Chapter 8 How Economists Define and Compute Unemployment Rate

What was the highest unemployment rate since the Great Depression?

The highest unemployment rate since the Great Depression occurred during the COVID-19 pandemic in April 2020, reaching 14.8% in the United States.

Define Unemployment

people who are out of work and actively looking for a job

Who isn’t considered unemployed?

Children, retirees, full-time students, and stay at home parents

Employment

people working for pay

Out of the labor force

people who aren’t working for pay and NOT actively looking for a job

Labor force

the number of employed people plus the number of unemployed people

Calculation for Unemployment Rate

number of unemployed people/ number of people in the labor force x 100

What are individuals who fall under the umbrella of hidden unemployment called?

discouraged or underemployed

What is a discouraged worker?

Someone who is no longer counted in the unemployed group since they are not actively looking for work

What is an underemployed worker?

someone with a college degree in finance who had a job as a cashier

What does the natural rate of unemployment stem from?

A combination of economic, social, and political factors with the economy neither booming or having a recession

Labor force participation rate

employed + unemployed/total adult population x 100

What’s an establishment payroll survey?

A report that shows the number of jobs created each month in the U.S.

What’s a criticism of establishment payroll surveys?

They don’t count the self-employed 

During periods of recession and depression, what’s unemployment?

higher

During periods of economic growth, what’s unemployment?

lower

Can unemployment fall below zero?

No, just relatively low

Younger workers tend to have what?

higher rates of unemployment

Middle-aged workers typically have what?

lower rates of unemployment

Middle-aged workers feel the responsibility of doing what?

needing to have a job

What’s one primary determinant of firms demanding labor?

How they perceive the state of the macroeconomy

What determines the amount of labor demanded?

If the macroeconomy is improving or slowing down

What’s the cyclical unemployment?

When the economy moves from expansion to recession and vice versa

For union workers working under a multiyear contract, what would cause a labor dispute or strike?

Wage cuts

What are the 5 sticky downward wage theories?

Implicit Contract, Efficiency wage, adverse selection of wage cuts, insider-outsider model, and relative wage coordination

What are Sticky downward wages?

Tendency of nominal wages to result in reductions even during economic downturns

What’s the implicit contract theory?

The stability in the job encourages worker loyalty and long-term employment relations 

In what theory do firms absorb short-term,m losses rather than cutting wages to avoid harming worker morale and productivity

Implicit contract

What’s the argument with the implied contract theory

The employee will not expect a huge salary increase when the economy or the firm is strong

What’s the efficiency wage theory?

When firms pay wages above the market-clearing level to increase worker productivity and efficiency

In what theory does higher wages reduce turnover, attract better workers, and motivate employees to work harder, leading to greater efficiency

Efficiency Wage

What’s the argument with the efficiency wage theory?

Workers’ productivity depends on their pay, so employers find an incentive to pay their employees more than what the market dictates 

What’s the adverse selection of wage cuts theory?

When firms cut wages, the most skilled and productive workers are most likely to leave

What theory states that leaving behind less productive workers reduces overall firm efficiency?

Adverse selection of wage cuts 

What’s the argument with the adverse selection of wage cuts theory?

If an employer reacts to poor business conditions by reducing the wages of all workers, the best workers are most likely to find work elsewhere

What’s the insider-outider model theory?

The labor market consists of insiders and outsiders

What are insiders in the insider-outsider model

current employees

What are outsiders in the insider-outsider model

unemployed or new entrants

What theory requires insiders to possess firm-specific skills and social connections, thereby granting them bargaining power? 

Insider-Outsider Model

What’s the argument with the insider-outsider model theory?

Those who work in firms are considered “insiders, “ and new employees, at least for some time, are “outsiders. “

What's the Relative wage coordination theory?

Workers care about their wages relative to others in similar positions

What theory states that if one firm cuts wages but others don’t, it may lead to resentment and decreased morale among workers?

Relative Wage Coordination

What’s the argument with the relative wage coordination?

A firm would have to cut wages across the board, which is hard to implement and may cause workers to compare pay cuts amongst themselves

What do the sticky wage theories imply?

Wages will decline very slowly, even during tough times for the economy 

When wages are unlikely to fall, what is likely to occur?

Excess supply of labor

What happens if the wage rate is stuck above the wage equilibrium?

Unemployment

When is unemployment higher?

Rising demand for labor, wages rise

What is the natural rate of unemployment caused by?

frictional unemployment, structural unemployment, and public unemployment

Frictional unemployment 

Unemployment that occurs in the meantime as workers move in between jobs

What must one do in frictional unemployment?

Find the job that they are best suited, not the first one that’s offered

What’s the ease of communication in frictional unemployment?

the level of the frictional unemployment Will depend on how easy it is for workers to know about an alternative

Willingness to relocate in frictional unemployment?

How willing people are to move to a new area to find jobs

Does unemployment rates become higher as you become older?

No, they become lower

Structural Unemployment

People who dont have jobs because they lack skills valued by the labor market

What do people think that causes structural unemployment?

New technology that puts low skilled employees out of work, but demand high skilled workers 

What is natural unemployment related to?

Full employment and potential real GDP

What happens if productivity unexpectedly changes?

It affects the natural rate of unemployment

When productivity is unexpectedly lower, what happens to the levels of unemployment?

They tend to be higher

When productivity is unexpectedly higher, what happens to the levels of unemployment?

they tend to be lower

How does supply side public policies to assist the unemployed affect potential workers?

It affects how eager people are to find work 

What does demand side policies affect?

It affects willingness to hire workers

Who does the demand side policies represent?

Government rules and unions

What’s an example of Demand-side policies?

If bureaucratic rules make it hard to start a business or expand, businesses will be discouraged from hiring

What has helped reduce the natural rate of unemployment?

The growth of the temporary worker industry

When was the natural rate of unemployment lower on average?

1990s and early 2000s