all persons 15 years of age and over who were not employed during the reference period had used at least one channel for seeking a job during the last three months and were available to start work within two weeks. Persons who have already found a job and will start to work within 3 months, or established his/her own job but were waiting to complete necessary documents to start work were also considered to be unemployed

What does the unemployment rate really measure? It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. Unemployed v. not in the labor force ???

What does the unemployment rate really measure? Discouraged workers are people who want to work but have given up looking for jobs after a period of unsuccessful search. These people are not recorded in unemployment statistics.

How many are they?

İŞGÜCÜNE DAHİL OLMAYANLAR: İşşiz veya istihdamda bulunmayan kurumsal olmayan çalışma çağındaki nüfustur. 1. İş aramayıp çalışmaya hazır olanlar: Çeşitli nedenlerle bir iş aramayan, ancak 2 hafta içinde işbaşı yapmaya hazır olduğunu belirten kişilerdir. İki alt başlıkta ele alınmaktadır: İş bulma ümidi olmayanlar: Daha önce iş aradığı halde bulamayan veya kendi vasıflarına uygun bir iş bulabileceğine inanmadığı için iş aramayan ancak işbaşı yapmaya hazır olduğunu belirten kişilerdir. Diğer: Mevsimlik çalışma, ev kadını olma, öğrencilik, irad sahibi olma, emeklilik ve çalışamaz halde olma gibi nedenlerle iş aramayıp ancak işbaşı yapmaya hazır olduğunu belirten kişilerdir.

Not seeking a job but available to start a job: These are the persons who did not look for a job with different reasons, but were available for work within 2 weeks. This group consists of two sub-groups: I. Discouraged workers: These are the persons not seeking a job because they had looked for before or did not believe to find a job with his/her qualifications but they were ready to start to work. II. Other: These were the persons who were not seeking a job for reasons such as being seasonal workers, busy with household chores, student, property income earner, retired or disabled, but available to start to work.

Your turn now

Labor Force Statistics Turkey August 2014 0. Adult population 57,098,000 Employed 26,313,000 Unemployed 2,944,000 1+2 Labor force 29,257,000 Not in the Labor force 27,841,000 Discouraged workers: 750,000 Ready to start work: 1,300,000 Move A from “not in the labor force” to “unemployed” and recompute the u-rate and the LFPR. u-R = 3.7/30 = 12% Move A and B from “not in the labor force” to “unemployed” and recompute the u-rate and the LFPR. u-R = 5/31.3 = 16%

2. Mevsimlik çalışanlar: Mevsimlik çalışması nedeniyle iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir. 3. Ev işleriyle meşgul: Kendi evinde ev işleriyle meşgul olması nedeniyle iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir. 4. Eğitim/Öğretim: Bir öğrenim kurumuna devam etmesi nedeniyle iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir. 5. Emekli: Bir sosyal güvenlik kuruluşundan emekli olduğu için iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir. 6. Çalışamaz halde: Bedensel özür, hastalık veya yaşlılık nedeniyle iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir. 7. Diğer: Ailevi ve kişisel nedenler ve bunun dışındaki diğer nedenler ile iş aramayan ve iş başı yapmaya da hazır olmayan kişilerdir.

Exercise In each of the following, what happens to the u-rate? Does the u-rate give an accurate impression of what’s happening in the labor market? A. Sue lost her job, and begins looking for a new one. B. Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work. C. Sam has three kids, his wife is not working. Sam just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field. The objective of this exercise is to lead students to discover why the unemployment rate is not a perfect indicator of joblessness. 39

Answers A. Sue lost her job, and begins looking for a new one. A. Sue lost her job, and begins looking for a new one. u-rate rises A rising u-rate gives the impression that the labor market is worsening, and it is. 40

Answers B. Jon has been out of work since last year, becomes discouraged, stops looking for work. Discouraged workers would like to work but have given up looking for jobs classified as “not in the labor force” rather than “unemployed” u-rate falls, because Jon is no longer counted as unemployed. A falling u-rate gives the impression that the labor market is improving, but it is not. 41

Answers C. Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one. u-rate unchanged, because a person is “employed” whether they work full or part time. Things are worse, but the u-rate fails to show it. 42

Unemployment and socio-economic groups The United Kingdom

The Labour Market Experience of Different Groups Copyright©2010 South-Western

Unemployment statistics How much do you remember?

How long are the unemployed without work? Most spells/instances of unemployment are short. But most unemployment observed at any given time is long-term. Example: Murat is unemployed for the full year of 2012, January to December. There are also 12 other instances of unemployment in the year. Person X was unemployed in January but found a job in February, Person Y was unemployed in February but found a job in March, etc. So, among the 13 cases of unemployment in 2012, only 1 case was long term and the other 12 cases were short term. But if you collect employment statistics in say month of November, you will see 2 persons unemployed: Murat the long term unemployed and the other person who is short term unemployed. So you say 50% of the people who were unemployed in November were long term unemployed

The U.S., Bureau of Labor Statistics March 2013

Turkey: Duration of unemployment Jan 2013 Mpnths YEARS unemployed 1 - 2 3 - 5 6 - 8 9 - 11 1-2 2-3 more than 3 2.890 959 818 379 83 436 138 76 33% 28% 13% 3% 15% 5%

Why are there always some people unemployed? A little bit of theory Why are there always some people unemployed?

