Department of Economics, North South University

Semester: Summer 2013

ECO 104 (NMh) - Chapter 6 (Parkin)

1. Breaking down the population into different parts (Fig 6.1). Draw diagram.

- The population is divided into two parts, "working age population" and the "young and

institutionalized". The latter includes all those who are younger than 16 years, and those who are

in jail, hospital, or other form of institutional care (asylum). Rest of the population is

- Of those who are able and allowed to work ("working age population"), there are three groups:

employed, unemployed and not in labour force.

- An employed person is one who has a full time or a part time job.

- An unemployed person is one who is available for work, and satisfies one of the following

criteria; waiting to be called back to a job from which he has been laid off, waiting to start a job

within 30 days or has looked for work in the last month.

- Not everyone who doesn't have a job looks for one, and these people form the third group, " not

in labour force". An interesting component of this group are "discouraged workers", those who

are willing and able to work but have not made specific efforts to find a job within the last

month.

- The employed and the unemployed together form the labour force.

2. Three Labour Market Indicators

- We need to determine the percentage of people who are actively looking for work but can't find

them. This gives us a snapshot of the economy's ability to provide jobs as demanded.

Unemployment rate = (number of unemployed people/labour force) x 100%

- We need to determine the percentage of people who are willing to take jobs amongst the

working age population. This helps us understand women's participation in the economy and also

the situation with discouraged workers (who often stop looking for jobs during a recession and

re-enter the labour force during expansion).

Labour force participation rate = (labour force/working age population) x 100%

- Due to the way unemployed is defined, those who are interested in work but not looking for it

actively are often left out of the unemployment picture ("Not in labour force), but they are an

important component of the economy. A high number proportion of "not in labour force" shows

a weak economy. To examine this more closely, we calculate the following:

Employment-to-Population Ratio= (number of employed people/working age population) x

100%

- Fig 6.2: The unemployment rate shows the fluctuation in business cycle. The labour force

participation rate and employment-to-population ratio also show fluctuation, but they have an

upward trend. The fluctuations are caused by the business cycle and the upward trend is

explained by increasing women's participation in the workforce. Refer to Fig 6.3.

- Page 134 explains Fig 6.3.

- From Aggregate Hours (page 134) until the beginning of Types of Unemployment (page 139)

is not included in the syllabus.

- Note: The Anatomy of Unemployment (Page 137 to middle of Page 139) is indirectly needed

for Q.4 (page 149), but I expect that it is possible to do it without reading this.

3. Types of unemployment:

- Frictional: The unemployment that arises from natural frictions in the economy, from people

entering and leaving the workforce and from the ongoing creation and destruction of jobs

(business opening and closing down). The amount of frictional unemployment is influenced by

unemployment compensation.

- Structural: The unemployment that arises when changes in technology or international

competition change the skills needed to perform jobs. Structural unemployment lasts longer than

frictional unemployment because workers must retrain and possibly relocate to find a job.

- Cyclical: The fluctuating unemployment over the business cycle. E.g. Someone who is laid off

during recession and rehired during expansion.

4. Full Employment

- Frictional and structural unemployment make up natural unemployment, because this is an

inseparable part of a modern economy.

- When the economy's unemployment rate is equal to its natural rate of unemployment, we say

that it is operating at full employment

- Page 141 is not included in the syllabus

5. CPI (page 142-145)

- Not included in midterm 1, will cover it in midterm 2.