Category Archives: Unemployment

Natural Rate of Unemployment explained.

Good video here from Marginal Revolution University. The natural rate of unemployment is a situation where there is no excess or deficiency of demand for labour. Known as the equilibrium rate of unemployment, it is caused primarily by frictions in the labour market. Types of unemployment which are likely to cause this rate to rise would include structural; technological; frictional and seasonal. The video covers types of unemployment which impact the natural rate of unemployment and also explain the difference between the actual rate and the natural rate.

Unemployment figures in New Zealand nearing pre-Covid levels.

Been covering unemployment with my Yr 13 class and showed them this graph today during our online class. As well as talking about recent changes it was useful to mention the boom period in the early 2000’s, the GFC in 2007 and how they impacted the level of unemployment. Also note the correlation between the labour cost index (changes in wages and salaries) and the unemployment rate. As labour becomes more scarce (lower levels unemployment) the LCI starts to rise and vice versa.

Source: Westpac Economic Overview. February 2021

The most recent figures publish show that the unemployment rate in New Zealand fell 0.4 percentage points to 4.9 percent in the December 2020 quarter which surprised a lot of commentators who predicted an increase. This time last year the unemployment rate was 4.1%. The number of those unemployed fell by 10,000 to 141,000 in the December quarter, while the number of those employed rose by 17,000 to 2,734,000 in seasonally adjusted terms. The proportion of the working-age population that were in the labour force also rose in the quarter. The labour force has seen sectors affected in different ways:

Negative – sectors in retail, hospitality and transport have seen major job losses.
Positive – with increased government spending there was employment growth in health, education and public services. Employment in the construction industry expanded by 8.2 percent between the December quarters, with Stats NZ reporting that more people were “working in areas such as plumbing and electrical services, roofing, and concreting”.

Differences in the economic fortunes of various sectors explain why there are reports of skill shortages at the same time as unemployment has risen. On the whole New Zealand is in a very lucky position relative to other parts of the world.

Introducing Unemployment with UB40

I recently started teaching the Unemployment topic to my Year 13 A2 class and remembered that one of the first albums I bought was UB40 Signing Off released in 1980 (see below).

The front cover and reverse has been made to look like the UB40 unemployment benefit attendance card from which the band took their name. Their UK top-ten hit “One In Ten” was an attack on Thatcherism and is mistakenly cited as referring to the number of unemployed in the UK at that time. It is in fact a song about government statistics in general, and how politicians use them to de-humanise problems. Useful way to introduce the subject especially if the class like reggae. I found it useful to have two windows open and play the video along side the lyrics. Click here for the lyrics of the song and here to see UB40 perform on Top of the Pops in 1981.  I was surprise at how many of the class knew of the band.

Those left behind and the attacks on US Congress

Been reading an excellent book by Martin Sandbu (FT) entitled ‘The Economics of Belonging’. In it he addresses the problem that when an economy moves to more efficient ways of production new methods are established and old ones decline. For some who have been part of the old methods of doing things, the economic system has passed them by. He explains four ways how this has happened.

The plight of the uneducated. Economic value is now derived from cognitive skills and knowledge. The competitive nature of the global economy demands increased productivity which has streamlined production using technology and is cognitively demanding for the labour force. This results in the diminishing use of blue collar (manual) workers which tend to use little knowledge or initiative. As a result manual labour is not demanded like before and if there is any demand the wage is does not equate to what they received 10-20 years ago. As Sandbu states: If the world today offers much less than it once did to routine workers with only basic schooling or training, it is because they are less useful to the modern economy.

The triumph of cities. In most western economies poorer areas grew faster than richer ones therefore they were catching-up with the big cities. However at the start of the Thatcher and Reagan era the richer urban areas have pulled away from their rural counterparts. Deindustrialisation, especially in the UK, with the move from manufacturing to the service sector favouring urban areas where there is a concentration of people today’s most valuable skills and talent. If urban and rural areas go about different economic direction for long enough, inequality will increase as well as cultural separation which is turn leads to political separation. Sandbu points out that the strongest support of antiestablishment movements is found in the regions that have lost out in the competition to attract capital and skill.

The cost of staying put. If you stay in an area that is ‘the wrong side of the train tracks’ moving away from home will increase your chances of success. In the last 40 years those that have moved have reaped the benefits of higher incomes. One thinks about the UK and the North South divide with the migration flows south in search of opportunity. Regional inequality favours those who actually move, but also those capable of moving. Mobility reflects risk taking and a tolerance for what is new, different and uncomfortable whilst staying put comes with greater economic disadvantage than it did 40 years ago. From the 2016 US election: White Americans who still lived in the community where they were raised supported Donald Trump by 57% against only 31% for Hillary Clinton. Even those who lived two hours’ drive away preferred Trump. Among those who had moved further away, however, more supported Clinton.

