AA

Chapter 11: Unemployment and Labor Force Participation (Vocabulary)

What this chapter covers

  • Employment, unemployment, and labor force participation
  • How these are measured
  • The different types of unemployment
  • How institutions and policies influence the decision to work

Measuring unemployment and labor force participation

  • Unemployed definition: adult non-institutionalized civilian who does not have a job but is actively looking for work
    • Criteria: age 16+, not institutionalized, civilian
  • Employed definition: adult non-institutionalized civilian who has a job
  • Labor force: Employed + Unemployed
  • Adult population: all civilians aged 16+ (including those not in the labor force)

Key formulas

  • Labor Force: ext{Labor Force} = ext{Employed} + ext{Unemployed}
  • Unemployment Rate (UR): UR = rac{ ext{Unemployed}}{ ext{Labor Force}} imes 100
  • Labor Force Participation Rate (LFPR): LFPR = rac{ ext{Labor Force}}{ ext{Adult Population}} imes 100

Unemployment rate – quick example

  • If Unemployed = 6.54 million and Labor Force = 163.23 million, then
    • UR = rac{6.54}{163.23} imes 100 \approx 4 ext{%}

Labor force participation rate – quick example

  • If Unemployed + Employed = 163.23 million and Adult Population = 258.24 million,
    • LFPR = rac{163.23}{258.24} imes 100 \approx 63.2 ext{%}

Discouraged workers and underemployment

  • Discouraged workers: people who want and are available for work but have given up looking for a job
  • Discouraged workers are not counted as unemployed; they are outside the labor force
  • Underemployment: workers who are not fully utilizing their skills or desires
    • Examples: part-time workers who want full-time, or workers who would like a job but have given up looking
  • Note: The unemployment rate does not capture the quality of jobs or match between workers and jobs

Three broad categories of unemployment

  • Frictional unemployment
  • Structural unemployment
  • Cyclical unemployment
  • Definitions summarize the source and duration of unemployment in each case

Frictional unemployment

  • Short-term unemployment from the ordinary process of matching workers with jobs
  • Causes: information frictions; imperfect job matching
  • Potential remedy: faster/more widespread information about job openings (e.g., job-search platforms, networks)
  • Duration: many spells are short; in the US, a large share of unemployment spells are short
  • Creative destruction can increase frictional unemployment when firms reorganize or new firms hire

Structural unemployment

  • Persistent, long-term unemployment due to long-lasting shocks or permanent features of an economy that make it hard for some workers to find jobs
  • Causes include: large shocks (e.g., oil price shocks), globalization, new technologies, shift from manufacturing to services
  • Consequences: lost output, skill atrophy, stigma for long unemployment
  • Remedies/policies: retraining, job search assistance, work tests, early employment bonuses; policy tools include unemployment benefits, minimum wage rules, unions, and employment protection laws

Cyclical unemployment

  • Unemployment that tracks the business cycle (rises in recessions, falls in expansions)
  • Causes: weak demand, idle capital, firms lay off workers when GDP falls
  • Relation to GDP: Okun's law (rough rule of thumb)

Okun's Law

  • Rule of thumb relating unemployment and GDP growth:
  • rac{ ext{Change in real GDP}}{ ext{GDP}} ext{ declines by about } 2 ext{ percentage points} ext{ for every } 1 ext{ percentage point rise in UR}
  • More precisely: riangle ext{Real GDP} ext{ %} \approx -2 imes riangle UR ext{ (percentage points)}

Natural unemployment

  • The natural rate of unemployment is the rate when cyclical unemployment is zero
  • Definition: u{ ext{natural}} = uf + u_s
    • where uf = frictional unemployment, us = structural unemployment
  • Cyclical unemployment fluctuates around the natural rate with the business cycle
  • The natural rate changes slowly over time; cyclical unemployment can change quickly

Labor force participation rate (LFPR)

  • LFPR is the share of the adult population that is in the labor force (working or seeking work):
  • LFPR = rac{ ext{Labor Force}}{ ext{Adult Population}} imes 100
  • Two main factors affecting LFPR:
    • Lifecycle effects and demographics
    • Incentives (taxes, benefits, retirement rules)

Factors influencing LFPR – lifecycle and incentives

  • As people age, LFPR tends to fall for very old ages
  • Differences across countries in older-age LFPR reflect incentives (taxes, retirement benefits) and policy settings
  • Female LFPR rose sharply from 1948 onward due to cultural, economic, and policy changes
  • The Pill (publicly available since 1972) reduced the cost of pursuing education/career for women and increased LFPR

Exam-style reminders

  • The unemployment rate is a good summary indicator but incomplete; it omits discouraged workers and underemployment
  • Other indicators to monitor: LFPR, employment-population ratio, number of full-time jobs, average wages
  • The unemployment rate and LFPR are related but measure different aspects of the labor market

Quick recap of definitions

  • Unemployed: not working, actively seeking work
  • Employed: working
  • Labor force: Employed + Unemployed
  • Adult population: 16+ non-institutionalized civilians
  • UR: UR = rac{Unemployed}{Labor ext{ Force}} imes 100
  • LFPR: LFPR = rac{Labor ext{ Force}}{Adult ext{ Population}} imes 100
  • Natural unemployment: frictional + structural, excludes cyclical
  • Okun's Law: GDP falls ~2% for each 1% point UR increase
  • Discouraged workers: out of the labor force but would like a job
  • Underemployment: insufficiently utilized or desired full-time work not matched by current job