Labor Economıcs (ENG) — Ünite 8 Soru-Cevap

For an individual to be counted as unemployed, she or he must be without a job, willing to work and actively seeking one, and ready to take up work in a short period of time.

The labor force participation rate (LFPR) is the ratio of the labor force - which is also called the active population- to the working age population:

LFPR = (LF/LF + OLF)* 100

Many people are inclined to think that the creation of new jobs will necessarily reduce the unemployment rate, or that an increase in job destruction always implies higher unemployment. However, this is not necessarily true, as there are other flows in and out of the labor force. To be more precise, there are considerable two-way movements of workers between all three labor market states, unemployment, employment, and out of the labor force. Every period, many unemployed people find employment, but some others stop searching for a job and drop out of the labor force for various reasons such as discouragement, education, or household chores. At the same time, a fraction of employed workers lose their jobs or voluntarily quit to seek a better one and become unemployed, and some leave the labor force for reasons of retirement, education, marriage, health, etc. Moreover, there are also workers who switch jobs without enduring any unemployment spells.

Steady state unemployment rate: The labor market is in long-run equilibrium or in steady- state when the unemployment rate is constant.

McCall (1970) and Mortensen (1970) provided the first dynamic job search models, although Stigler (1961) introduced
the search phenomenon to the economics literature. The basic job search model, which is also called the partial model, considers only the strategy of the workers and leaves firm behavior aside. A more complete description of the functioning of the labor market under two-sided search frictions is provided by the search and matching models. More advanced texts such as Pissarides (2000) or Cahuc et al. (2014), provide a detailed exposition of these models.

Reservation wage is the lowest acceptable wage offer.

The hazard rate of exiting unemployment is the probability of leaving unemployment and finding work at a given time.

Frictional unemployment results from the transitions of workers from one job to another or from the job search of labor
market entrants and reentrants.

Structural unemployment is the unemployment caused by the mismatch between skills demanded and supplied.

We considered frictional and structural unemployment to be two distinct types of unemployment. However, they are interrelated.
The mismatch between the skills of the unemployed and firm requirements is the main cause of structural unemployment. Yet, this does not mean that people suffering from the mismatch have no chance of finding employment. From the search model perspective, we can simply say that they face higher levels of frictions in the labor market (which can be represented by a lower arrival rate of offers) and probably endure a longer unemployment spell.

Cyclical unemployment results from low labor demand due to a downturn in the business cycle.

From the perspective of a simple supply-demand framework of the labor market, wage rigidity is the main cause of cyclical unemployment. After all, if the wages were flexible, decreased demand would generate lower employment and lower wages but not unemployment. Accordingly, various explanations have been offered for why real wages may not decline to equate labor supply and demand.

The determinants, magnitude, and structure of unemployment differ widely from country to country. Moreover, it is not stable over time. For instance, just before the great recession of 2008, in Spain and Greece, the unemployment rate was around 8%, slightly above the OECD average of 6%. In 2012, the unemployment rate in these two countries exceeded 25% - more than triple the OECD average. In October 2022, two years after the Covid-19 pandemic, the unemployment rate in the OECD was at its lowest level in the last 25 years, at 4.9%. In the Czech Republic, Japan, and Korea, the unemployment rate fell even below 3%. Nevertheless, in some of the OECD members, including Türkiye, Greece, and Spain, more than 10% of the labor force is still jobless. Table 8.2 presents the unemployment rate in some selected OECD countries since 2000.

It is striking that Türkiye has the lowest labor force participation and employment rates among all OECD countries, despite having one of the highest unemployment rates. In countries like the Netherlands and Switzerland, more than 80% of the working age population (15-64) takes part in market activity, while the corresponding rate is less than 60% in Türkiye.

It is not possible to understand the causes and dynamics of unemployment fluctuations without paying attention to labor market flows. Thus, explaining the determinants of differences in flow rates became a major issue. An important strand of research draws attention to the international differences in labor market institutions and flexibility. For example, Nickell et al. (2005) find that more than half of the broad unemployment movements in the OECD between 1960 and 1990 can be explained by shifts in labor market institutions such as unemployment insurance systems, labor unions, taxes, and employment protection legislation. Some other studies directly focused on the differences in flows. Elsby et al. (2013) analyze the unemployment fluctuations in fourteen OECD countries starting in the 1970s. They show that for Anglo-Saxon and Nordic economies, the monthly exit rate from unemployment exceeded 20%, while it was below 10% in continental European countries. In other words, the average duration of unemployment spells was twice as long in this latter group. Symmetrically, inflow rates from employment into unemployment were more than 1.5% in the former group, while it varied between 0.5% and 1% in continental European economies. Therefore, the incidence of unemployment was also lower in continental European economies. Moreover, in the Anglo-Saxon economies, unemployment inflows account for 15% of unemployment fluctuations, while 85% is explained by outflows from unemployment. The corresponding rates are 45%-55% for most European countries.

It is possible to discern three broad time periods with distinct unemployment trends. First, between 1988 and 2000, besides all its fluctuations, the unemployment rate had a downward course with an average of about 8%. 2001 – 2012 can be considered
as the second period. Following the 2001 economic crisis, we observed that the unemployment rate rapidly increased and reached a plateau around 10% until 2009. Unemployment soared with the 2009 economic crisis and reached a historic high of 14%. With the following rapid recovery, unemployment fell below its pre-crisis levels by 2011. The average annual unemployment rate for 2001 – 2012 was 10.6%. Finally, we observe another upward trend from 2012 onward, with a peak in 2019, just before the Covid-19 pandemic. The average annual unemployment rate increased to 11.3% for this last period.

In Türkiye, contrary to many other country examples, not all sustained strong growth periods were accompanied by a decline in the unemployment rate. For example, the average annual GDP growth between 2002 and 2008, and between 2012 and
2017 was around 6%, yet the unemployment rate had an upward drift. A closer look at labor market flows indicates that the unemployment rate increased because labor force growth exceeded employment growth in both periods. In the 2009 crisis, although GDP decreased by nearly 5%, employment stayed almost the same with a growth rate of 0.4%. However, accelerated flows into the labor force caused a jump in the unemployment rate. In 2019, although the slowdown in economic activity was modest compared to 2009 (GDP increased by 0.9%), strong outflows from employment brought about a severe jump in the unemployment rate.

There is a general downward trend in long- term unemployment, while the fraction of short term unemployed increases throughout time. The rise in short term unemployment points to an increase in unemployment inflows and outflows. This picture is also consistent with the higher share of temporary job losers in unemployment. Nevertheless, since 2016, long term unemployment (i.e., unemployment duration that lasts more than 12 months) has had an upward drift.

In its most basic form, the optimal search strategy of an unemployed worker, who is sampling wage offers from a known distribution of wages at a fixed rate, is to determine a reservation wage, which is the lowest acceptable remuneration. The value of unemployment is equal to the value of an employment offer at the reservation wage. Therefore, the worker accepts any wage offer higher than this reservation wage.

Besides strong interregional differences, female workers, high school graduates, and young people have a higher risk of unemployment in Türkiye.