ECON 252 Module 6: Unemployment

Why does unemployment matter?

unemployment affects mental, emotional, and physical health, it’s also an indicator of mismatch and health of the economy

What goes into the unemployment rate

start with population, do not count infants/kids, do not count those who are institutionalized or the military

Working age population (WAP)

those who are working age, not in the military or institutionalized

Unemployed (U)

people in the working-age population who are not working, available to work and are trying to find jobs

Not in the labor force (NILF)

not working and not looking for a job, NILF = WAP - LF

Labor force (LF)

LF = employed + unemployed

Labor force participation rate

percentage of the WAP who are either employed or unemployed; LFPR = LF/WAP * 100%

Unemployment rate

percentage of the labor force who is unemployed; UR = U/LF * 100%

Equilibrium unemployment rate

long-run unemployment rate to which the economy tends to return

Dynamics of US labor market

a dynamic labor makes it easier for people seeking jobs to find one, equilibrium in healthy labor market is rate of job destruction = rate of job birth, most job seekers already employed, unemployed for over 6 months is considered long-run unemployment

Hysteresis

long-run unemployment leads to loss of skills, making it harder to find work

Marginally attached workers

want a job, not looking for a job, have looked in past 12 months

Discouraged workers

subset of marginally attached workers, reason not looking for job is because there isn’t one for them

Other measures of unemployment measure

marginally attached workers, discourages workers, involuntary part-time workers

U1

long term unemployment

U2

job exit

U4

official plus discouraged workers

U5

official plus discouraged plus marginally attached

U6

official plus discouraged plus marginally attached plus involuntary part-time, roughly twice the unemployment rate

Frictional unemployment

due to the time it takes for employers to search for workers and for workers to search for jobs

Structural unemployment

occurs because wages don’t fall to bring labor demand and supply into equilibrium

Cyclical unemployment

due to a temporary downturn in the economy, affected by business cycle

Seasonal unemployment

due to different needs from the time of year

Causes of frictional unemployment

efficiency of matching jobs/employers to employees (how good is matching technology), skills mismatch, unemployment insurance and other income support during unemployment

Reasons for structural unemployment

efficiency wages and institutional causes (unions, job protection, minimum wage laws)

Efficiency wages

higher wage paid to encourage greater worker productivity

Natural rate

rate of unemployment that exists when an economy is at full employment, made up of frictional and structural unemployment, not a constant but a running average

Cautions about unemployment rate

backwards looking, can be misleading is examined in isolation

Economic costs of unemployment

unemployed often end up with lower wages and worse career opportunities, hysteresis, recessions discourage workers to look for better jobs, government receives lower tax revenues but spends more