Chapter 8: Unemployment (Notes)

Adult population categories:
- Employed: currently working for pay
- Unemployed: out of work and actively looking for a job
- Out of the labor force: not working and not looking for work
Also termed “not in the labor force.”
Labor force = Employed + Unemployed
Unemployment rate = ext{Unemployment rate} = rac{ ext{Unemployed}}{ ext{Labor force}} imes 100
Example (January 2021 data): Employed = 155.175 million; Unemployed = 6.877 million; Labor force = 162.052 million; Unemployment rate ≈ $rac{6.877}{162.052} imes 100 \approx 4.24\%$
Hidden unemployment: misclassified workers, part-time seek full-time, underemployment, and discouraged workers.
Labor Force Participation Rate (LFP): the share of adults who are either employed or unemployed and looking for a job.
LFP formula: ext{Labor force participation rate} = rac{ ext{Total labor force}}{ ext{Total adult population}} imes 100
Example question: calculate LFP using November 2021 statistics.

Hidden unemployment includes:
- Part-time or temporary workers seeking full-time or permanent work
- Underemployed individuals
- Discouraged workers who have stopped looking for work

The rate indicates how many people are engaged in the labor market relative to the adult population.

The U.S. unemployment rate moves with the business cycle but tends to return to a long-run range.
Over time, unemployment tends to hover in a range of $4\%\text{ to }6\%$ .
There is no clear long-run trend toward consistently higher or lower unemployment.

Gender: Historically, men’s and women’s unemployment rates have fluctuated; in recent decades they are often similar, with men sometimes slightly higher.
Age: Unemployment is highest for the very young and declines with age.
Race and Ethnicity: Black unemployment is typically about twice White unemployment; Hispanic unemployment is between these.

The U.S. unemployment rate is typically a bit better than the global average, but cross-country comparisons are cautious due to:
- Different definitions of unemployment
- Different survey methods
- Varying labor market structures (e.g., informal work in low-income countries)

Cyclical unemployment: unemployment tied to the business cycle (higher during recessions).
From a supply-and-demand view of competitive, flexible labor markets, unemployment is a puzzle in the short run.

With flexible wages, the equilibrium occurs at wage $We$ and quantity $Qe$ where the number of people wanting jobs equals the number of jobs available (demand equals supply).

When the wage rate is stuck at a level $W$ above the equilibrium, the quantity supplied of labor exceeds the quantity demanded, creating unemployment.

Implicit contract: unwritten expectation that wages won’t fall in weak times; employees don’t expect large salary cuts.
Efficiency wage theory: higher wages can boost productivity.
Adverse selection of wage cuts: cutting wages causes the best workers to leave.
Insider–outsider model: insiders (current workers) resist wage cuts; outsiders (potential hires) are affected differently.
Relative wage coordination: across-the-board wage cuts are hard to implement and resisted.

The insider-outsider and relative-wage arguments explain why wages don’t drop easily during downturns.

(a) With wage flexibility: an increase in labor demand from $D0$ to $D1$ raises employment from $Q0$ to $Q1$ and wage from $W0$ to $W1$ .
(b) If wages do not decline: a fall in labor demand from $D0$ to $D1$ lowers quantity of labor demanded at the original wage $W0$ from $Q0$ to $Q2$ ; workers want to work at $W0$ but cannot find jobs.

Natural rate of unemployment: the rate that exists in a growing, healthy economy given current economic, social, and political factors.
Frictional unemployment: short-term unemployment as workers move between jobs.
Structural unemployment: unemployment due to a mismatch between workers’ skills and those valued by employers.
The economy is at full employment when actual unemployment equals the natural rate.

Rising productivity increases demand for labor and raises wage expectations; a lag in recognizing productivity changes can create unemployment at certain wage levels when demand doesn’t rise as quickly as wages.
If productivity growth slows and wages keep rising, unemployment can persist at a higher level (Qs > Qd at the prevailing wage).
After a period with zero productivity growth, employers and workers may settle at a new equilibrium wage; if productivity later increases again, labor demand rises and unemployment can fall.

Supply-side policies (e.g., unemployment insurance, welfare, food stamps, health benefits) influence the opportunity cost of unemployment and search effort; duration matters.
Short-term benefits may encourage quicker re-entry into work; long-term benefits can reduce job-search intensity.
Public policies on the demand side (government rules, social institutions, unions) affect firms’ willingness to hire.

The natural rate has shifted over time due to changing structural factors.
Economists estimate the U.S. natural rate to be about $4.5\%\text{ to }5.5\%$ , lower than earlier estimates.
Possible reasons for the lower rate: internet as a job-search tool, growth of temporary work, and aging of the Baby Boom generation.