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What is the unemployment rate?

Unemployment rate = share of the labour force that is unemployed


What is the definition of unemployment according to ILO (International labour organisation)?

Definition of unemployment according to ILO (International Labour Organization):
A person is unemployed if he/she
(a) does not have a job,
(b) is available for work and
(c) is actively searching
Note: Differs from register-based unemployment, which is based on unemployment insurance statistics


How do we measure unemployment?

Operationalization in the Labour Force Survey:
(a) fully unemployed in the reference week
(b) able to start working within 2 weeks
(c) has been looking for a job within the last 4 weeks
If these conditions are satisfied, the person is regarded as unemployed.
(The a,b and c are directly related to the a,b and c of the definition)


How is it measured in DK?

As in the labour force survey but also unemployment statistics. Unemployment statistics are also the base of register-based unemployment.


Why is unemployment a lagging indicator of the business cycle?

When economy recovers, businesses first try to raise productivity before hiring additional workers
When entering a downturn, businesses rather reduce work hours or impose pay cuts before letting workers go


What is meant by structural unemployment?`

According to classical economic theory, every market, including the labour market, should have an equilibrium where supply and demand are equal. However, labour fails to reach an equilibrium. Sometimes it is a matter of wages not adjusting to clear the market. E.g. some skilled workers may have reservation wages (below which they are not willing to work) but which are higher than what employers are willing to pay. Or employers are only willing to pay below the minimum wage set by government. When such rigidities in the labour market lead to a shortage of jobs, it is called structural unemployment and those who are structurally unemployed tend to have longer spells of joblessness, on average.
Structural unemployment due to mismatch between demand and supply of labor across regions and skills + legislation / labor market institutions / policies (e.g. minimum wages)


What is frictional unemployment?

When people not are unemployed because there is a shortage of jobs but because finding a job takes time. Temporary spell of unemployment, matching workers takes time.


Can the unemployment rate ever fall to zero?

No. We always have two types of unemployment in the economy - frictional and structural unemployment.


What is the natural rate of unemployment?

Non-accelerating inflation rate of unemployment (NAIRU) = Amount of unemployment that the economy experiences in “normal times” (output gap = zero)

Also called natural rate of unemployment
Combination of 2 types of unemployment:
a) Frictional unemployment due to temporary spells of unemployment
b) Structural unemployment due to mismatch between demand and supply of labor across regions and skills + legislation / labour market institutions / policies (e.g. minimum wages)
Influenced by structural policies


What is meant by cyclical unemployment?

Year-to-year fluctuations in unemployment around its natural rate
Related to the short-run ups and downs of economic activity
Influenced by monetary and fiscal policy


What is job polarization?

When middle-skill jobs (such as those in manufacturing) are declining but both low-skill and high-skill jobs are expanding. In effect, the workforce bifurcates into two groups doing non-routine work: highly paid, skilled workers on the one and low-paid unskilled workers on the other.
We have a recent phenomena of: (a) automation and offshoring of middle-skill jobs (e.g. manufacturing), (b) Middle-skill workers shift to low-skill jobs in service sector (less susceptible to automation) and (c) Expansion of high-skill jobs
The consequence of this is job polarisation
(The jobs we have left are the ”Lousy and the Lovely Jobs”)
I.e. jobs for high-paid, skilled workers (such as architects, dentists and senior managers) and jobs for low-paid, unskilled workers (such as cleaners, burger-flippers, cashiers, security guards)


What drives automation and job polarisation?

Vulnerability to automation
• does not so much depend on whether work is manual or cognitive
• depends on whether work is routine or non-routine
• increasingly applies to many jobs previously considered as non-routine
Rapid technological progress in robotics and machine learning means that automation will accelerate


Should we be concerned for a jobless future?

Warnings about large-scale job loss are not a recent phenomenon:
As we know, these concerns were largely unwarranted - technology ended up creating more jobs than it destroyed
Example: Banking in the US
• introduction of led to decline in number of bank tellers from
• however, the lower cost of running a branch allowed for new branches to be opened and the total number of employees to increase
ATMs changed the employees’ work mix: fewer routine tasks, more customer services


What is the lump of labour fallacy?

Lump of labour fallacy: notion that there is a fixed amount of work to be done – a lump of labour – which can be shared out in different ways to create fewer or more jobs


How does the lump of labour fallacy ignore the economic response to automation?

• More workers are needed to perform tasks around machines that cannot be automated - in effect, more jobs might be created than destroyed
Example: decline of horse-related jobs due to cars led to job creation in motel and truck and fast-food industry along highways
• As certain services become cheaper, consumers spend time and money on other activities, increasing demand elsewhere in the economy  additional jobs are created
• Human imagination is too limited to predict which jobs emerge in the future
Example: video-game designer, social media coordinator


How can we relate comparative advantage to humans and robots?

Comparative advantage tells us that even in a world where robots outperform humans in all work activities, work will remain for humans in areas in which humans have a comparative advantage. Robots will be deployed in activities in which they have the relatively greatest productivity, while humans will work in fields where they have the smallest disadvantage.