Why Are There Always Some People Unemployed? In an ideal labor market, wages adjust to balance the supply and demand for labor In equilibrium all workers who are willing to work at the existing wage rate are employed. Labor Supply Wage Labor Demand WE QE Quantity of labor

All countries always experience some unemployment. Two observations All countries always experience some unemployment. The unemployment rate fluctuates from year to year. Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Cyclical unemployment vs. the natural rate of unemployment

Cyclical Unemployment vs. the Natural Rate The natural rate of unemployment is defined as the normal rate of unemployment around which the actual unemployment rate fluctuates Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Cyclical Unemployment vs. the Natural Rate The cyclical unemployment is the deviation of unemployment from its natural rate associated with business cycles, It is studied in more advanced courses like Econ 202. Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows data on both, for the U.S. economy, for the period 1960-2004.

Natural rate of unemployment U.S. Unemployment Since 1960 Unemployment rate Natural rate of unemployment Cyclical unemployment is the gap between the red and blue lines. When the economy is in recession – the bad part of the business cycle - the actual unemployment rate is higher than the natural rate, and cyclical unemployment is positive. When the economy is in the good part of its business cycle, unemployment is below normal and cyclical unemployment is negative. Source: same as textbook. The unemployment rate comes from the Department of Labor and is available at www.bls.gov. The natural rate of unemployment series is prepared by the Congressional Budget Office. I have not been able to find it at the CBO website (www.cbo.gov). It is available (with tons of other data) at www.economagic.com; paid subscribers can download it in Excel format; others can view it at their site for free. If you find a free source for the CBO’s natural rate series, please let me know! Thanks.

When the economy is in recession the unemployment rate is higher than the natural rate, and cyclical unemployment is positive. When the economy is in the fast growth phase, the unemployment rate is lower than the natural rate, and cyclical unemployment is negative.

The “natural rate of unemployment” selected countries

Explaining the Natural Rate: An Overview Even when the economy is doing well, there is always some unemployment. Frictional unemployment is unemployment that results from the time that it takes to match workers with jobs. It takes time for workers to search for the jobs that are best suit their tastes and skills. Structural unemployment occurs when there are fewer jobs than workers minimum wage laws, trade unions, efficiency wages … In later chapters, we will study short-run economic fluctuations and learn more about the causes and possible cures of cyclical unemployment. For the rest of this chapter, our job is understanding the various causes of the natural rate of unemployment. * * WARNING: If you are teaching with Mankiw for the first time, please note that his definition of structural unemployment may be different than the definition you’ve seen in other textbooks. Other books commonly define structural unemployment as arising from a mismatch between the skills or locations of workers and the skill requirements or locations of jobs. Such textbooks assert that such unemployment results from sectoral shifts. Mankiw’s position is as follows: If all wages were flexible, then they would adjust after structural changes so that all workers with any given skill set in any given location would be employed. The cause of “structural unemployment” therefore cannot be changes in the structure of demand and production; the cause must be wages that fail to adjust following these changes.

Frictional unemployment

Job Search Workers have different tastes & skills, and jobs have different requirements. Job search is the process by which workers find appropriate jobs given their tastes and skills. It results from the fact that it takes time for qualified individuals to be matched with appropriate jobs. It is caused by the time spent searching for the “right” job.

Job Search Sectoral shifts: changes in the composition of demand across industries or regions of the country. Some industries decline (steel in the US) some industries grow. Such changes displace workers in the declining industries, who must search for new jobs appropriate for their skills & tastes. The economy is always changing, so some frictional unemployment is inevitable. It takes time for workers to search for and find jobs in new sectors.

Explaining the natural rate of unemployment Structural Unemployment

Explaining Structural Unemployment Structural unemployment occurs when not enough jobs to go around. W L unemployment S actual wage W1 D WE Occurs when wage is kept above equilibrium. On this graph, WE is the equilibrium wage. There are three reasons for this…

MINIMUM WAGE LAWS When the minimum wage is set above the level that balances supply and demand, it creates unemployment.

Unemployment from a Wage Above the Equilibrium Level Labour supply Surplus of labour = Unemployment Labour demand Minimum wage LD LS WE LE Quantity of Labour

Does min wage cause unemployment? Survey results from 44 US economists:

http://www. igmchicago. org/igm-economic-experts-panel/poll-results http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_br0IEq5a9E77NMV

End of the lecture