Unemployment IDENTIFYING UNEMPLOYMENT • How Is Unemployment Measured? – Categories of Unemployment • The problem of unemployment is usually divided into two categories, the long-run problem and the short-run problem. • The natural rate of unemployment • The cyclical rate of unemployment How is Unemployment Measured? • Natural Rate of Unemployment • The natural rate of unemployment is unemployment that does not go away on its own even in the long run. • It is the amount of unemployment that the economy normally experiences. • Cyclical Unemployment • Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. • It is associated with short-term ups and downs of the business cycle. 1. The natural rate of unemployment a. is a constant. b. is the desirable rate of unemployment. c. cannot be altered by economic policy. d. None of the above is correct. • Describing Unemployment: Three Basic Questions • How does government measure the economy’s rate of unemployment? • What problems arise in interpreting the unemployment data? • How long are the unemployed typically without work? Unemployment is measured by the Bureau of Labor Statistics (BLS). It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey. Based on the answers to the survey questions, the BLS places each adult into one of three categories: • Employed • Unemployed • Not in the labor force Employed vs. unemployed • The BLS considers a person an adult if he or she is over 16 years old. • A person is considered employed if he or she has spent some of the previous week working at a paid job. • A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. • A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force. Labor Force • The labor force is the total number of workers, including both the employed and the unemployed. • The BLS defines the labor force as the sum of the employed and the unemployed.
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2. Assuming everyone in the question below is in the adult population, which of the following is not correct? a. Elmo works part time as a baby sitter. The BLS counts him as employed and in the labor force. b. Anna is a full-time student not looking for a job. The BLS counts her as unemployed and in the labor force. c. Jim is on temporary layoff. The BLS counts him as unemployed and part of the labor force. d. Liz is seeking work, but has not found it. The BLS counts her as unemployed and in the labor force. 3. Who would be included in the labor force? a. Karen, who works most of the week in a steel factory b. Beth, who is waiting for her new job at the bank to start c. Dave, who does not have a job, but is looking for work d. All of the above are included in the labor force. 4. Who would be included in the labor force? a. Karen, who works most of the week in a steel factory b. Beth, who is waiting for her new job at the bank to start c. Dave, who does not have a job, but is looking for work d. All of the above are included in the labor force.
Figure 1 The Breakdown of the Population in 2004
Employed (139.3 million)
Labor Force (147.4 million)
Adultt Population
(223.4 million) Unemployed (8.1 million)
Not in labor force (76.0 million)
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The unemployment rate is calculated as the percentage of the labor force that is unemployed. Number unemployed Unemployment rate = 100 Labor force The labor-force participation rate is the percentage of the adult population that is in the labor force. Labor force participation rate
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Labor force X 100 Adult population
5. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Canadian adult noninstitutionalized population was 25.022 million, the labor force was 16.956 million, and the number of people employed was 15.864 million. According to these numbers, the Canadian labor-force participation rate and unemployment rate were about a. 67.8% and 6.4%
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b. 67.8% and 4.4% c. 63.4% and 6.4% d. 63.4% and 4.4% 6. The BLS reported in 2005 that there were 28.19 million people over age 25 who had no high school degree or its equivalent. In this group 11.73 million were employed and 1.04 million were unemployed. About what were the labor-force participation rate and the unemployment rate for this group? a. 41.6% and 3.7% b. 41.6% and 3.7% c. 45.3% and 8.1% d. 45.3% and 8.1% Figure 2 Unemployment Rate Since 1960
Percent of Labor Force 10 Unemployment rate
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6 Natural rate unemployme of nt
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Labor-Force Participation Rate (in percent) 100 Men
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Does the Unemployment Rate Measure What We Want It To? • It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. • Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, don’t show up in unemployment statistics.
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Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work.
How Long Are the Unemployed without Work? • Most spells of unemployment are short. • Most unemployment observed at any given time is long-term. • Most of the economy’s unemployment problem is attributable to relatively few workers who are jobless for long periods of time. 7. Suppose that some people report themselves as unemployed when, in fact, they are working in the underground economy. If these persons were counted as employed, a. both the unemployment rate and labor-force participation rate would be higher. b. both the unemployment rate and labor-force participation rate would be lower. c. the unemployment rate would be higher and the labor-force participation rate would be higher. d. the unemployment rate would be lower and the labor-force participation rate would be unaffected. 8. Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, a. both the unemployment rate and labor-force participation rate would be higher. b. the unemployment rate would be higher and the labor-force participation rate would be lower. c. the unemployment rate would be lower and the labor-force participation rate would be higher. d. None of the above is correct.
9. Discouraged workers a. are not counted either as part of the adult population or as part of the labor force. b. are counted as part of the adult population, but not as part of the labor force. c. are counted as part of the adult population, and as unemployed. d. None the above are correct.
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10. If you were told that someone you knew nothing else about had just become unemployed, your best guess would be a. that they would be unemployed a long time and that most of the unemployed they’ve joined have been unemployed a long time. b. that they would be unemployed for a long time, even though most of the unemployed they’ve joined have been unemployed for a short time. c. that they would be unemployed for a short time, even though most of the unemployed they’ve joined have been unemployed for a long time. d. that they will be unemployed for a short time, and that most of the unemployed they’ve joined have been unemployed for a short time.
Why Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed.
