Chapter 06:Unemployment

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives

• 06-01. Know how unemployment is measured.

• 06-02. Know the socioeconomic costs of unemployment.

• 06-03. Know the major types of unemployment.

• 06-04. Know the meaning of “full employment.”

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The Labor Force• Labor force: all persons age 16 and over who

are either employed or actively seeking work.– Out of the labor force: those not working and

not actively seeking employment.

Totalpopulation

Out of thelabor force

Labor force

Employed

Unemployed

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Impact of Labor Force Growth• The labor force grows

due to population growth and immigration, adding 2 million new workers yearly.

• The PPC pushes outward, increasing the capacity to produce goods and services.– We need to create 2

million new jobs for the expanding labor force, or we end up at point F inside the PPC.

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Unemployment

• Unemployment: the inability of labor force participants to find jobs.

• This is an idled resource, so the economy operates inside its PPC, in the inefficient zone.– Okun’s Law: a 1 percent increase in

unemployment results in a 2 percent decrease in GDP.

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Measuring Unemployment• A person is counted as unemployed if he or

she is not working but is actively seeking work.

• Unemployment rate: the proportion of the labor force that is unemployed:

14,825,000 2010 unemployment rate = = 9.6% 153,889,000

Number of unemployed peopleUnemployment rate = Labor force

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Demographics of Unemployment

• The unemployment rate is higher for– Men than women.– Blacks and Hispanics than whites.– Less educated people than higher-educated

people.– Teenagers than people older than them.

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Duration of Unemployment

• Duration: how long does joblessness last?• When the economy is growing, both the

unemployment rate and the duration decrease.

• When the economy stagnates or goes into decline, both the unemployment rate and the duration increase.

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Reasons for Unemployment• Job leavers.

– They quit to seek other opportunities.

• Job losers.– They are laid off or fired.

• New entrants.– First-time job seekers.

• Reentrants.– They had left the labor

force but have returned.

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Discouraged Workers

• Former job seekers who have given up and no longer actively seek employment.– They drop out of the labor force.– They are no longer counted in unemployment

statistics.

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Underemployment

• People who want full-time work in their field but can find only part-time work or work at jobs below their capability.– They are counted as employed.

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Defining Full Employment• Full employment is not the same as zero

unemployment.• There are four categories of unemployment.– Seasonal unemployment.– Fictional unemployment.– Structural unemployment.– Cyclical unemployment.

• At full employment, all of these exist except cyclical unemployment.

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Defining Full Employment

• Seasonal unemployment: unemployment due to seasonal changes in employment.

• The Labor Department reports seasonally adjusted unemployment rates for every month.– Unemployment data exclude the effects of

seasonal unemployment.

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Defining Full Employment

• Frictional unemployment: brief periods of unemployment experienced by people moving between jobs or into the labor market.– Adequate demand for frictionally unemployed.– They have skills required for existing jobs. – The job search period is relatively short.

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Defining Full Employment

• Structural unemployment: unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.– Caused by a change in the market for the

product made, or– … a change in the technology or process by

which the goods is made.

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Defining Full Employment

• Cyclical unemployment: unemployment caused by a decline in economic activity.– The demand for products decreases and

workers get laid off.– Results in an excess supply of workers for the

remaining available jobs.– The economy must grow at least as fast as the

labor force to avoid cyclical unemployment.

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Defining Full Employment• Economists think that we are near full

employment when rising prices signal that we are nearing production capacity – that is, the PPC.

• Inflationary flashpoint: the rate of output at which inflationary pressures intensify.

• Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.

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Defining Full Employment

• Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.– Both frictional and structural unemployment

exist at full employment.

• Full employment ranges between 4 and 6 percent unemployment, depending on the size of structural unemployment.

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Changes in Structural Unemployment

• Changes in structural unemployment come from changes in society itself.– Growing numbers of youth and women.– Changes in transfer payments for the jobless.– Changes in products demanded by consumers.– Changes in how (and where) products are made.

• During periods of change, structural unemployment increases.

• When changes are fully absorbed, structural unemployment decreases.

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The “Natural” Rate of Unemployment

• Natural rate of unemployment: long-term rate of unemployment determined by structural forces in labor and product markets.