Is this time different?

› This time may be different:
• Every industry uses computers today
• Transition from non-skilled routine to skilled non-routine relatively challenging
• Software can be deployed in relatively short time (innovation vs. implementation - it takes time for processes to change, standards to emerge and people to learn new skills)
• Pessimists (techies) vs. optimists (economists and historians)


What is important to do to reduce the risk of being replaced by a robot and how could robots increase inequality?

• Importance of education and skill acquisition
• Who owns the robots?
› Future not necessarily jobless, but no guarantee for well-paying wages
› As human workers can be more easily substituted by machines, this will put downward pressure on wages
› Income will increasingly come from ownership of robots
› Concerns about economic inequality


How can income security be provided?

Employment protection legislation (EPL)
- Regulates the conditions under which workers can be dismissed from their jobs
- E.g. notice periods and severance pay
Unemployment insurance (UI)
- Unemployment insurance benefits
Trade-off: Counties with high levels of EPL tend to have low UI and vice versa


What are the problems of EPL and UI?

If you have a very high EPL it will induce firms to create less jobs because it is very difficult for them to get rid of workers.
If the country has an extensive UI system, it creates disincentives for workers, some workers would be reluctant to actively search for a new job because it is too attractive to be unemployed.


What are two characteristics of unemployment insurance?

Whether it is compulsory or voluntary: compulsory for all wage earners in most countries vs. voluntary in Denmark, Sweden, Finland and Belgium
Whether it is part of the social security system of financed by funds: unemployment insurance funds (e.g. Denmark, Germany) vs. part of social security system (e.g. Norway)


How does unemployment insurance work in DK?

Voluntary membership in one of 24 UI funds (a-kasser)
Around 40% of the costs of the UI system is financed by membership fees, while the remaining 60% is paid for by the government
› Eligibility for benefits:
• member of UI fund for more than 1 year (exceptions for recent graduates)
• worked for more than 52 weeks within last three years
• registered with job office and available for work


What are the implications of the Danish UI?

› UI benefits (Dagpenge):
• 90% (replacement ratio) of previous wage, averaged over last 12 months of paid work
• max. 19,083 DKK per month (2020)  average replacement ratio only 67%
• max. duration: 2 years
• after 2 years: lower means-tested social assistance
› Implications of Danish replacement ratio:
• High replacement ratio for low-income groups, provides high degree of insurance,
but creates incentives problems


Which labour market policies have an effect on inflation and which do not?

Policies that try to lower unemployment by boosting consumer demand (raising production) can only do so temporarily and at the cost of higher inflation later. However, policies that are geared toward easing frictional or structural unemployment can boost employment without necessarily affecting inflation.


What is active labour market policies and how does it work in DK?

› Active Labour Market Policies (ALMP) are aimed at
• counteracting the negative incentive effects from high UI benefits
• increasing employment chances through better qualifications (up-skilling, re-skilling)
› In Denmark, activation is a “right and duty”:
• activation offer no later than
› 13 weeks of unemployment if under 30 years (obligation to take education lasting at least 6 months)
› 6 months of unemployment if 30 years or above
• Types of measures:
› Counselling and requalification
› Job-training/internship in public/private firm
› Employment with wage subsidy in public/private firm


What are the effects of ALMP?

The cost of the program must be compared to the improvements in the likelihood of finding a job
(+)Threat/motivation effect: people increase job search effort when activation is looming
(-) Locking-in effect: people reduce job search effort while in training or employment program
(+) Post-program effect: program increases people’s employability
Recent evidence:
• importance of early intervention
• focus on job search and on-the-job training rather than classroom training


Describe the Danish flexicurity model

› The Danish labour market has become internationally famous for its flexicurity model
› Flexicurity is a combination of flexibility for employers and security for workers
1. Flexibility for employers: low level of employment protection, i.e. workers (especially blue-collar) can be fired at relatively short notice  easy (and cheap) to hire and fire workers
2. Security for workers: a generous social safety net, in particular generous UI benefits
› Unions accept the flexible firing rules due to the generous UI benefits. This ensures a positive attitude towards globalization, technological and other changes that may imply risks of job losses.
› However, 1. and 2. are not sufficient. Disincentives due to generous UI benefits and need for qualifications require
1. active labour market policies (ALMP, in Denmark since 1990s)


What is the golden triangle of the flexicurity model?

Flexible hiring and firing rules + active labour market policy + generous social safety net
This achieves security without distorting job search incentives too much
Flexicurity considered as conducive to job creation, low unemployment, growth and structural change
• Allows more efficient use of labour – can easily move to sectors with highest return to labour input – important in the globalization process


Why are active labour market policies costly?

Timing and type
• Do not use resources on people who will have a fast return to employment anyways
• Unemployment due to lack of qualifications (need to establish qualifications)
• Trade-off between incentives and cost of active policy