Wage Labor Supply
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Labor Demand QE Quantity of labor
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Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. • In other words, it takes time for workers to search for the jobs that are best suit their tastes and skills. Structural unemployment is the unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
JOB SEARCH • Job search is the process by which workers find appropriate jobs given their tastes and skills. • It results from the fact that it takes time for qualified individuals to be matched with appropriate jobs. • This unemployment is different from the other types of unemployment. • It is not caused by a wage rate higher than equilibrium. • It is caused by the time spent searching for the “right” job. Why Some Frictional Unemployment Is Inevitable • Search unemployment is inevitable because the economy is always changing. • Changes in the composition of demand among industries or regions are called sectoral shifts. • It takes time for workers to search for and find jobs in new sectors.
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11. Unemployment that exists because it takes time for workers to search for the job that suits them best is a. frictional unemployment, which partly accounts for the natural rate of unemployment. b. frictional unemployment, which does not help account for the natural rate of unemployment. c. structural unemployment, which partly accounts for the natural rate of unemployment. d. structural unemployment, which does not help account for the natural rate of unemployment. 12. Providing training for unemployed individuals is primarily intended to reduce a. frictional unemployment. b. seasonal unemployment. c. structural unemployment. d. cyclical unemployment. Public Policy and Job Search • Government programs can affect the time it takes unemployed workers to find new jobs. • These programs include the following: • Government-run employment agencies • Public training programs • Unemployment insurance • Government-run employment agencies give out information about job vacancies in order to match workers and jobs more quickly. • Public training programs aim to ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty. • Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. • Offers workers partial protection against job losses. • Offers partial payment of former wages for a limited time to those who are laid off. • Unemployment insurance • increases the amount of search unemployment. • reduces the search efforts of the unemployed. • may improve the chances of workers being matched with the right jobs. • • • Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to explain longer spells of unemployment. Why is there Structural Unemployment? • Minimum-wage laws • Unions • Efficiency wages
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MINIMUM-WAGE LAWS • When the minimum wage is set above the level that balances supply and demand, it creates unemployment.
Wage Surplus of = Unemployme labor nt Labor supply
Minimum wage W
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Labor deman d 0 L
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Quantity of Labor
UNIONS AND COLLECTIVE BARGAINING • A union is a worker association that bargains with employers over wages, benefits and working conditions. • In the 1940s and 1950s, when unions were at their peak, about a third of the U.S. labor force was unionized. • A union is a type of cartel attempting to exert its market power. The process by which unions and firms agree on the terms of employment is called collective bargaining. • A strike will be organized if the union and the firm cannot reach an agreement. – A strike occurs when the union organizes a withdrawal of labor from the firm. • A strike makes some workers better off and other workers worse off. • Workers in unions (insiders) reap the benefits of collective bargaining, while workers not in the union (outsiders) bear some of the costs. • By acting as a cartel with ability to strike or otherwise impose high costs on employers, unions usually achieve above-equilibrium wages for their members. • Union workers earn 10 to 20 percent more than nonunion workers. Are Unions Good or Bad for the Economy? • Critics argue that unions cause the allocation of labor to be inefficient and inequitable. • Wages above the competitive level reduce the quantity of labor demanded and cause unemployment. • Some workers benefit at the expense of other workers. • Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers. • They claim that unions are important for helping firms respond efficiently to workers’ concerns. THE THEORY OF EFFICIENCY WAGES • Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. • The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level. • A firm may prefer higher than equilibrium wages for the following reasons: • Worker health: Better paid workers eat a better diet and thus are more productive. • Worker turnover: A higher paid worker is less likely to look for another job. • Worker quality: Higher wages attract a better pool of workers to apply for jobs. • Worker effort: Higher wages motivate workers to put forward their best effort.
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13. Economists would predict that, other things the same, the more generous unemployment compensation a country has, a. the shorter the duration of each spell of unemployment, and the higher the unemployment rate. b. the shorter the duration of each spell of unemployment, and the lower the unemployment rate. c. the longer the duration of each spell of unemployment, and the higher the unemployment rate. d. the longer the duration of each spell of unemployment, and the lower the unemployment rate. 14. Wages in excess of their equilibrium level help explain a. frictional but not structural unemployment. b. structural but not frictional unemployment. c. frictional and structural unemployment. d. neither frictional or structural unemployment. 15. An increase in the minimum wage would a. increase both the quantity demanded and the quantity supplied of labor. b. decrease both the quantity demanded and the quantity supplied of labor. c. increase the quantity of labor demanded while decreasing the quantity supplied. d. decrease the quantity of labor demanded while increasing the quantity supplied. 16. Suppose that telemarketers are not unionized. If they unionize, then the supply of labor in other sectors of the economy a. decreases, raising wages in industries that are not unionized. b. decreases, reducing wages in industries that are not unionized. c. increases, raising wages in industries that are not unionized. d. increases, reducing wages in industries that are not unionized. 17. Mary Sue is the newly appointed CEO of a company that manufactures CD drives on an assembly line. Her staff has told her that the output the firm produces, given the number of workers employed, indicates that some workers may be shirking. According to efficiency wage theory, what should she do? a. pay all workers more than the equilibrium wage rate b. pay all workers below the equilibrium wage rate to make up for the loss from shirking c. make sure that workers are getting paid exactly the equilibrium wage rate d. None of the above is correct according to efficiency wage theory.
Summary • The unemployment rate is the percentage of those who would like to work but don’t have jobs. • The Bureau of Labor Statistics calculates this statistic monthly. • The unemployment rate is an imperfect measure of joblessness. • In the U.S. economy, most people who become unemployed find work within a short period of time. • Most unemployment observed at any given time is attributable to a few people who are unemployed for long periods of time. • One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. • A second reason why our economy always has some unemployment is minimum-wage laws. • Minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded. • A third reason for unemployment is the market power of unions. • A fourth reason for unemployment is suggested by the theory of efficiency wages. • High wages can improve worker health, lower worker turnover, increase worker effort, and raise worker quality.
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