Lecture 12: LABOR FORCE & UNEMPLOYMENT

Working-age population

The total number of people aged 16 years and over who are not in jail, hospital, or some other form of institutional care or in the military.

employed

working-aged individuals who work, including self-employed individuals.

Part-time/full-time status does not matter

unemployment

the number of people who are actively looking for work but aren't currently employed

labor force

employed + unemployed

Does not include:
- not working and not looking for jobs
- Ex: retirees, full-time students who do not hold jobs

labor force participation rate formula

unemployment rate

- Fluctuates a lot, BUT NEVER 0
- Snapshot measure: even if it stays the same, it does not have to represent the same people
- There is a flow from employment into unemployment (and vice versa)

unemployment rate formula

Longterm unemployment

unemployment that lasts longer than six consecutive months

- has negative effects and reduced likelihood of exit from unemployment due to the loss of social and human capital

marginally attached workers

would like to be employed and have looked for a job in the recent past but are not currently looking for work
(not included in unemployed population)

discouraged workers

1/4 of marginally attached workers:
individuals who would like to work but have given up looking for a job (not included in unemployed population)

Underemployment

counts as employment; however, there is either a want for more hours or a job that better matches their skills

involuntary part-time workers

Individuals who would like a full-time job, but who are working only part time (counts as employment)

frictional unemployment

unemployment that occurs when people take time to find a job

Four factors affecting frictional unemployment

- Normal functions of the economy: Fresh graduates looking for jobs are here

- Information problem: Better job search methods and job seeker-to-employer matching reduces this

- Skill matching problem: Takes time to find employment that matches an individual’s skills

- Policy effects: More generous policies can reduce hardship but prolong unemployment duration

structional unemployment

is long-term unemployment that is driven by the reorganization of the industries/economy and the nature of its institution

Factors affecting structural unemployment

- Normal functioning of the economy: Technological progress and globalization can make some industries shrink or disappear

- Retraining problem: May need to radically shift skills to find employment, but education is costly and takes time

- Prevailing market wage problem: Supply and demand mismatch due to above-equilibrium market wages

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

natural rate of unemployment

the normal rate of unemployment, consisting of frictional unemployment and structural unemployment

Costs of Unemployment

Long-term loss of wages and reduced career prospects, and reduction in taxes received by the government

Hysteresis (unemployment)

A period of high unemployment affects the economy such that the equilibrium rate of unemployment increases

Social costs of unemployment

- Impact on life satisfaction
- Long-term health and mortality consequences
- Generational effects