Principles of Macroeconomics - Unemployment

Chapter Objectives

  • By the end of this chapter, you should be able to answer the following:

    • How is unemployment measured?

    • What is the “natural rate of unemployment”?

    • Why are there always some people unemployed?

    • What are structural, frictional, or cyclical unemployment?

    • How do discouraged workers impact the unemployment rate?

    • How is unemployment affected by unions and minimum wage laws?

    • What is the theory of efficiency wages, and how does it help explain unemployment?

15-1 Identifying Unemployment

Employment and Unemployment

  • Important questions for new graduates:

    • What kind of job market will you enter upon graduation?

    • Will there be a plethora of job opportunities, or will jobs be scarce, forcing you to take positions that do not utilize your education at low wages?

    • The job market conditions are influenced by the total number of jobs available and the number of job seekers.

Historical Context

  • The class of 2014 faced significant challenges:

    • In July 2014, approximately 10 million Americans were looking for a job but could not find one.

    • An additional 8 million had given up on finding full-time employment and took part-time jobs instead.

    • During the recession of 2009, despite economic hardship, the U.S. economy created numerous jobs, totaling 139 million people employed.

Why Unemployment is a Problem

  • Unemployment poses serious personal and social economic issues for two primary reasons:

    • Lost Incomes and Production: Loss of income severely impacts the individuals affected, leading to reduced consumer spending and loss of overall economic production.

    • Lost Human Capital: Unemployment diminishes skills and erodes potential productivity; unemployment benefits offer limited financial support and do not fully replace lost wages. Not everyone qualifies for unemployment benefits, leaving some without a safety net.

How Is Unemployment Measured?

Current Population Survey (CPS)

  • Conducted monthly to assess the U.S. labor force's status.

    • Managed by the Bureau of Labor Statistics (BLS), part of the U.S. Department of Labor.

    • Based on a consistent survey of approximately 60,000 households, focusing on the adult population (16 years and older).

Population Groups Defined by BLS

  • The BLS categorizes the population into three groups:

    • Employed: Individuals who are paid employees, self-employed, or unpaid workers in a family business, whether full-time or part-time.

    • Unemployed: Individuals not working but who have actively sought employment within the past four weeks.

    • Not in the Labor Force: All others, including students and retirees.

  • Labor Force: Sum of the employed and unemployed individuals, representing the total number of workers.

Criteria for Being Counted as Unemployed

  • To be classified as unemployed, individuals must be:

    1. Without work but have made specific efforts to find a job within the last four weeks.

    2. Waiting to be called back to a job from which they were laid off.

    3. Waiting to start a new job within 30 days.

Labor Force Statistics

Key Metrics

  • Labor Force: Total number of workers (employed + unemployed).

  • Unemployment Rate: Percentage of the labor force that is unemployed.

  • Labor-force Participation Rate: Percentage of the adult population that is in the labor force, computable for the entire adult population or specific demographic groups.

Example Calculation of Labor Force Statistics (July 2022)

  • Adult Population: 264.1 million

  • Number of Employed: 158.3 million

  • Number of Unemployed: 5.7 million

  • Not in Labor Force: 100.1 million

  • Labor Force Calculation:

    • Labor force = Employed + Unemployed = 158.3 + 5.7 = 164 million.

  • Unemployment Rate Calculation:

    • Unemployment rate = 100 × (Unemployed)/(Labor force) = 100 × 5.7/164 = 3.5%.

  • Adult Population Calculation:

    • Adult population = Labor force + Not in Labor Force = 164 + 100.1 = 264.1 million.

  • Labor Force Participation Rate Calculation:

    • Labor-force participation rate = 100 × (Labor force)/(Adult population) = 100 × 164/264.1 = 62.1%.

Labor Force Statistics for Different Demographic Groups

Example Statistics (June 2016)

  • Adults (20 years and older)

    • White, Male: Unemployment Rate (u-rate) 4.0%, Labor Force Participation Rate (LFPR) 71.9%

    • White, Female: u-rate 4.0%, LFPR 57.6%

    • Black, Male: u-rate 8.2%, LFPR 67.8%

    • Black, Female: u-rate 7.3%, LFPR 60.9%

  • Teens (16–19 years)

    • White: u-rate 14.1%, LFPR 37.0%

    • Black: u-rate 31.2%, LFPR 29.2%

  • By Education Level (Jan 2022)

    • Less than high school: u-rate 6.3%, LFPR 45.2%

    • High school diploma: u-rate 4.6%, LFPR 57.2%

    • Some college or associate degree: u-rate 3.6%, LFPR 66.0%

    • Bachelor’s degree or more: u-rate 2.3%, LFPR 74.4%

Persistence of Unemployment

  • Most unemployment spells are short:

    • Approximately one-third of the unemployed are without work for less than five weeks.

    • Two-thirds are unemployed for less than fourteen weeks.

