Chapter 6 - Unemployment & Wages

Employed

Person working full-time, part-time, temporary, or absent from job (vacation, sick, etc.)

Unemployed

Person without a job who is actively looking for work and able to work

Not in Labor Force

Person not working and not looking for work

Labor Force

Employed + Unemployed

Unemployment Rate

Unemployed ÷ Labor Force

Labor Force Participation Rate

Labor Force ÷ Adult Population

Discouraged Workers

People who stopped looking for work because they think no jobs are available

Underemployed

Workers with jobs but want better or full-time jobs

Marginally Attached Workers

People who looked for work in last 12 months but not recently

U-3 Unemployment Rate

Official unemployment rate

U-6 Unemployment Rate

Broad measure including underemployed and discouraged workers

Cost of Unemployment

Lost income, lower production, psychological stress, social problems

Frictional Unemployment

Short-term unemployment from job searching

Structural Unemployment

Long-term mismatch between skills and jobs

Cyclical Unemployment

Unemployment caused by economic downturns (recession)

Natural Rate of Unemployment

Frictional + Structural unemployment (never zero)

Job Search Process

Time needed for workers and firms to find good matches

Efficiency Wages

Higher wages paid to increase productivity and reduce turnover

Minimum Wage

Price floor that can cause unemployment if set above equilibrium

Labor Unions

Organizations that protect workers but may reduce market efficiency

Unemployment Insurance

Government payments to unemployed; may reduce job search effort

Business Cycle

Economic ups and downs affecting employment

Labor Market

Market where firms demand labor and workers supply labor

Demand for Labor

Depends on worker productivity and price of output

Value of Marginal Product (VMP)

Extra revenue from hiring one more worker

Law of Diminishing Returns

Each additional worker adds less output than previous

Labor Demand Curve

Downward sloping (lower wage → more workers hired)

Labor Supply Curve

Upward sloping (higher wage → more workers willing to work)

Reservation Wage

Minimum wage a worker is willing to accept

Shift in Labor Demand

Caused by changes in productivity or output prices

Shift in Labor Supply

Caused by population, immigration, retirement, participation

Real Wage

Wage adjusted for inflation (purchasing power)

Real Wage Growth

Caused by increased productivity and technology

Wage Stagnation

Slow growth in wages due to slower demand or higher labor supply

Wage Inequality

Difference in wages across workers due to skills, globalization, technology

Globalization

Expands markets but increases competition and inequality

Worker Mobility

Movement of workers between jobs and industries

Skill-Biased Technological Change

Technology increases demand for skilled workers more than unskilled