Labor Market Dynamics: Unemployment, Sector Shifts, and Union Wage Effects

Hidden Unemployment: Definition and Market Data Effects

Hidden unemployment refers to discouraged workers who are not officially counted as unemployed but are available for or seeking employment. Because these individuals are not included in the standard definition of the labor force, their unemployment is not visible through normal labor market data, such as the official unemployment rate.

The Relationship Between Hidden Unemployment and Discouraged Workers

Discouraged workers are defined as people who want to work but have stopped actively searching because they believe there are no jobs available for them, even if suitable jobs might exist. This group forms the core of hidden unemployment.

Determining Hidden Unemployment in the Labor Market

Economists cannot directly measure hidden unemployment using the standard unemployment rate formula:

• Unemployment Rate = (# Unemployed / Labor Force) × 100%

To gauge the true health of the labor market and potentially identify hidden unemployment, economists often look at related metrics, particularly the Labor Force Participation Rate (LFPR), which is calculated as:

• LFPR = Labor Force / Working Age Population

A persistently low or declining LFPR, especially during periods of economic recovery, can signal the presence of a significant number of discouraged workers (hidden unemployment).

Shifts in Employment Concentration Over Time

Changes in the concentration of employment over time refer to the structural shift of jobs across major economic sectors. Historically, this concentration has moved sequentially:

1. Primary Sector: Agriculture, fishing, and mining (extraction of raw materials).
2. Secondary Sector: Manufacturing and construction (processing raw materials).
3. Tertiary Sector: Services, trade, finance, and government (service provision).

This transition reflects economic development and technological advancement.

20th Century Employment Changes in North America

The concentration of employment changed significantly throughout the 20th century in North America, largely driven by industrialization, technological innovation, and immigration patterns.

Initially, the shift was from the primary sector to the secondary sector (the industrial boom). By the mid-20th century, the concentration began moving heavily toward the tertiary (service) sector, a trend that continues today.

Immigration played a crucial role in filling labor needs, particularly in low-end and labor-intensive markets. During the mid-20th century, many immigrants, primarily from European backgrounds, were brought in to support Canadian labor demands. Later in the century, Canada broadened its immigration policies, allowing people from regions like Africa and Asia to enter, often fleeing political instability, further diversifying and supplying the labor market.

Understanding the Unionization Spillover Effect

The spillover effect occurs when wage increases secured by a unionized workforce (starting from W1 and Q1 on a graph) lead to an excess supply of labor (Q3) in the unionized sector. Since the unionized sector cannot absorb this excess labor, these workers are forced to seek employment in the non-unionized workforce.

Market Impact of the Spillover

This movement of excess workers causes a fundamental shift in the labor market:

• Unionized Sector: The supply of labor effectively contracts relative to the demand at the higher union wage.
• Non-Unionized Sector: The influx of displaced workers causes the labor supply curve to shift right. This increased competition drives down wages in the non-unionized sector, meaning employees there receive lower salaries than they did before the union wage increase.

The spillover effect is important because it demonstrates how wage policies in one segment of the labor market can negatively impact wages and employment conditions in the non-regulated segment.

Factors That Lessen the Spillover Effect

To lessen the negative impact of the spillover effect, measures must be taken to reduce the excess labor supply in the unionized sector or increase demand in the non-unionized sector. One proposed method is to decrease the allowed working hours for unionized workers. If workers receive similar total compensation while working fewer hours, the demand for labor might be spread across more individuals, reducing the excess labor pool that would otherwise spill into the non-unionized market.