Table of Contents
A. Introduction 2
B. Unemployment caused by job search 2
B.1 Frictional unemployment 2
B.2 Sectoral shifts 3
B.3 Unemployment insurance 4
C. Unemployment caused by wage rigidity 5
C.1 Minimum wage 6
C.2 Union labors 6
C.3 Efficiency wages 7
D. Conclusion 9
Way is there unemployment?Introduction
Unemployment is a major macroeconomic problem. It occurs when people are willing to work, but they do not have a job. It is measured with the unemployment rate, which is the percentage of people with labor force, who are unemployed.
There is always some unemployment in an economy, which is called natural rate of unemployment. This is a rate towards which the economy gravitatesin the long run, considering all the labor market imperfections that prevent people from immediately finding a job.
There are two main reasons why unemployment occurs. One is job search, and the other one is wage rigidity.
Unemployment caused by job search
The main problem of job search is that it takes time, to find a new job. There is an economic term for the unemploymentcaused by the time factor and it’s called frictional unemployment.
B.1 Frictional unemployment
Frictional unemployment occurs for different reasons. One of the main reasons is that workers have different abilities & preferences and jobs have different attributes & skill requirements. One might be highly qualified in a field, but if these skills are not required, it could be very hard to find ajob.
Another reason is the geographic mobility of workers, which is not instantaneous. People might find a perfect job that matches their preferences, but if it is in another city, they will probably not move to another city.
Also to mention is the fact that the flow of information about vacancies and job candidates is imperfect. For example there might be a job that fits a person, but theinformation about the job vacancy does not arrive to the person at all, or it does not arrive in time.
B.2 Sectoral shifts
A last reason for unemployment is caused by sectoral shifts. Sectoral shifts are changes in the demand for different goods that leads to a change in demand for the labor that produces them.
Since sectoral shifts frequently occur and it takes people time to changesectors, frictional unemployment is always present.
A good example for major sectoral shift is the technological change. After the invention of the computer there was a great demand for people who could operate in this field. This of course meant that other sectors like type writing suffered, because the demand for type writers and the labor force connected to it decreased very much.
Also goodexamples for sectoral shifts are the structural changes of an economy. Usually what happens is that agriculture and manufacturing decreases over time leaving more space for the service sector. As a result the types of jobs available now are vastly different than just two generations ago.
Other examples for structural change could be the industrial revolution, when agriculture declined andmanufacturing got very popular. In the energy crisis from the 1970s there has been a shift from large cars to big cars.
Finally as a last example for structural change is the health care spending as % of GDP. This percentage more than tripled itself in the last 50 years. From 5.2% in 1960 it grew to 16.2% in 2007.
The government seeks to decrease the natural rate of unemployment by reducingfrictional unemployment. It uses a set of programs for reducing frictional unemployment, which are: Government employment agencies and Public job training programs.
The unemployment agencies are institutions, where information about job applicants and employers is gathered together, in order to facilitate the information flow between the two parts.
The public job training programs are...