Politica Economica

Chapter 4: Unemployment and inflation
• Introduction to labour market analysis • The Beveridge curve • The NAIRU
– – – – – – – Introduction to Equilibrium unemployment model Wage-setting under imperfect competition Price-setting under imperfect competition The Equilibrium Rate of Unemployment (NAIRU) The derivation of the Phillips curve Factors that shift the WS and PS curves: labour marketpolicy Some empirical evidence

• The measurement of inflation • The costs of expected inflation • Inflation theory

Introduction (I)
• Unemployment (or joblessness), as defined by the International Labour Organization (ILO), occurs when people are without jobs and they have actively sought work within the past four weeks. • The unemployment rate is a measure of the prevalence of unemploymentand is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force. • As defined by the ILO, "unemployed workers" are those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work.

Introduction (II)
• Eurostat defines unemployed as those persons aged15 to 74 who:
– Are not currently working – Have looked for work in the last four weeks and – Are ready to start work within two weeks.

• Statistical data are available by member state, for the European Union as a whole (EU27) as well as for the euro area (EA16). Eurstat also includes a long-term unemployment rate. This is defined as that part of the unemployed who have been unemployed for anexcess of 1 year. • The main source used is the European Union Labour Force Survey (EU-LFS) which collects data on all member states each quarter. For monthly calculations, national surveys or national registers from employment offices are used in conjunction with quarterly EU-LFS data.

Introduction (III)
• The labour force participation rate is the ratio between the labour force and theoverall size of their cohort (national population of the same age range). In the West during the later half of the 20th century, the labour force participation rate increased significantly, largely due to the increasing number of women entering the workplace. • The “Encuesta de Población Activa” (EPA) is made by INE using quarterly data from a sample of 65.000 households. The methodology was updatedin 2005. http://www.ine.es/jaxi/menu.do?type=pcaxis&path=/t22/e308_mn u&file=inebase&N=&L=0 • Economists distinguish between various types of unemployment: cyclical or Keynesian, frictional, structural, and classical.

Introduction (IV)
• Voluntary unemployment is often attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment(including the market structure, government intervention, and level of aggregate demand) in which individuals operate. • In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behaviour. Thus, voluntary unemployment includes workers who reject low wage jobs whereas involuntary unemployment includes workers fired due to an economic crisis,industrial decline, company bankruptcy, or organizational restructuring.

Introduction (V)
• On the other hand, cyclical unemployment, structural unemployment, and classical unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, whereas classical unemployment may result from the legislative and economicchoices made by labour unions or political parties. • So, in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, some unemployed workers would still remain....