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Chapter 06:Unemployment

  Copyright © 2013 by The McGraw-Hill Companies, Inc !ll rights reser"e# McGraw-Hill$Irwin

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Unemployment

• We recognize unemployment as oneof the two major macroeconomic

problems we can face. – When is a person “unemployed”?

 – What are the costs of unemployment?

 –What is an appropriate goal for “fullemployment”?

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Learning Objecties

• !"#!$. %now how unemployment ismeasured.

• !"#!&. %now the socioeconomic costsof unemployment.

• !"#!'. %now the major types of

unemployment.• !"#!(. %now the meaning of “full

employment.”

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 )he Labor *orce

• Labor force: all persons age $" and oerwho are either employed or actielysee+ing wor+.

 – Out of the labor force: those not wor+ing andnot actiely see+ing employment.

Totalpopulation

Out of thelabor force

Labor force

Employed

Unemployed

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 )he Labor *orce

•  )he labor force comprises about half thepopulation.

•

 )he size of the labor force has morethan doubled since $,"! due topopulation growth.

•  )he labor force participation rate 

increased rapidly due to the increasingnumbers of women joining the laborforce.

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-mpact of Labor *orce

rowth•  )he labor force growsdue to populationgrowth andimmigration/ adding &million new wor+ersyearly.

•  )he 001 pushesoutward/ increasing thecapacity to producegoods and serices. – We need to create &

million new jobs for thee2panding labor force/or we end up at point F inside the 001.

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Unemployment

• Unemployment: the inability oflabor force participants to 3nd jobs.

•  )his is an idled resource/ so theeconomy operates inside its 001/ inthe ine4cient zone.

 – Okun’s Law: a $ percent increase inunemployment results in a & percentdecrease in 50.

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6easuring Unemployment• 7 person is counted as unemployed if

he or she is not wor+ing but is actielysee+ing wor+.

• Unemployment rate: the proportionof the labor force that is unemployed8

  14!"#000  "010 unemployment rate $ $ %&6'  1#(!!%000

)umber of unemploye*people

Unemployment rate $ Labor force

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92ercise

•1alculate the unemployment rate. – :in labor force ; &!!/!!!

 – :unemployed ; $!/!!!

 – Unemployment rate ; 2 $!!

; @

)umber of unemploye*people

Unemployment rate $ Labor force

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5emographics of

Unemployment•  )he unemployment rate is higher for

 – 6en than women.

 – Alac+s and Bispanics than whites. – Less educated people than higher#

educated people.

 –

 )eenagers than people older than them.

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5uration of Unemployment

• +uration: how long does joblessnesslast?

• When the economy is growing/ both theunemployment rate and the durationdecrease.

•

When the economy stagnates or goesinto decline/ both the unemploymentrate and the duration increase.

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Ceasons for Unemployment•  Dob leaers.

 –  )hey Euit to see+ other

opportunities.

•  Dob losers.

 –  )hey are laid oF or3red.

• Gew entrants.

 – *irst#time job see+ers.

• Ceentrants.

 –  )hey had left the laborforce but hae returned.

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5iscouraged Wor+ers

• *ormer job see+ers who hae gienup and no longer actiely see+

employment. – )hey drop out of the labor force.

 – )hey are no longer counted in

unemployment statistics.

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Underemployment

• 0eople who want full#time wor+ intheir 3eld but can 3nd only part#time

wor+ or wor+ at jobs below theircapability.

 – )hey are counted as employed.

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 )he Buman 1osts

of Unemployment• Loss of income.

•

Loss of con3dence.• Hocial stress.

• 5eclining health.

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5e3ning *ull 9mployment

• *ull employment is not the same as zerounemployment.

•  )here are four categories ofunemployment. – Heasonal unemployment. – *ictional unemployment. – Htructural unemployment. – 1yclical unemployment.

• 7t full employment/ all of these e2iste2cept cyclical unemployment.

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5e3ning *ull 9mployment

• ,easonal unemployment: unemployment due to seasonal

changes in employment.•  )he Labor 5epartment reports

seasonally adjusted unemployment

rates for eery month. – Unemployment data e2clude the eFects

of seasonal unemployment.

