Ch 10 (Part. II) Labor Markets: Unemployment Types, Measures, and Economic Impact

Discouraged Workers

Individuals who have looked for a job in the past 12 months but stopped searching because they believe no jobs are available.

Unemployed

Not counted as unemployed because they haven't looked in the past 4 weeks.

Bureau of Labor Statistics (BLS)

Reports discouraged workers separately.

Economic Impact of Discouraged Workers

In bad times, more discouraged workers lead to a lower official unemployment rate.

Unemployment Rate

If every unemployed worker became discouraged, the unemployment rate would equal 0%, even though no one is working.

Recoveries and Discouraged Workers

As discouraged workers begin looking again, the unemployment rate temporarily rises.

Long-Term Issues of Discouraged Workers

After 1 year, discouraged workers are removed from labor statistics except as part of the Civilian Non-Institutional Population (CNIP).

Prolonged Recessions

Understate true economic damage because discouraged workers disappear from data.

Example of Discouraged Workers

April 2013: 73,000 jobs lost, 806,000 left labor force → unemployment rate fell from 6.7% to 6.3%.

Reasons People Leave Labor Force

Discouragement, Retirement, Raising children, Returning to school.

New Entrants

Young workers entering the labor force.

Employment Growth Rule

About 200,000 new jobs per month are needed to slightly lower the unemployment rate.

U-3 (Official Rate)

Standard BLS unemployment rate (those actively looking). Example: 4.05% (June 2024).

U-6 (Broader Measure)

Includes discouraged workers + part-timers wanting full-time work. Example: 7.4% (June 2024).

Unemployment Claims

Collected weekly by states and reported by the Department of Labor.

Tricky Interpretation of New Claims

New claims can fall not because economy improves, but because people already receive benefits or benefits expired.

Extended Benefits

Normal limit = 26 weeks; during 2008-2009 recession, extended to 99 weeks (≈2 years).

Impact of Extended Benefits

Discouraged job seeking and delayed recovery.

Research Insight by Casey Mulligan

Found that half of the rise in unemployment during the 2008-2009 period came from extended benefits.

Pandemic Example (2021)

Many job openings + high unemployment; federal supplements made benefits greater than prior wages → incentive not to work.

Frictional Unemployment

Short-term unemployment from job transitions or entering the labor force.

Structural Unemployment

Long-term unemployment due to mismatched skills or changes in technology, trade, or tastes.

Cyclical Unemployment

Unemployment caused by economic downturns in the business cycle.

Full Employment

The economy is at full employment when cyclical unemployment = 0.

Discouraged Worker

Individuals who have stopped looking for work due to a belief that no jobs are available.

Civilian Non-Institutional Population (CNIP)

The total number of individuals aged 16 and older who are not in the military or institutionalized.

Labor Force Participation Rate (LFPR)

The percentage of the civilian non-institutional population that is in the labor force.

U-3 Unemployment Rate

The official unemployment rate that includes only those actively seeking work.

U-6 Unemployment Rate

A broader measure of unemployment that includes discouraged workers and underemployed individuals.

Unemployment Insurance

A government program that provides financial assistance to unemployed workers.

Potential GDP

The maximum output an economy can produce without triggering inflation.

Spontaneous Order

The natural emergence of order in a market without central planning.

Healthy Economy

An economy characterized by both frictional and structural unemployment.

Economic Downturn

A period when the economy is declining, often leading to increased unemployment.

Labor Market Health

A comprehensive view of the labor market that considers various factors beyond just the unemployment rate.

Market-based Training

Training programs that are driven by market demand rather than government initiatives.

Job Switching

The process of leaving one job for another, often seen in frictional unemployment.

Obsolete Skills

Skills that are no longer relevant or needed in the current job market.

Economic Stagnation

A prolonged period of slow economic growth, often associated with low structural unemployment.

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.