Principles of Macroeconomics - Unemployment and Labor Force Participation

Three Broad Categories of Unemployment

• Frictional Unemployment

  • Short-term unemployment resulting from the difficulty of matching employees to employers.

• Structural Unemployment

  • Long-term unemployment caused by enduring changes in the economy that hinder job finding for certain workers.

• Cyclical Unemployment

  • Linked to the business cycle; increases during recessions and decreases during economic expansions.

Cyclical Unemployment

• Cyclical unemployment is synchronized with economic conditions.

• In a recession, unemployment rises due to:

  1. Falling GDP leading firms to lay off workers.
  2. Idle workers and capital resulting in non-maximized economic output.

• Graphical Representation:

  • Shaded areas in graphs represent recession periods:
  • Higher unemployment during recessions
  • Lower unemployment during expansions

• Expectation:

  • A negative relationship between economic growth and unemployment rates.

Natural Rate of Unemployment

• Definition: The natural unemployment rate consists of frictional and structural unemployment only, excluding cyclical unemployment.
• Changes gradually over time due to long-lasting economic features.
• Actual unemployment rates fluctuate around this natural rate, affected by cyclical employment which can vary significantly in the short term.

Labor Force Participation

• Definition: Labor Force Participation Rate (LFPR) is the percentage of the adult, non-institutionalized, civilian population that is either working or actively seeking employment.

  • Formula:
  • LFPR = (Unemployed + Employed) / Adult Population * 100

• Factors influencing LFPR:

  1. Lifecycle Effects and Demographics
  2. Incentives: Changes in taxation and benefits affecting workforce participation.

Aging Population Impact on Labor Force Participation

• An aging labor force leads to a decrease in participation rates.
  • In 2000: 12.4% of the population was 65+
  • By 2030: Estimated to increase to 20%.

International Comparison of Labor Force Participation Rates (1998) - Males Aged 55-64

• Belgium: 33.9%

• France: 41.3%

• Italy: 43.5%

• Netherlands: 46.9%

• Germany: 55.4%

• Spain: 58.2%

• Canada: 58.8%

• United Kingdom: 62.6%

• United States: 68.1%

• Sweden: 71.5%

• Japan: 85.2%

• Factors for Difference:

  • Lifecycle effects, demographics, economic incentives/penalties.

Situational Factors Affecting Labor Force Participation

• Discrepancies in labor participation rates due to:
  • Economic policies like taxes and benefits influencing the decision to work.
  • Example: In the Netherlands, working past age 60 resulted in loss of retirement benefits, effectively acting as a tax on continued employment.

Female Labor Force Participation Over Time (1948-2016)

• 1948: ~35% of women (25-54 years) participated in the labor force.
• Mid-1990s: Increased to ~75%.

Causes for Increased Female Participation:

• Changing cultural norms promoting equality.
• Economic shifts encouraging workforce entry.
• Technological advances in home production.
• Growth in service jobs versus manufacturing.
• Effective birth control providing more autonomy for women.