note_ch28 - Chapter 28 Unemployment Unemployment is a...

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Unformatted text preview: Chapter 28 Unemployment Unemployment is a measure of those who don't work, but who would like to work. Measuring unemployment Labor Force = Employed + Unemployed Employed = those who are working Unemployed = those not working, but looking for a job Not in the labor force = those neither working nor looking for a job Unemployment rate = Unemployed/Labor Force Labor Force Participation Rate = Labor Force/Adult Population Unemployment rates vary considerably across demographic groups (see table 1). Labor force participation rates vary across demographic groups (see Figure 3). What does unemployment mean? It is supposed to measure utilization of labor But this can be hard to interpret for a number of reasons. (1) Some employed workers seek fulltime work, but are working only part time (2) Some individuals call themselves unemployed so they can qualify for unemployment benefits (3) There are discouraged workers, who leave the labor force we might want to count them, but they don't appear in the government statistics. Details about unemployment. Unemployment (U) at any point in time consists of: U = new job losers + new entrants to labor force who haven't found a job + incumbent unemployed job finders incumbent unemployed who leave labor force Unemployment duration In the US, most unemployment is relatively short. During normal economic times, most unemployed workers find a new job within 8 weeks or so. But about 15 percent of workers may stay unemployed for a year or more. It is normal for the economy to have some unemployment The economy is always in flux. As Vons supermarket expands, they seek to add workers, and as Ralphs supermarket contracts, they reduce their workforce. It takes some time for the Ralph's workers to beginning working at Vons. We call this frictional unemployment , which is the natural process of individuals and companies searching for employment matches. Most countries have unemployment benefits. This offers workers some protection against job loss. Benefits are not available to those who quit, who are fired for cause, or who only have a very short employment history. (Try to use the concepts of moral hazard and adverse selection to understand why the government does not provide benefits to those mentioned above). Designing unemployment benefits is difficult. This is because a high benefit will tend to provide an incentive to the unemployed not to try very hard to find a new job. For example, suppose unemployment benefits were equal to the amount of your former salary if this was the case, it is likely that relatively few unemployed would search for a new job. Unemployment benefits in Europe are much higher than in the United States. Economists argue that the incentive effects of unemployment insurance is one reason why unemployment rates in Europe are much higher than in the United States. Another incentive effect on working is taxes. The income you earn is taxed both by the federal government and by state, and sometimes local governments. (For example, the Commonwealth of Pennsylvania has a very low state income tax, but the City of Philadelphia has a very high city wage tax that is paid by anyone living and/or working in the city). Another reason why economists believe Europeans work less than Americans is because of differences in income tax rates. Today, Americans work about 20 percent more than Europeans. But 40 years ago, it was the exact opposite Europeans worked much more than Americans. One reason economists point to is because tax rates in Europe in the 1960s were quite low, but are much higher today. High tax rates reduce the incentive to work by reducing your takehome pay. ...
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