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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