A measure of wasted resources…
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Unemployment is measured by the Bureau of
Labor Statistics (BLS) part of the
Department of Labor.
Data is compiled from monthly surveys
Current Population Survey
Data does not come from unemployment
insurance (UI) records…
UI is one of many factors used.
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If you have a job, you are employed
If you do not have a job but you are
available and looking for work, you are
If you are neither employed nor
available and looking for a job you are
not in the labor force.
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a v r
t e F
Full time, part time and temporary
Worked at least ONE hour or more for
pay or profit during the survey week.
Worked 15 hours or more without pay in
a family business.
Temporarily absent from work
Illness, vacation, labor dispute, etc.
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Do not have a job.
Available for work.
Made specific efforts to find a a job
during the previous four weeks.
Not working, waiting to be called
back to a job from which they were
temporarily laid off.
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Not in the Labor Force
Those who have no job and are not looking
for a job.
Full time students
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LF = E + U
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Unemployment= X 100
Labor Force = Active Population X 100
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Is Unemployment Measured
No. There are three problems with this
2. The Discouraged Worker Effect
3. The treatment of part time work as
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Discouraged Workers are
not in the Labor Force.
A discouraged worker is someone who
gave up looking for a job.
They are NOT counted as
unemployed but should because
they are part of the active
population, and would work if a job
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LF = E + U
Unemployment = Unemployed X 100
Rate (Ur) Labor Force 16
1.1 give up looking for work
When workers lose
all hope of finding a
E=140 rate decreases! 15.9
Ur = 15.9/156=10.2%
Discouraged Worker Effect.
An increase in the number of
discouraged workers shows up as a
decrease in the unemployment rate!
During long recessions, more workers
become discouraged reducing the Ur.
During recessions true
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Part Time Workers counted as
Including those who worked only
These individuals would work full
time if a job was available…
They should be counted –at least
partially- as unemployed.
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counted as Employed
A person working on a job that does not use
his/her full potential is Underemployed
A computer programmer delivering pizzas.
Underemployed individuals are counted as
employed even though their skills are
There are no official statistics on
Difficult to develop objective criteria.
Difficult to quantify loss to society.
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The Unemployment Rate:Three
Discouraged Underestimate true
Workers Not Unemployed
Part Time Counted as employed
Workers Inflate Number
employed Counted as employed
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Reagan Bush Clinton Bush 01- Obama
81-89 89-93 93-01 09 09-
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Clinton 93-01 Bush 01-09
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Unemployment is never ZERO
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Unemployment is never
Even when the economy is growing at its
“potential” there will be some workers
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Three types of unemployment:
Structural: workers who do not have
the necessary skills…there is no job
Frictional: workers with the
necessary skills but have not found
their job yet.
Cyclical: workers with the necessary
skills for the job, but lack of
demand prevents firms from hiring
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The Full Employment Rate of
Unemployment: Natural Rate
At full employment
Unemployment is NOT zero.
CYCLICAL unemployment is zero.
But at full employment
There is still frictional and
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Three components to
Between Jobs Unemployment
due to Frictional
recession Recession Ends 4%
to lack of skills Structural
1% Zero Cyclical 1%
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The Natural Rate of
Frictional + Structural = Natural
Natural Rate of
estimated between 5 and
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Natural Rate of Unemployment
The Cost of Unemployment:
Inequality When the Ur for white
Men rises by 1%, the
Unemployment Unemployment rate for
increases Rises by:
inequality: Non-white 2.2 points
When the national males
unemployment rate Non-white 2.9 points
unemployment rate 20-24
of the most Non-white 2.6 points
groups rise faster.
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How do you protect yourself from unemployment?
STAY IN SCHOOL
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Unemployment Rates Aug. 2011
The Cost of Unemployment
Lost Output: Okun’s Law
An extra percentage point of
unemployment above the natural
rate corresponds to an output
gap of 2.5 percentage points of
14,000 *0.025 = 350 Billion worth of
goods and services lost for each 1%
Okun’s Law: an example
Ur (2007) = 4.9%
Ur (2008) = 7.2%
Extra Unemployment = 2.3%
Each 1% = 2.5% less GDP
2.3% extra unemployment = 2.3(2.5) = 5.75%
GDP in 2007 = 11,620b (5.75%)=668billion
dollars worth of goods and services lost.
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1. Explain the Discouraged worker effect and
how it affects the calculation of the
2. Explain why the unemployment rate is never
3. Explain why unemployment is
underestimated by treating Full time and
part time work the same.
4. Explain why unemployment is
underestimated due to underemployment
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5. Suppose that the active population is
230 million, the labor force participation
rate is 66% and the unemployment rate
is 5%. If the number of discouraged
workers increases by 5 million, what does
the unemployment rate become?
5. Active population is 30 million, labor
force participation rate 60%, number of
discouraged workers 2 million, number of
people with full time jobs 13 million,
number of people with part time jobs is 2
million. Calculate the unemployment rate.
7. Suppose that GDP is 11,000 billion and
current unemployment is 7%. What
would GDP be if unemployment were
only 5%? Hint: use Okun’s Law.
8. Does the existence of unemployment
insurance eliminate the economic costs
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Employed? Unemployed? Not in the
1. After 14 months, Mrs. Smith gives up searching for a job.
2. Claudia reports wanting to work, but she made no specific
efforts to find employment.
3. John works as a clerk in a government office.
4. Harry is in active duty in the military.
5. Raul was paid for 2 hours work during the survey week.
6. Joe is retired and volunteers his time at a hospital.
7. Anthony was given a 2 day suspension from work for being late.
8. Joseph works two days a week at a restaurant.
9. Mary, a part time teacher, reports searching unsuccessfully for
a full time job.
10. Ron, a PhD in Philosophy, drives a delivery van after searching
unsuccessfully for a job. 47
Cyclical? Structural? Frictional?
1. Richard loses his job at UPS due to a downturn in general
2. Mark loses his job as a parking attendant. His job was replaced
by a new automated system.
3. Sarah quits her job as a hostess to look for work that is more
4. Andrew quits looking for work because he does not think he can
find a suitable job.
5. Eileen lost her job because of the recession.
6. Mathew just graduated from college and does not have a job
7. Pedro lost his job as software developer for a weapons
manufacturer. He is looking for a new job.
OKUN’S LAW THE COMPLETE
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