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Unemployment and Okun’s Law

Unemployment and Okun’s Law. Determining Unemployment. The unemployed are searching for/available for work (4 weeks) Employed + Unemployed = Labor force Labor force participation rate = Labor force X 100 Population 16 or older Unemployment rate: Number of unemployed X 100

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Unemployment and Okun’s Law

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  1. Unemployment and Okun’s Law

  2. Determining Unemployment The unemployed are searching for/available forwork (4 weeks) Employed + Unemployed = Labor force Labor force participation rate = Labor force X 100 Population 16 or older Unemployment rate: Number of unemployed X 100 Labor force

  3. Problems of Unemployment Rate • The figure itself is an estimate based on random sampling of 60,000 households scaled up • Tends to understate the true level (though it can overstate it as well!) • Discouraged workers • Marginally attached workers • Underemployed workers • These are not accounted for in the standard unemployment statistics (U3), but in U6 only

  4. Though U6 is not the standard measure, the two lines are parallel which shows that the increase/decrease trends are valid

  5. Demographics of Unemployment • Experienced workers • “Prime ages” (25-54) • White and Asian • Low educational attainment • African Americans • Under 25 and over 55 Most easily employed groups Most often unemployed groups

  6. Okun’s Law • Recessions are linked to rising unemployment; expansions see falling unemployment (in the long run) • “Growth recession” - Below-average growth is normally accompanied by rising unemployment • Okun’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

  7. Types of Unemployment • Frictional unemployment - Unemployment due to time workers spend in job search • Frictional unemployment is the result of constant process of job creation/destruction

  8. Types of Unemployment • Structural unemployment – results when the number seeking jobs is greater than jobs offered of a certain type or at current wage structure • Structural unemployment can occur when wage is set permanently above the equilibrium wage, creating a surplus • Most often the result of: • Government policies • Unions • Mismatch

  9. Types of Unemployment • Cyclical unemployment – result of the business cycle; accompanies downturns in growth

  10. Changes in Natural Rate of Unemployment • Natural rate of unemployment – normal rate Natural rate = Frictional + Structural Actual rate = Natural + Cyclical • Natural rate changes over time as a result of: • Changes in Labor Force • Changes in Labor Market • Changes in Government Policy

  11. Practice Categorize each of the following (C, F, or S): • A literary editor leaves her job in New York to look for a new job in San Francisco. • Advances in technology make the assembly-line worker’s job obsolete. • A high school graduate lacks the skills necessary for a particular job. • Workers are laid off when the local manufacturing plant closes because the product made there isn’t selling.

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