    • Only 19.3% have been unemployed for over six months.

  • Long-term unemployment tends to have a lower turnover rate, contributing significantly to the total unemployment observed.

Types of Unemployment

Natural Rate of Unemployment

  • Natural Rate of Unemployment: The long-term and stable rate of unemployment to which the economy tends to return.

  • Cyclical Unemployment: Represents short-term deviations from the natural rate due to economic fluctuations, often correlated with economic downturns.

Why Does Unemployment Exist?

  • Some unemployment is always present, even during strong economic periods, caused by:

    • Frictional Unemployment: The time taken for workers to find jobs that fit their skills and preferences; usually short-term.

    • Structural Unemployment: Results from an imbalance in job availability in certain labor markets; typically more prolonged.

15-2 Job Search

Job Search Dynamics

  • Job Search: The process by which workers identify suitable employment opportunities that match their skills.

  • Frictional unemployment can be viewed as unavoidable due to:

    • Continuous changes within the economy.

    • Sectoral shifts altering demand among various industries or regions.

Public Policy and Job Search

  • Role of government-run employment agencies:

    • Provide job-seeking information to assist those in search of new positions.

    • Public training programs facilitate transitions of workers from declining to expanding industries.

Advocacy and Criticism

  • Proponents: Argue that government involvement helps maintain higher employment levels and reduce inequalities.

  • Critics: Suggest that the market should dictate job matching without governmental interference, warning that government efforts may lead to inefficiencies.

Unemployment Insurance

Definition

  • Unemployment Insurance: A government program designed to provide partial income protection for unemployed individuals, specifically those laid off due to a lack of demand for their skills.

Impact

  • While it serves to reduce income uncertainty and allows more time for job searches:

    • It can increase frictional unemployment.

  • Ensures that unemployed workers can seek jobs better suited for their qualifications and preferences.

Explaining Structural Unemployment

Structural Unemployment Overview

  • Occurs when not enough jobs exist at a level sufficient to meet worker demand.

    • Usually influenced by wage levels maintained above the equilibrium rate.

Causes of Structural Unemployment

  1. Minimum Wage:

    • If the minimum wage enforces a higher wage than the equilibrium, the supply of labor may exceed its demand.

    • As such, some workers, especially those with fewer skills (e.g. teenagers), may find themselves unemployed as they await job openings.

  2. Unions:

    • A Union is an organization comprising workers that collectively bargains with employers regarding wages and working conditions.

    • Although unions generally raise wages, they can concurrently lead to reduced employment as they push wages above equilibrium rates.

  3. Efficiency Wages:

    • Efficiency Wage Theory: Suggests that higher than equilibrium wages are paid by firms to enhance worker productivity due to various reasons:

      • Worker Health: Healthier employees contribute to higher productivity; firms may benefit by ensuring better nutrition through higher wages.

      • Worker Turnover: High wages can minimize turnover, reducing recruitment and training costs.

      • Worker Quality: Higher wages attract better candidates.

      • Worker Effort and Morale: Employees are more productive when satisfied with their compensation and treatment.

Active Learning Tasks

Task 1: Structural vs. Frictional Unemployment

  • Which scenarios would likely reduce types of unemployment, including:

    • Eliminating minimum wage (likely improves labor demand, reducing structural unemployment).

    • Increasing unemployment benefits (could increase frictional unemployment).

    • Banning unions (may decrease structural unemployment through wage reductions).

    • Utilizing platforms like LinkedIn (enhances job matching, reducing frictional unemployment).

    • Increased frequency of sectoral shifts (tends to raise frictional unemployment).

Answers to Active Learning Tasks

  • Eliminate Minimum Wage: Reduces structural unemployment (increases job availability).

  • Increase Unemployment Benefits: May increase frictional unemployment.

  • Banning Unions: Likely to reduce structural unemployment.

  • LinkedIn Utilization: More effective job matching, reducing frictional unemployment.

  • Increased Sectoral Shifts: Raises frictional unemployment due to constant job market fluctuations.

Summary of the Natural Rate of Unemployment

  • The natural rate consists of:

    • Frictional Unemployment: From job searches.

    • Structural Unemployment: Results from wage policies and market imbalances.

  • Future chapters will explore cyclical unemployment linked to the economy's business cycles.

Conclusion

Key Takeaways

  • The economy's natural rate changes over time based on labor market dynamics.

  • The complexity of unemployment suggests there is no straightforward solution.

  • Societal organization and political choices significantly impact the prevalence and nature of unemployment.

Self-Assessment Questions

  • Reflect on whether minimum-wage laws better explain structural unemployment among teenagers or college graduates, providing rationale for your answers.

Think-Pair-Share Activity

  • Discuss implications of changes in unemployment statistics, specifically how fluctuations in the unemployment rate don't necessarily correlate directly with job availability without further context or data analysis.