Economics 2 - The Labor Market CHAPTER 3

Vocabulary and core concepts regarding the labor market, including demographic flows, unemployment types, labor indicators, and the natural rate of unemployment.

Working-age population ($NT_t$)

The number of individuals within a country’s total population ($N_t$) who are older than the age marking the end of compulsory education and younger than the legal retirement age.

Unemployed (ILO definition)

A person of working age who is without work during the reference period, currently available for work, and seeking work.

Inactive (Not in the labour force)

Individuals of working age who are currently not employed and not looking for work, such as students, stay-at-home parents, early retirees, etc.

Labor force ($NA_t$)

The total number of individuals in the working-age population who either have a job ($E_t$) or are unemployed ($U_t$), expressed as $NA_t = E_t + U_t$.

Labor force participation rate (Activity rate, $TA$)

The ratio between a country’s labor force ($NA_t$) and its total working-age population ($NT_t$), calculated as $\frac{NA_t}{NT_t}$.

Employment rate ($TE$)

The proportion of the country’s working-age population that is employed, calculated as $\frac{E_t}{NT_t}$.

Unemployment rate ($u_t$)

The ratio between the number of unemployed individuals ($U_t$) and the total labor force ($NA_t$), calculated as $\frac{U_t}{NA_t}$.

U3 Unemployment Rate

The official unemployment rate measured in the United States.

Discouraged workers

Jobseekers who have stopped looking for jobs, falling stricto sensu into the ‘not in the labor force’ category; included in the US $U5$ unemployment series.

Underemployed workers

Workers who had to reduce their working time for economic rather than personal reasons; included in the US $U6$ unemployment series.

Frictional unemployment

The irreducible part of the unemployment rate resulting from the length of the matching process between employees and employers under imperfect information.

Matching process

The process of assigning the right employee to the right employer.

Natural unemployment

The unemployment level observed in neutral economic conditions, depending on the structural characteristics of an economy including frictional unemployment.

Cyclical variations in unemployment

Changes in the unemployment rate that are positive or negative depending on the business cycle and the cyclical sensitivity of unemployment.

Scarring effect of unemployment

The phenomenon where the longer an individual is out of work, the more their competencies become obsolete, lowering their chances of being employed again.

Hysteresis

The speed at which the unemployment rate drops after an economy emerges from a crisis.

Entry flow ($Fen_t$)

The number of people who become unemployed in period $t$, including those losing jobs, entering the workforce from inactivity, or reaching working age.

Exit flow ($Fex_t$)

The number of people who stop being unemployed in period $t$, including those finding a job or exiting the workforce due to age or inactivity.

Contracyclical variable

A variable that evolves in the direction opposite to the direction of GDP variation; for example, the number of unemployed workers.

Procyclical variable

A variable that moves in the same direction as GDP variation.

Okun's law

The empirically robust correlation between the unemployment rate and the GDP growth rate, modeled as $u_t - u_{t-1} = \beta(Y\text{ growth} - c)$.

Okun coefficient ($\beta$)

The parameter indicating by how many percentage points the unemployment rate will change if the GDP growth rate increases by $1\%$, estimated at $-0.160$ for the EU-15.

Labor hoarding

The tendency of companies to retain staff during economic downturns due to firing and re-hiring costs and supporting policies.

Job separation rate ($f_{en}$)

The share of employed workers ($E_t$) becoming unemployed in period $t$.

Job finding rate ($f_{ex}$)

The share of unemployed workers ($U_t$) finding a job in period $t$.

Natural unemployment rate (stationary formula)

The unemployment rate determined by the ratio of job findings to job separations, calculated as $u_n = \frac{1}{1 + \frac{f_{ex}}{f_{en}}}$.

Potential GDP

The GDP level associated with the natural rate of unemployment ($u_n$).

Output gap

The difference between the observed effective GDP level and the potential GDP.