ECONOMICS: EXPLORE & APPLYby Ayers and Collinge CHAPTER 6“Unemployment”
Learning Objectives • Identify who is part of the labor force, and who is not. • Explain how the unemployment rate is calculated. • Elaborate upon unemployment in other countries. • Divide unemployment into different types and explain the implications each.
Learning Objectives 5. Describe the natural rate of unemployment and its converse, full-employment GDP. 6. (E&A) Discuss how the quality of unemployment can deteriorate when mandates increase.
6.1MEASURING UNEMPLOYMENT • Add employment and unemployment to the list of macroeconomic concerns because… • Most people’s incomes come from their jobs. • To understand unemployment we must measure it in total, and by types. • An economy with unemployment is wasting resources.
The Labor Force and Unemployment • The U.S. civilian labor force is composed of individuals age 16 and over, excluding the military. • The labor force and be divided in two parts consisting of the employed, and the unemployed. • The employed are those who work for pay, and the unemployed are those who do not work, but are seeking jobs. • The unemployment rate is the fraction of the labor force who are unemployed, expressed in percentage terms.
Number of Unemployed Persons Number of Persons in the Labor Force The Unemployment Rate Unemployment Rate =
The Labor Force and Unemployment • The labor force participation rate is the ratio of the civilian labor force to the population age 16 and over. • Between 1979, and 2001 there has been a consistent increase in the participation rate because of the increase in the number of women in the labor force.
Labor Force Data 2001 Population age 16 and over – 211.9 mil
The Labor Force and Unemployment • The economy must steadily create more jobs each month, as more Americans enter the labor force each month. • If job creation lags behind the increase in the labor force, then some job seekers will be unable to find work, and unemployment will increase. • Labor force participation and job creation are dependent on each other.
A person is counted as employed as long as they work at least one hour per week or more for pay. Work in a family business without pay for at least 15 hour per week is counted as being employed. Full time students are not counted as employed. Full time students are also not counted as being unemployed, unless they are looking for jobs. Unemployment Rate Details
Discouraged Workers Discouraged workers are workers who would like to have a job, but have tried unsuccessfully to find one in the past and have given up looking. Because they have stopped looking, discouraged workers are not counted in the unemployment statistics. Not counting discouraged workers understates the true unemployment rate.
Underground Economy The underground economy refers to the market transactions which go unreported. Some of these goods and services are illegal and thus not recorded in GDP. Others are legal, but not reported so that their producers may avoid paying taxes on the output. The underground economy causes the reported unemployment rate to overstate true unemployment.
Duration of Unemployment (2001) Total Unemployment: 6742 Less than 5 weeks:2833 5–14 weeks: 2163 15-26 weeks: 949 27 weeks and over: 797
6.2IDENTIFYING TYPES OF UNEMPLOYMENT Frictional- associated with entering the labor market or switching jobs Seasonal - unemployment that can be predicted or recur periodically Structural - caused by a mismatch between a person’s human capital and that needed in the workplace Cyclical - resulting from downturns in economic activity (i.e. the business cycle)
Types of Unemployment • Seasonal unemployment affects workers in agriculture, tourism related occupations, education, tax accounting, professional sports, and some other industries. • Seasonal unemployment can be planned for, and is of little concern as it is “part of the job”.
Types of Unemployment • Frictional unemployment occurs when people are between jobs, or waiting to start their first job. • It is usually a brief period of time. • Changing jobs does not imply frictional unemployment. • Unemployment due to layoffs and firings does result in frictional unemployment.
Types of Unemployment • Structural changes in the economy can give rise to structural unemployment. • This occurs when demand for some types of goods and services gives rise to demand for others. • Workers with outdated skills , which are no longer in demand exemplify structural unemployment. • These workers must be retrained to re-enter the workforce. • Geographical immobility gives rise to structural unemployment.
Types of Unemployment • Specific human capital is often specific to a particular firm or job. • These workers are prone to structural unemployment. • General human capital is easily transferred from job to job. • Without structural unemployment, there would be no progress, therefore it is a necessary part of economic evolution.
Types of Unemployment • Cyclical unemployment is a systematic disorder caused by downturns in the business cycle. • Cyclical unemployment is a temporary phenomena since recessions are temporary. • As the economy pulls out of a recession, job creation leads to a number of the cyclically unemployed to either go back to their old jobs, or find new jobs.
6.3OTHER INFLUENCES ON UNEMPLOYMENT • Unemployed workers who qualify are able to collect government-provided unemployment payments to help tide them over during a spell of unemployment. • Workers who are laid off for economic reasons qualify for benefits, while workers who are fired do not. • The average weekly check was about $221.01 in 2001.
Other Influences on Unemployment • Unemployment benefits vary from state to state. • Unemployment insurance contributes to a higher unemployment rate, since workers who receive these benefits have a longer duration of unemployment. • Unemployment is costly to the economy in two ways. • It cost taxpayer dollars. • It decreases the economy’s output, and lowers living standards.
6.4THE NATIONAL RATE OF UNEMPLOYMENT • The unemployment rate does not tend towards zero, exactly. • Rather the long-run tendency is for unemployment to settle at a few percentage points above zero, due to the inevitable presence of seasonal, frictional, and structural unemployment. • The minimum long-run sustainable level of unemployment is termed the natural rate of unemployment.
The Natural Rate of Unemployment • The natural rate of unemployment changes over time but is considered today to be 4 to 5% of the workforce. • The full employment rate is the opposite of the natural rate of unemployment. • It equals 100% minus the natural rate of unemployment. • Because the natural rate of unemployment exceeds zero, full employment occurs when the employment rate is less than 100%.
6.5 EXPLORE & APPLYThe Hidden Cost of Law • Employers incur expenses when hiring new employees associated with complying with employment laws and regulations. • The hassles of hiring can be avoided by working current employees longer hours or more efficiently. • Cost also increase from government mandated protections for employees about to lose their jobs. • To avoid the cost of hiring, many employers are hiring more part time and temporary workers.
labor force unemployment rate labor force participation discouraged workers frictional unemployment seasonal unemployment structural unemployment cyclical unemployment specific human capital Key Terms
general human capital natural rate of unemployment full employment Key Terms
Test Yourself • To Be counted as employed someone must work • at least 1 hour a week for pay. • at least 15 hours a week. • at least 35 hours a week. • for at least as many hours as that person wants to work.
Test Yourself 2. The civilian labor force does not include • workers under the age of 16. • the unemployed. • part time workers. • anyone working in a family business without pay.
Test Yourself 3. To be counted as unemployed, an individual must • not have a job. • not have a job and be looking for work. • not have a job, be looking for work, and be willing to accept the first job offer he or she receives. • have held a job in the past, not have a job now, be looking for work, be willing to accept the first job offer.
Test Yourself 4. Discouraged workers • are counted among the employed. • are counted among the unemployed. • would increase the unemployment rate if they were counted among the unemployed. • have no effect on the labor force and unemployment statistics regardless of how or whether they are counted.
Test Yourself 5. How does the underground economy affect the measurement of unemployment? • It causes the reported unemployment rate to be higher than the true unemployment rate. • It causes the reported unemployment rate to be lower than the true unemployment rate. • It has no effect on the labor force and unemployment rate. • It affects the reported unemployment rate in varying , but unpredictable ways.
Test Yourself 6. Which type of unemployment is associated with a recession? • frictional. • seasonal. • structural. • cyclical.
The End! Next Chapter 7 “Inflation"