CHAPTER 6 Unemployment

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CHAPTER 6Unemployment
ECONOMICS EXPLORE APPLYEnhanced Edition
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Learning Objectives

1. Identify who is part of the labor force, and who
   is not.
2. Explain how the unemployment rate is calculated.
3. Elaborate upon unemployment in other countries.
4. Divide unemployment into different types and
   explain the implications each.

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Learning Objectives

• 5. Describe the natural rate of unemployment and
  its converse, full-employment GDP.
• 6. (EA) Discuss how the quality of unemployment
  can deteriorate when mandates increase.

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6.1MEASURING UNEMPLOYMENT

• Add employment and unemployment to the list of
  macroeconomic concerns because
• Most peoples incomes come from their jobs.
• To understand unemployment we must measure it in
  total, and by types.
• An economy with unemployment is wasting resources.

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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.

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The Unemployment Rate
Unemployment Rate
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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 2003 there has been a
  consistent increase in the participation rate
  because of the increase in the number of women in
  the labor force.

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WHAT INFLUENCES THE LABOR FORCE?

• Increased opportunities for women and minorities
• Opportunities for early retirement
• Better healthcare lets us work longer
• Government Aid
• Individual attitudes towards work

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Labor Force Data 2003
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Labor Force Data 2003
Population age 16 and over 211.9 mil
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Labor Force Participation Rates for Men and Women
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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.

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Unemployment Rate Details

• 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.

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Historical U.S.Unemployment Rates for Selected
years
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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.

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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.

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Unemployment Rates by Group
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Duration of Unemployment
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Unemployment by Country
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6.2 IDENTIFYING 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
  persons human capital and that needed in the
  workplace
• Cyclical - resulting from downturns in economic
  activity (i.e. the business cycle)

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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.

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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.

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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.

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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.

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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.
• In contrast the higher unemployment in 2002 and
  2003 was associated with the so-called jobless
  recovery.

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6.3 UNEMPLOYMENT INSURANCE AND THE NATIONAL RATE
OF 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 258.29 in
  2002, and 276.60 in 2003.

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Unemployment Insurance

• 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 economys output, and lowers
  living standards.

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The Growth in the Average Weekly Unemployment
Benefit
Year Average Weekly Check
1980 98.95
1985 128.09
1990 161.20
1995 187.04
1996 189.27
1997 192.84
1998 200.58
1999 212.01
2000 221.01
2002 258.29
2003 260.60
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The Natural 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.

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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.

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6.5 EXPLORE APPLYEmploying Labor

• 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.

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Key Terms

• labor force
• unemployment rate
• labor force participation
• discouraged workers
• frictional unemployment

• seasonal unemployment
• structural unemployment
• cyclical unemployment
• specific human capital

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Key Terms

• general human capital
• natural rate of unemployment
• full employment

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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.

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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.

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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.

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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.

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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.

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Test Yourself

• 6. Which type of unemployment is associated with
  a recession?
• frictional.
• seasonal.
• structural.
• cyclical.

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The End! Next Chapter 7 Inflation