Unemployment and the Labor Market

Measuring Unemployment

  • Definitions:

    • Employed: Individuals currently holding a job.
    • Unemployed: Individuals not currently holding a job but actively seeking employment.
    • Out of the labor force: Individuals neither employed nor unemployed (e.g., students, retirees).

  • Unemployment Rate (U): Percentage of the labor force that is unemployed.
    U = \frac{\text{# unemployed}}{\text{labor force}} * 100

  • Labor Force Participation Rate (LFPR): Percentage of the working-age population that is in the labor force.
    LFPR = \frac{\text{labor force}}{\text{adult population}} * 100

Unemployment Rate Example

  • U.S. Employment Data, January 2025
    • Employed: 163.895 million
    • Unemployed: 6.849 million
    • Not in Labor Force: 101.941 million

Labor-Market Experiences of Various Demographic Groups, Jan. 2025

  • Teenagers (16-19): 11.8%
  • Men (age 20+): 3.7%
  • Women (age 20+): 3.7%
  • White: 3.5%
  • Black or African American: 6.2%
  • Asian: 3.7%
  • Hispanic or Latino ethnicity: 4.8%
  • Adults age 25+:
    • Less than HS diploma: 5.2%
    • HS, no college: 4.5%
    • Some college or associate’s: 3.5%
    • Bachelor’s degree: 2.3%

Limitations of Unemployment Rate

  • Discouraged workers: Individuals who have stopped looking for work and are not counted as unemployed.
  • Underemployed workers: Individuals employed but working less than they want or at a job below their skill level.
  • During recessions, the unemployment rate may underestimate negative effects because the LFPR falls.

Other Measurements of Unemployment

  • U1: Long term (15+ weeks) unemployment
  • U2: Job losers + those who finished temporary work
  • U3: Official unemployment rate
  • U4: Unemployed + discouraged workers
  • U5: Unemployed, discouraged + marginally attached
  • U6: Unemployed, discouraged, marginally attached + underemployed

Categories of Unemployment

  • Natural Rate of Unemployment: Normal level of unemployment that persists in an economy in the long run.

    • Three contributors:
      • Frictional unemployment
      • Structural unemployment
      • Real-wage or classical unemployment

  • Cyclical Rate of Unemployment: Caused by short-run fluctuations.

    • Due to ‘sticky wages’.
    • Recessions: cyclical unemployment increases.
    • Expansions: cyclical unemployment decreases.

Types of Unemployment Examples

  • Mary is temporarily unemployed after she decides to move to NYC for better job prospects: Frictional.
  • Montana increases its minimum wage, which makes it difficult for David to find work: Classical.
  • Layoffs due to impending recession: Cyclical.
  • Advances in computer-aided architecture technology leaves Ann, a drafter, unemployed: Structural.

Influences on Unemployment

  • Public Policies
    • Minimum wage
    • Unemployment insurance
    • Income taxes
    • Policies that make firing employees difficult
  • Labor Unions
  • Efficiency Wages