Unemployment and Okun’s Law

Employment StatisticsEmployed

You have a job (even if part time)Unemployed

“Jobless, looking for jobs, and available to work”

Must be ACTIVELY searching during the past 4 weeks

Labor ForceSum of the employed and unemployedInstitutionalized (students, military, inmates)

are excluded

Natural Rate of UnemploymentExpansion…unemployment↓Recession…unemployment ↑ (but not always!)There is still a level of unemployment even

when jobs are plentifulEven in the best of times, jobs are constantly

being created and destroyedThe job market is constantly fluctuating

Also called FULL EMPLOYMENT

Problems with the Unemployment RateThe figure itself is an estimate based on random

sampling of 60,000 households scaled upTends to understate the true level (though it can

overstate it as well!)Discouraged workersMarginally attached workersUnderemployed workers

These are not accounted for in the standard unemployment statistics

Three Types of UnemploymentThere are three different types of

unemployment that describe how jobs are constantly being created and destroyedFrictionalStructuralCyclical

Frictional UnemploymentUnemployment due to the time workers

spend in the job search“in between jobs” or seeking first jobTypically by choiceSomewhat desirable-indicates mobility

Structural UnemploymentLosing a job to changing structure of the

economyThe skill-set is no longer in demand by the

nation’s producersSomewhat desirable-indicates productivity

and efficiency

Cyclical UnemploymentResults from a fall in total demand for a

nation’s outputAssociated with the recession phase in a

business cycle

Determining UnemploymentEmployed + Unemployed = Labor force

Labor force participation rate:Labor force X 100

Population 16-64

Unemployment rate:Number of unemployed X 100

Labor force

Changes in Natural Rate of UnemploymentNatural rate of unemployment: “normal rate”

NRU = Frictional + Structural

Actual Unemployment Rate = Natural + Cyclical

Natural rate changes over time as a result of:Changes in Labor ForceChanges in Labor MarketChanges in Government Policy

Okun’s LawRecessions are linked to rising unemployment;

expansions see falling unemployment (in the long run)The economic cost of unemployment is measured as

the GDP gap—the amount of sacrificed outputOkun’s Law – About a 2% decrease in output (GDP)

for every 1% increase in unemployment Okun’s Law is based on observation, not theory, so it

is approximated and has been adjusted a little over time