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Chapter 18: Employment and Unemployment
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1. Employment and Unemployment
Statistics
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Employed persons includes those 16 years of age and older who are either: employed by a private firm or a
government unit self-employed had jobs but were not working because
of illness, bad weather,
Employed Persons
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Employment-Population Ratio
For February 2005:
Employment-Population Ratio =
employed persons
noninstitutional population 16 years of older
* 100
Employment-Population Ratio =
139,100,000
225,041,000 * 100 = 61.8%
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Unemployed persons includes those 16 years of age and older, who are not working but are available for work, and either: (1) engaged in some job-seeking activity in
the past 4 weeks. (2) were waiting to be called back to a job
from which they were temporarily laid off. (3) would have been looking for job but
were temporarily ill. (4) waiting to report for a new job within
30 days.
Unemployed Persons
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Unemployment Rate
Unemployment Rate
=unemployed persons
unemployed + employed persons
* 100
Unemployment Rate =
unemployed persons
labor force* 100
or
For February 2005:
LFPR
= 8,549,000
147,649,000* 100 = 5.8%
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Employment-Population Ratio
50%
52%
54%
56%
58%
60%
62%
64%
66%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Em
ploy
men
t-Po
pula
tion
Rat
io
Employment-Population Ratio
• The employment-population ratio has risen over the past 4 decades.
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Unemployment Rate
0%
2%
4%
6%
8%
10%
12%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Em
ploy
men
t-Po
pula
tion
Rat
io
Unemployment Rate
• The unemployment rate been highly variable over the past 4 decades.
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The unemployment rate and employment-population ratios come from a monthly household survey which has the following advantages: Time-consistent and large survey Time lag in obtaining data is short. Data is available on a disaggregated basis. The unemployment rate provides
information about the business cycle.
Advantages of Household Survey
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The monthly household survey has the following disadvantages: Part-time workers are counted as fully
employed even if they wanted to work as a full-time worker.
Unemployed persons must be actively seeking work.
It does not measure persons who are subemployed.
Persons may provide false information.
Disadvantages of Household Survey
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All unemployed persons are counted equally.
The data contain no information about minimum acceptable wages.
Disadvantages of Household Survey
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Stock-Flow Model• At any point in time,
there is a measurable stock of people in
each of the three boxes that represent categories of
labor force status.
Population Not in the Labor Force
Unemployed
Employed
• But these stocks are simultaneously being depleted by flows in and out of each category.
• Changes in the rates of these flows can
significantly affect the unemployment rate.
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Some unemployment is voluntary and some unemployment is involuntary.
The natural rate of unemployment is The unemployment rate at which there is
neither excess demand nor excess supply in the labor market or
The unemployment rate that will occur in the long run if he expected and actual rates of inflation are equal.
The natural rate of unemployment changes over time.
Determining Full Employment
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Questions for Thought:1. Do you expect the natural rate of unemployment
to (a) increase, (b) decrease, or (c) remain at the present level over the next decade? Explain your reasoning.
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2. Macroeconomic Output and Employment Determination
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Aggregate demand for goods and services indicates the total quantity of goods and services that domestic consumers, businesses, government, and foreign buyers will collectively desire to purchase at each price level.
Aggregate Demand
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The aggregate demand curve slopes downward because of the Interest rate effect
A lower price level will reduce money demand and thus interest rates.
The lower interest rate will increase spending on goods such as housing.
Wealth or real balances effect A lower price level will increase the real
value of assets whose value is fixed in nominal terms and thus raise spending.
Aggregate Demand
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Foreign purchases effect A lower price level will reduce the price
of U.S. goods relative to foreign goods and so foreigners will increase their spending on U.S. goods.
Aggregate Demand
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Aggregate supply of goods and services is the relationship between the price level and total quantity of real output that firms are willing to produce and offer for sale. The aggregate supply curve is upward
sloping below the natural rate of output. Since wages are inflexible downward, a
decrease in demand will result in layoffs and reduce output.
Aggregate Supply
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The aggregate supply curve is vertical at the natural rate of output. Greater demand increases can’t increase
output since the economy is at full-employment
Aggregate Supply
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Real Output Determination
• The intersection of the aggregate demand and supply
curves D and SkAASSc c produces equilibrium price and real output levels P0 and Qn.
Real Output
Price Level
Sc
D
Qn
P0
Sk
A
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Employment Determination• In the aggregate labor market,
the equilibrium wage rate and level of total employment are determined by the intersection of the aggregate labor demand supply curves.
• Employment level En is the natural rate of employment; it is the amount of labor needed to produce the natural level of real output.
Employment
Wage rateSL
DL
En
W0
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3. Frictional Unemployment
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Frictional unemployment is unemployment due to voluntary quits, job switches, and new entrants or reentrants into the labor force.
Sources of frictional unemployment: Search unemployment which is caused by
individuals searching for the best wage offer and firms searching for workers to fill job openings.
Frictional Unemployment
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Wait unemployment which is caused by the excess supply of workers that results from non-market clearing wages. Temporary layoffs
• Workers on temporary layoff usually don’t search for another job
Union job queues• Workers may wait in a union job queue rather
than take a nonunion job
Efficiency wages• Efficiency wages contribute to frictional
unemployment since firms pay high wages to increase worker productivity.
Frictional Unemployment
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4. Structural Unemployment
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Structural unemployment is unemployment due: Mismatch between the skills required for
available job openings and the skills possessed by those seeking work.
Geographic mismatch between the locations of job openings and job seekers.
Workers losing jobs because of permanent plant closing or job cutbacks.
Structural Unemployment
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5. Demand-Deficient Unemployment
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Demand Deficient Unemployment
• A decline in aggregate demand reduces the demand for labor (from DL to DL1).
• Assuming a rigid nominal wage W0, the decline in labor
demand results in involuntary demand-deficient
unemployment by the amount ab.
Employment
Wage rateSL
DL
En
W0
DL1
E1
ab
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Nominal wages are inflexible downward is unemployment due to: Unions Bias toward layoffs by firms Implicit contracts Insider-Outsider theories
Wage Rigidity
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Questions for Thought:1. Define the term structural unemployment and
distinguish it from frictional and demand-deficient unemployment. Why might structural unemployment fall when demand-deficient unemployment declines?
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6. The Distribution of Unemployment
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Unemployment rates are higher for: Less skilled workers Teenagers Blacks.
Mean and women now have unemployment rates that are very similar.
The percentage of persons unemployed for a long duration (15+ weeks) rises during recessions.
Distribution of Unemployment
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7. Reducing Unemployment:
Public Policies
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Expansionary fiscal and monetary policy can used to reduce demand-deficient unemployment.
Complications arise from conducting stabilization policy. Time lags
It takes time for changes in policy to affect the unemployment rate
Reducing Unemployment
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Crowding out effect Higher government spending causes the
government to borrow more funds and thus raise interest rates and reduce private spending.
Tendency to create inflation.
Reducing Unemployment
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EndChapter 18