Feminism is good for your wallet. The old blue collar work whether it be on production lines, oil rigs, truck driving, farming etc. were traditionally done by men. There was a macho image portrayed in these jobs but the new jobs were focused on the skills that create value in the new service and knowledge economy. It is estimated in the US that one in four jobs in the next decade are expected come in health care, social assistance, and education which tend to come with low status and lower pay. This means that more men (particularly unskilled) must be prepared to work in the service sector in jobs that are traditionally done by women. Soft skills are now increasingly rewarded and traditional manual work (mainly done by men) no longer attract much pay in the job market. Job roles must adapt in parallel with changing cultural expectations of gender roles in the home. Trump’s make America great again was a call to bring back the blue collar jobs but this was never going to happen with globalisation.

Sandbu points out that the one group which has been particularly effected by these four changes is low-skilled white men in small rural communities and subscribe to traditional cultural attitudes. Often blamed on globalisation, these consequences are the result of how we now produce output which has been driven by labour saving technology. Sandbu states that:

But we should recognise that much else of value was lost with jobs, and the dissatisfaction from these structural changes goes far beyond the financial.

It is only to be expected that these groups have become more visible within the populist insurgency and fresh in our memory is the attack on the US Congress on 6th January.

Source: The Economics of Belonging – Martin Sandbu 2020

Global Economic Data as of February 2021

I always encourage students to be aware of what is happening in the global economy as well as their own. Below are growth, unemployment and interest rates for the main economies. Note the high rates of quarterly economic growth which indicates a bounce back from the previous quarter when most of the world was in a serious lockdown. The unemployment rates you would expect to be a lot higher with COVID-19 and a 4.9% rate in NZ was a surprise. An area of employment growth in the December quarter was Construction, along with many government-dominated industry types. Monetary policy been very accommodative and although rates have been very low note that in Japan and the Euro zone areas it has been like this since 2016. These figures could be used for discussion purposes in you class.

Quarterly Economic Growth Rates

Unemployment %
Global Interest Rates

Source: Monthly Economic Review – February 2021 – NZ Parliamentary Service

US minimum wage increase – does it mean more job losses?

President Biden is pushing the US congress to gradually increase the federal minimum wage from $7.25 to $15 by 2025. The Economist video below talks about what economists have traditionally said – ‘increasing the minimum wage will mean that there will be job losses’. In most economics textbooks the labour market is shown with a simple graph of the supply of labour and the demand for labour and where they intersect the wage that employees receive for their service and the amount employed.

The minimum wage distorts the market equilibrium as there is now a wage floor – a level which the wage cannot fall below. If the minimum wage is below the equilibrium wage then there is no impact as the market will ensure that is reaches equilibrium. However a minimum wage above the equilibrium means that companies will hire fewer workers and therefore result in more unemployment. On the graph below a minimum wage of W1 means that the level of employment has fallen but those prepared to work but are involuntary unemployed has increased. However the people still employed are better off as they are paid more for the same work; their gain is exactly balanced by their employers’ loss. The jobs that someone would have been willing to do at less than the wage of We and for which some company would have been willing to pay more than We. Those jobs are now gone, as well as the goods and services they would have produced.

Real Impact of the Minimum Wage.

In reality the theory of the minimum wage explained above is not as simple as it is made out to be. From records in the USA there is no obvious relationship between the minimum wage and unemployment: adjusted for inflation, the federal minimum wage was highest from 1967 through 1969, when the unemployment rate was below 4%. One study in 1994 by David Card and Alan Krueger evaluated an increase in New Jersey’s minimum wage by comparing fast-food restaurants on both sides of the New Jersey – Pennsylvania border. They concluded, “contrary to the central prediction of the textbook model … we find no evidence that the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”

The idea that a higher minimum wage might not increase unemployment goes against the the theory in textbooks as if labour becomes more expensive firms will take on less employees. But there are several reason why this might not be the case:

  • The standard model states that firms will replace labour with machines if wages increase, but what happens if labour saving technologies are not available at a reasonable cost.
  • Some employers may not be able to maintain their business with fewer workers especially in service based industries. Therefore, some companies can’t lay off employees if the minimum wage is increased.
  • Small firms are traditionally labour intensive and can’t afford large capital investment. Therefore the minimum wage doesn’t have the impact of laying off workers.
  • If employers have significant market power that the theory of the supply and demand for labour doesn’t exist, then they can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example, see graph Monopsony Labour Market). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.
  • Even though a higher minimum wage will raise labour costs many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs.
  • Higher wages boost productivity as they motivate people to work harder, they attract higher-skilled workers, and they reduce employee turnover, lowering hiring and training costs, among other things. If fewer people quit their jobs, that also reduces the number of people who are out of work at any one time because they’re looking for something better. A higher minimum wage motivates more people to enter the labor force, raising both employment and output.
  • Higher pay increases workers’ buying power. Because poor people spend a relatively large proportion of their income, a higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs.
Monopsony Labour Market

