unemployment - Unemployment The type of unemployment that...

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The type of unemployment that we are interested in is known as involuntary unemployment. So what does it mean for a unit of labor, let's say a worker, to be involuntarily unemployed? Note: from now on I mean involuntary unemployment unless I state otherwise. OK, here's the usual definition: A worker is said to be unemployed if she/he does not have a job but wants a job paying the market wage. The market wage is simply the wage currently being paid workers. It is not the worker's reservation wage (the minimum wage that he would accept). Nor is it the wage that he was being when he was last employed. (The unemployment rate is the percentage of those wanting jobs paying the market wage who don't have jobs. The formula for calculating it is: U = (QLS – QLE)/QLS x 100% Here QLS = quantity of labor supplied, QLE = quantity of labor employed. Note, though the QLD = QLS, the QLE will be < QLD.) Note that this definition can lead to some confusion about whether or not a jobless person is unemployed. When asked his availability for work, a worker may very well 1) not know the market wage or 2) be thinking about the wage he was being paid. For example, say a commercial painter was laid off shortly after the U.S. economy went into recession. Say she was making $16 an hour when she was laid off. Let's also say that due to the recession, the market wage for painters with this person's experience and skill set fell, to $14.50 an hour. Well, she may be ready to work for $16 an hour, but unwilling to work for $14.50 (at least for a while). She figures she should be paid at least what she was making. Though we can all appreciate her thinking, the market wage for commercial painters is now $14.50. And if she's not willing to take a job paying $14.50 an hour, she is not involuntarily unemployed. These observations behind the monetarist claim that cyclical unemployment is specious. More on that later. All right, let's note that even when the labor market is in equilibrium there will be some unemployment. This unemployment is known as natural unemployment. So the unemployment rate when the labor market is in equilibrium is called the natural rate of unemployment. Why is there unemployment when there is exactly one job for everyone who wants a job? The answer is this: the economy is a dynamic place. All the time people are waking up and saying, "It's time I went out and got a job!" That is, people who were not in the labor market (did not want a job, like my mom when I was in 5th grade) decide to enter it (wanted a job, like my mom the next year, when I was in 6th grade). Also, people are always being laid off but still want a job; or are quitting jobs to look for other jobs. In short, people are always becoming unemployed. And even if there is an available job for each of these unemployed workers,
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This note was uploaded on 03/03/2011 for the course ECON 2020 taught by Professor Mukherjee during the Spring '08 term at Western Michigan.

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unemployment - Unemployment The type of unemployment that...

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