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Unformatted text preview: Chapter 18: Unemployment: Causes and Consequences This chapter provides an overview of the types of unemployment and various theoretical explanations for the existence of unemployment • most of the theoretical work addresses the fundamental question of why the wage rate fails to adjust downwards to clear the labour market Given the diverse nature of unemployment, there is no single explanation of why the unemployment rate should be at a particular level, and there is no single policy prescription that will yield "full employment". • the most contentious aspect of government policy toward unemployment is the provision of unemployment insurance (UI) o while in the 1970s and 1980s UI was viewed as an important, progressive part of the social safety net, in the 1990s many argued that UI was the major villain for the increase in unemployment during the 1980s We begin with a "taxonomy" of the various types of unemployment; however, it should be noted that these definitions are not mutually exclusive and the distinctions between various types of unemployment are often not clear-cut, either conceptually or practically. Types of Unemployment 1. Frictional Unemployment is associated with the normal turnover of people and jobs in the labour market and can be thought of as unemployment that would prevail even in a well-functioning labour market o change is a pervasive feature of modern economies; young people enter the labour force each year while others retire or leave the labour force; new jobs open up in some firms and disappear in other firms o as a consequence, unemployed workers and unfilled job vacancies will coexist at any point in time o it takes time for an unemployed person to find a suitable job and for an employer to find a suitable employee to fill a job vacancy an unemployed person will want to examine a number of possibilities before accepting a job; if you take the first job you find, you run the risk that you will miss out on a better job because you stopped searching too soon similarly, firms will usually interview several applicants before actually hiring a new employee; most firms looking for help do not take the first unemployed person who walks through the door o even when an existing job vacancy exactly matches the skills and work experience of an unemployed person, it will take time to make the match, and during this period of job search and match people are said to be frictionally unemployed o the amount of frictional unemployment that exists at any given time depends on the amount of job turnover in the labour market, the information available to job seekers, and...
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