Principles of Macroeconomics - Chapter 9: Unemployment

Labor Force

The sum of employed and unemployed workers in the economy.

Employed

Someone who currently has a job or is temporarily away from their job.

Unemployed

Someone who is not currently working, is available for work, and has actively looked for work during the previous month.

Not in the Labor Force

People who are neither employed nor unemployed, such as retirees, many full-time students, homemakers, or people not seeking work.

Working-Age Population

People age 16 or older who can potentially participate in the labor market.

Labor Force Formula

Labor Force = Employed + Unemployed

Unemployment Rate

The percentage of the labor force that is unemployed.

Unemployment Rate Formula

(Unemployed ÷ Labor Force) × 100

U-3

The official and most commonly reported BLS measure of the unemployment rate.

Labor Force Participation Rate

The percentage of the working-age population that is in the labor force.

Labor Force Participation Rate Formula

(Labor Force ÷ Working-Age Population) × 100

Employment-Population Ratio

The percentage of the working-age population that is employed.

Employment-Population Ratio Formula

(Employed ÷ Working-Age Population) × 100

Current Population Survey

The monthly household survey used to estimate employment, unemployment, and labor-force statistics.

Household Survey

Another name for the Current Population Survey; asks working-age household members about employment and recent job-search activity.

Reference Week

The period respondents are asked about when determining their employment status.

Discouraged Worker

A person available for work who has not searched during the previous four weeks because they believe no jobs are available for them.

Are Discouraged Workers Counted as Unemployed?

No. They are classified as not in the labor force because they are not currently searching for work.

Underemployed Worker

A person who is employed but is working less than desired or in a job that does not fully use their abilities.

Why Can the Official Unemployment Rate Understate Joblessness?

It excludes discouraged workers and does not fully measure underemployment or the intensity of employment.

Why Can the Official Unemployment Rate Overstate Joblessness?

Some people may falsely report that they are actively looking for work or may hide employment.

U-6

A broader measure of unemployment that includes additional forms of labor underutilization, including discouraged and underemployed workers.

U-3 vs. U-6

U-3 is the official unemployment rate; U-6 is a broader measure and is normally higher.

Establishment Survey

A BLS survey of businesses and other places of employment based on their payrolls.

Payroll Survey

Another name for the establishment survey.

Advantage of the Establishment Survey

It is based on actual payroll records rather than workers self-reporting employment.

Disadvantage of the Establishment Survey

It excludes self-employed workers, may omit newly opened firms, and provides employment but not unemployment data.

Why Do the Household and Establishment Surveys Give Different Numbers?

They measure different groups and both are subject to measurement error.

Three Types of Unemployment

Frictional, structural, and cyclical unemployment.

Frictional Unemployment

Short-term unemployment caused by the process of matching workers with jobs.

Job Search

A major cause of frictional unemployment; occurs when people enter or reenter the labor force or move between jobs.

Seasonal Unemployment

Unemployment caused by seasonal changes in demand for certain jobs; treated as part of frictional unemployment in the slides.

Seasonally Adjusted Data

Employment data adjusted to remove predictable seasonal changes.

Can Frictional Unemployment Be Beneficial?

Yes. It can increase economic efficiency by allowing workers time to find better job matches.

Structural Unemployment

Unemployment caused by a persistent mismatch between workers' skills or attributes and the requirements of available jobs.

Structural Unemployment Duration

Usually associated with longer periods of unemployment than frictional unemployment.

How Can Structural Unemployment Be Reduced?

Workers may need education or retraining to obtain jobs requiring different skills.

Structural Unemployment Example

A skilled 2-D animator losing work because the industry has shifted toward computer-assisted 3-D animation.

Cyclical Unemployment

Unemployment caused by a business-cycle recession.

What Happens to Cyclical Unemployment During Recovery?

It falls as the economy recovers from a recession.

Full Employment

A situation where unemployment consists only of frictional and structural unemployment; cyclical unemployment is zero.

Does Full Employment Mean Zero Unemployment?

No. Frictional and structural unemployment still exist at full employment.

Natural Rate of Unemployment

The normal unemployment rate consisting of frictional plus structural unemployment.

Natural Rate Formula

Natural Unemployment = Frictional Unemployment + Structural Unemployment

Natural Rate of Unemployment in the U.S.

The slides state a general economist consensus of roughly 4% to 5%.

Cyclical Unemployment Formula

Cyclical Unemployment = Actual Unemployment Rate − Natural Rate of Unemployment

Actual Unemployment Above Natural Rate

Indicates positive cyclical unemployment, typically associated with a recession.

Actual Unemployment Equal to Natural Rate

The economy is considered to be at full employment.

Why Does Unemployment Never Normally Reach Zero?

Even a healthy economy has frictional and structural unemployment.

Trade Adjustment Assistance

A federal program providing training to workers displaced by competition from foreign firms.

Trade Adjustment Assistance Targets Which Unemployment?

Structural unemployment.

Policies That Can Reduce Frictional Unemployment

Policies that improve job matching or subsidize new hires.

Unemployment Insurance

Payments to eligible workers who lose their jobs while they search for new employment.

How Can Unemployment Insurance Increase Unemployment Duration?

It reduces the pressure to immediately accept a low-paying job, allowing workers to search longer for a better job.

Potential Benefit of Unemployment Insurance

It gives unemployed workers more time to search for a better job match.

Minimum Wage

A legally required minimum hourly wage employers may pay workers.

How Can a Minimum Wage Cause Unemployment?

If the minimum wage is above the market-clearing wage, the quantity of labor supplied can exceed the quantity of labor demanded.

Minimum Wage and Teen Employment

The slides state that studies suggest a 10% increase in the minimum wage reduces teenage employment by about 2%.

Overall Minimum Wage Effect on U.S. Unemployment

The slides state the effect is probably small at current levels because relatively few workers earn the minimum wage.

Labor Union

An organization of workers that bargains with employers for higher wages and better working conditions.

Labor Unions and Unemployment

Unions can raise wages, but the slides state they are probably not a significant cause of U.S. unemployment because relatively few private-sector workers are unionized.

Efficiency Wage

An above-market wage paid by a firm to increase worker productivity.

Why Do Firms Pay Efficiency Wages?

Higher wages can motivate employees to work harder and avoid losing a desirable job, especially when monitoring workers is difficult or costly.

How Can Efficiency Wages Cause Unemployment?

Above-market wages attract more people who want the jobs than the number of jobs firms offer.

Recession and Unemployment

Unemployment generally rises when the economy is weakening or in recession.

Expansion and Unemployment

Unemployment generally falls when the economy is doing well.

Labor Market Classification: Has a Job

Employed.

Labor Market Classification: Temporarily Away From a Job

Employed.

Labor Market Classification: No Job but Actively Searching

Unemployed.

Labor Market Classification: No Job and Not Searching

Not in the labor force.

Labor Market Classification: Retired

Not in the labor force.

Labor Market Classification: Full-Time Student Not Seeking Work

Not in the labor force.

Labor Market Classification: Discouraged Worker

Not in the labor force.