Unemployment and the labour force

Labour force or workforce - The number of people employed and self-employed plus those unemployed but ready and able to work. Three factors affect the size of the labour force:
Population Migration Labour force participation in economic activity.

Population
Birth rates in most industrial countries fell to replacement levels or lower in the 1980s. This implies an older workforce and higher old-age dependency rates (the number of retired people as a percentage of the population of working age) in the future. By 2010, 15-20% of the population in industrial economies will be over 65 years of age. On the other hand, developing countries have young populations with up to 50% under 15 years. This suggests an expanding working-age population with potential problems for housing and job creation. .

Migration
In the industrial countries, inflows of foreign workers increased since the late 1980s and a substantial number of illegal immigrants were granted amnesty in America, France, Italy and Spain. Foreign-born persons account for over 5% of the labour force in America, Germany and France; around 20% in Switzerland and Canada; and over 25% in Australia German unification boosted that country's productive potential. Wealthier developing countries, especially oil producers, have large proportions of foreigners in their labour forces.

However, large numbers of refugees seeking asylum can have significant adverse effects on income per head.

Participation
Participation rates (the labour force as a percentage of the total population) generally increased in the 1980s and 1990s. Earlier retirement for men, especially in France, Finland and the Netherlands, was generally offset by more married women entering the labour force, especially in America, Australia, Britain, New Zealand and Scandinavia. Women account for a smaller proportion of the workforce in Muslim countries (20%). But they account for a greater proportion in Africa (up to 50%) where they traditionally work on the land.

The unemployment rate

Usually defined as a percentage of the labour force (the employed plus the unemployed). There are national variations :
Germany excludes the self-employed from the labour force; Belgium produces two rates expressing unemployment as a percentage of both the total and the insured labour force. By changing the definition, the unemployment rate can be moved up or, down by several percentage points.

Types of unemployment
Frictional : arises from normal labour turnover, ie people entering and leaving the labour force. Generous unemployment compensation leads to high frictional unemployment. European countries like France fall in this category. Structural : arises due to changes in technology, international competition, etc. Arises due to skill obsolescence or lack of competitiveness. Cyclical : fluctuates with the business cycle. Increases during a recession and falls during an expansion.

Full employment
The natural rate of unemployment is that rate at which there is no cyclical unemployment, ie all the unemployment is structural or frictional. Full employment occurs when the unemployment rate equals the natural rate of unemployment. Unemployment rate fluctuates because of :
a) b) c)

Job search Job rationing Sticky wages

Job rationing
Job rationing is the practice of paying employed people a wage that creates an excess supply of labour, a shortage of jobs and increases the natural rate of unemployment. It arises because of : A) Efficiency wage : The company may pay more to attract and retain talent. B) Insider interest : Insiders would not like outsiders to be paid lower wages. C) Minimum wage : The government may specify minimum wages.

Discussion topic
Unemployment rates in Europe have tended to be higher than in the US. Why is this so?

Phillips curve
In 1958, a New Zealand economist , A.W.H. Phillips proposed that there was a trade-off between inflation and unemployment. The lower the unemployment rate, the higher was the rate of inflation. Governments simply had to choose the right balance between the two evils. Economies did seem to work like this in the 1950s and 1960s, but then the relationship broke down.

NAIRU(Non Accelerating inflation rate of unemployment)

Now economists prefer to talk about the NAIRU, the lowest rate of unemployment at which inflation does not accelerate. The lowest rate of unemployment at which the jobs market can be in stable equilibrium. When unemployment is above this rate, demand can potentially be increased to bring it to the natural rate, but attempting to lower it even further will only cause inflation to accelerate.

The Keynesians and the Monetarists

Keynesians, assumed that the economy would always have some slack. The government could lower the rate of unemployment if it was willing to accept a little more inflation. However, economists such as Milton Friedman argued that the economy of left to itself would adjust to full employment. The supposed inflation-for-jobs trade-off was in fact a trap. Governments that tolerated higher inflation in the hope of lowering unemployment would find that joblessness dipped only briefly before returning to its previous level, while inflation would rise and stay high. Instead, they argued, unemployment has an equilibrium or natural rate, determined not by the amount of demand in an economy but by the structure of the labour market. They stressed the importance of flexible labour markets.

Unemployment data

Headline inflation data

Core inflation data

Commodity price data