Topic 4- Unemployment

Working Age Population (WAP)

the number of people 16+ who are non-institutionalized and not active military

WAP = Labor Force + Not in the Labor Force

WAP = Employed + Unemployed + Not in the Labor Force

Employed Definition

• someone 16+ who did ANY work during the reference week (for someone else or their own business)

• OR someone who works 15+ hours without pay for a family business

• OR someone who has a job but is temporarily absent (with or without pay)

Unemployed Definition

when a worker (16+) is willing and able to work, is not currently employed, and has been searching for a job within the last 4 weeks

• OR a worker on layoff waiting for recall

Not in the Labor Force

someone (16+) who did NOT look for a job in the last 4 weeks (either they don’t want one or they gave up looking)

ex: full-time student, stay at home parent, retiree

Labor Force

sum of all employed and unemployed workers in the economy (excludes those not in the labor force)

Unemployment Rate Formula

(Number of Unemployed Workers / Labor Force) x 100

Cases of Overlap

• labor force activities take precedence over non-labor force activities (a college student who also works part-time is considered employed)

• working/having a job takes precedence over looking for work (someone looking for a job is considered unemployed)

Problems with Measuring Unemployment

the BLS measure of unemployment is not a perfect measure (can overstate or understate true unemployment)

Reasons for Understated Unemployment (2)

• Underemployment- someone who’s employed but wants to work more hours or aren’t working to their full potential (usually part-time workers)

• Discouraged Workers- people who stop looking for a job because they have given up searching (even though they’re willing and able)

Errors in Data Collection

• mistakes in reporting that lead to faulty unemployment statistics

• can cause understatements OR overstatements in unemployment

• ex: confusing responses, unrepresentative samples, mis-reportings

Frictional Unemployment

short-term unemployment due to the process of matching workers with jobs (AKA when people are between jobs)

Structural Unemployment

• due to persistent mismatch between the skills of workers and and job requirements

• firms have to move geographic locations

• advancements in tech and automation lead to job displacement

• long-lasting since workers need entirely new skills

Cyclical Unemployment

• due to a decline in the economy’s total production

• during contractions/recessions the lack of demand for goods/services leads to layoffs

Seasonal Unemployment

• people lose their jobs during certain seasons

• ex: teachers in the summer, ice cream shops in the winter

Labor Force Participation Rate (LFPR)

the ratio of the labor force to the total non-institutionalized population (16+)

LFPR = (Labor Force / Working Age Population) x 100

*Labor Force = Employed + Unemployed

Employment-Population Ratio

a measure of the portion of the population engaged in paid work

Employment-Population Ratio = (Employed/Working Age Population) x 100

Why Unemployment ≠ 0

• vibrant economies always have some level of frictional and structural unemployment

• “full employment” = no CYCLICAL unemployment

• full employment is considered at the natural rate of unemployment (3-5%)

Governments Reducing Unemployment (5)

• Sponsored Job Fairs

• Aid Worker Retraining

• Subsidize New Hires

• Unemployment Insurance

• Minimum Wage Laws

Sponsored Job Fairs

speeds up matching unemployed workers with unfilled jobs (reduces frictional unemployment)

Aid Worker Retraining

Trade Adjustment Assistance Program trains laid-off workers that were let go due to foreign competition (reduces structural unemployment)

Subsidizing New Hires

government covers new hires’ wages, training expenses, or taxes (reduces ALL unemployment, but especially cyclical)

Unemployment Insurance

• government program that provides temporary cash to workers who lost their jobs (through no fault of their own)

• affects frictional and cyclical unemployment

• CON: may cause workers to take longer to search for jobs (which increases frictional unemployment)

Minimum Wage Laws

• minimum wage is set above market wage so supply of labor is greater than demand

• can increase structural unemployment

• if minimum wage rises too high, wages will become too expensive and small businesses will shut down, which terminates jobs

• PA Minimum Wage = $7.25/hr

Labor Unions

• workers organize to negotiate higher wages and better working conditions

• union wages are often above market equilibrium wage

• can increase structural unemployment rate (wages are expensive, so only highly skilled workers get job offers)

Efficiency Wages

• an above-market wage that a firm pays to increase workers’ productivity

• can increase structural unemployment

Benefits of Efficiency Wages (3)

• reduces shirking (avoiding or failing to perform a work)

• motivates performance

• reduces costly hiring and turnover

Wage Rigitidies

• minimum wage laws, labor unions, and efficiency wages result in wages higher than equilibrium wage

• quantity of labor supplied > quantity of labor demanded

• since wages are more expensive, firms are more selective ad hire fewer workers, increasing structural unemployment (less skilled workers don’t get hired)

Economic Costs of Unemployment (5)

• lost output (actual GDP < potential GDP)

• lower wages and worse career opportunities

• underutilization of resources (leads to lower incomes)

• government loses tax revenue

• firms lose profits that could have been made with full employment

Social Costs of Unemployment (5)

• worse career opportunities

• anxiety/depression

• reduction in health (from stress)

• suicide

• increase in crime and violence