All the above add a range of variables that are not considered in the simple supply and demand model for labour. It maybe useful as a starting point in discussing the minimum wage but has its limitations in the more complex real world

Source: Economism by James Kwak

OCR – LSAP – FLP = New Zealand’s Monetary Policy Toolkit

Below is a useful flow diagram from the ANZ bank which adds Large Scale Asset Purchases (LSAP) and Funding for Lending Programme (FLP) to the Official Cash Rate (OCR – Base Rate)

LSAP – this is the buying of up $100 billion of government bonds – quantitative easing
FLP – this gives banks cheap lending based on the Official Cash Rate – could be about $28 billion based on take up
OCR – wholesale interest rate currently at 0.25%. Commercial banks borrow at 0.5% above OCR and can save at the Reserve Bank of New Zealand (RBNZ) at 1% below OCR.

With FLP and more LSAP this will mean lower lending rates and deposit rates. This should provide more stimulus in the economy and allay fears of future funding constraints making banks more confident about lending. Add to this a third stimulus – an OCR of 0.25%. The flow chart shows the impact that these three stimulus policies have on a variety of variables including – exchange rates – inflation -unemployment – consumer spending – investment – GDP. Very useful for a class discussion on the monetary policy mechanism.

Covid19 and unemployment – BBC Podcast

BBC World Service - The Real Story, Newshour Extra: Welcome

Below is a link to a very good podcast from the BBC ‘The Real Story’. Dan Damon discuss what should be done about rising unemployment in the age of Covid-19? Contributors include Australian economist Steve Keen author of ‘Debunking Economics’. Topics of debate include:

  • Universal Basic Income
  • Modern Monetary Theory
  • How much debt can a government sustain in propping up an economy?
  • Should a government subsidise companies taking-on workers?

Also features a very good interview with Daniel Susskind – author of ‘A World Without Work: Technology, Automation and How We Should Respond’

It is 53 minutes long but can take your mind off the commute to work.

https://www.bbc.co.uk/programmes/w3cszcnf

The flattening of the Phillips Curve

Part of the CIE A2 macro syllabus focuses on the wage price spiral which relates to the Phillips Curve. Here are some excellent notes that I picked up from Russell Tillson in my early days teaching at Epsom College in London. As from previous posts, the Phillips Curve analysed data for money wages against the rate of unemployment over the period 1862-1958. Money wages and prices were seen to be strongly correlated, mainly because the former are the most significant costs of production. Hence the resulting curve purported to provide a “trade-off’ between inflation and unemployment – i.e. the government could ‘select’ its desired position on the curve. During the 1970’s higher rates of inflation than previously were associated with any given level of unemployment. It was generally considered that the whole curve had shifted right – i.e. to achieve full employment a higher rate of inflation than previously had to be accepted. Milton Friedman’s expectations-augmented Phillips Curve denies the existence of any long-run trade off between inflation and unemployment. In short, attempts to reduce unemployment below its natural rate by fiscal reflation will succeed only at the cost of generating a wage-price spiral, as wages are quickly cancelled out by increases in prices.

Central Banks

Central banks have found that inflation has been the pest it has been in the past – most countries inflation rates have been short of its target rate. After the GFC the level of unemployment rose and inflation was quite subdues. However, with the post GFC recovery unemployment began to fall whilst the inflation rate was still showing no signs of accelerating which went against the original Phillips Curve. A further problem was that imported goods and services in one country have little relevance on the wages in another and the low levels of unemployment tempted people back into the labour force who hadn’t been counted as unemployed. This is particularly the case in Japan.

When there is an increase in job numbers, with a boom period, inflation may also be slow to rise. Although firms tend to be reluctant to lower wages when the economic climate slows as it is harmful to staff morale. The same could be said in good times as wages tend not to rise that quickly.

For many businesses changing the price of their goods or services can be costly especially for a small increase in price. Therefore the change in the business cycle tends not to be reflected in price changes as there needs to be major swings before prices will move at all. Central bank policy tends to manipulate interest rates to maintain a stable inflation causing unemployment to move up or down – unemployment is what changes not inflation.

The problem that central banks face today is that to keep the phillips curve flat they need to be able to cut interest rates to stimulate growth when inflation threatens to become deflation. However there is little room for further easing with rates so low. Central banks will need to work with the government’s fiscal policy to stimulate growth and spend the money that the central bank’s create.