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5e3ning *ull 9mployment

• Frictional unemployment: briefperiods of unemployment e2perienced

by people moing between jobs orinto the labor mar+et.

 – 7deEuate demand for frictionallyunemployed.

 – )hey hae s+ills reEuired for e2isting jobs.

 – )he job search period is relatiely short.

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5e3ning *ull 9mployment

• ,tructural unemployment: unemployment caused by a mismatch

between the s+ills of jobsee+ers and the reEuirements of aailable jobs.

 – 1aused by a change in the mar+et for the

product made/ or – I a change in the technology or process by

which the goods is made.

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5e3ning *ull 9mployment

• Cyclical unemployment: unemploymentcaused by a decline in economic actiity.

 –

 )he demand for products decreases andwor+ers get laid oF.

 – Cesults in an e2cess supply of wor+ers for theremaining aailable jobs.

 –

 )he economy must grow at least as fast as thelabor force to aoid cyclical unemployment.

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5e3ning *ull 9mployment

• 9conomists thin+ that we are near fullemployment when rising prices signal thatwe are nearing production capacity J that

is/ the 001.• -n.ationary .ashpoint: the rate of

output at which inKationary pressuresintensify.

•

Full employment: the lowestunemployment rate compatible with pricestability zero cyclical unemployment.

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5e3ning *ull 9mployment

• Full employment: the lowestunemployment rate compatible withprice stability zero cyclicalunemployment. – Aoth frictional and structural

unemployment e2ist at full employment.

•

*ull employment ranges between ( and" percent unemployment/ depending onthe size of structural unemployment.

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1hanges in Htructural

Unemployment• 1hanges in structural unemployment come

from changes in society itself. –

rowing numbers of youth and women. – 1hanges in transfer payments for the jobless. – 1hanges in products demanded by consumers. – 1hanges in how products are made.

• 5uring periods of change/ structuralunemployment increases.

• When changes are fully absorbed/ structuralunemployment decreases.

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 )he “Gatural” Cate of

Unemployment• )atural rate of unemployment: 

long#term rate of unemployment

determined by structural forces inlabor and product mar+ets.

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 )he 9conomy )omorrow

• Outsourcin/ obs: relocation of production to other countries to ta+e adantage of lowerproduction costs. – 1heaper labor.

 – Low#cost/ high#speed communications.

• 7 two#way street.• *oreign producers also outsource jobs from their countries when they build

production facilities in the United Htates.

 – 6ore jobs are “insourced” this way than we outsource.

• 0roduction possibilities e2pand/ not contract/ withoutsourcing.

• 7s world trade e2pands/ we will see more outsourcingJ and insourcing J in the economy tomorrow.

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Ceisiting the Learning

Objecties• !"#!$. %now how unemployment is

measured.

 – )he unemployed are part of the laborforce who are not wor+ing but who areactiely see+ing wor+.

 – -t is usually e2pressed as theunemployment rate/ the ratio ofunemployed to the labor force.

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Ceisiting the Learning

Objecties• !"#!&. %now the socioeconomic costs

of unemployment. –

O+unMs Law estimates there is a &@ declinein output for eery $@ increase inunemployment.

 – )he human costs of unemployment includenot only 3nancial losses but also social/physical/ and psychological costs.

 – 6inorities/ teens/ and the less educatedhae higher rates of unemployment.

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Ceisiting the Learning

Objecties• !"#!'. %now the major types of

unemployment. – Heasonal8 people who wor+ part of a year/ in

season/ but are unemployed at other times. – *rictional8 people who leae a job to pursue

better opportunity elsewhere. – Htructural8 people who lose their job when

demand for a product declines or when there

are major changes in how the product isproduced. – 1yclical8 people who lose their job due to an

oerall decline in demand J that is/ a recession.

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Ceisiting the Learning

Objecties• !"#!(. %now the meaning of “full

employment.” – )he lowest unemployment rate compatible

with price stability. – Nero cyclical unemployment.

 – *rictional and structural unemploymente2ist.

 – 9stimated to be in the range of ( to "percent unemployment/ depending onstructural factors.