Lec 6 - Unemployment

Measuring Unemployment

  • Total Population of the U.S. is categorized as follows:

    • Persons under 16

    • Persons in the armed forces

    • Persons institutionalized

    • Civilian Noninstitutional Population

    • Not in Labor Force

    • Employed

    • Civilian Labor Force

      • Unemployed

Definitions and Concepts

  • Unemployment Rate:

    • Definition: The percentage of the civilian labor force that is unemployed.

    • Formula: extUnemploymentrate=racextnumberofunemployedextcivilianlaborforceext{Unemployment rate} = rac{ ext{number of unemployed}}{ ext{civilian labor force}}

  • Hidden Unemployment:

    • Definition: Individuals who are mislabeled in employment statistics, including various groups:

    • Part-time or temporary workers seeking full-time or permanent positions.

    • Underemployed individuals working below their skill level.

    • Discouraged workers who have stopped seeking employment due to a lack of suitable jobs available.

Example: On-Demand ‘Gig’ Workers

  • Number of U.S. On-Demand Workers: 57 million.

  • Top Reasons for Becoming Gig Workers:

    • Independent contractor/freelancer: 49%

    • Choosing work hours: 40%

    • Location flexibility: 33%

  • Income Sources for On-Demand Workers:

    • On-demand work

    • Contracting and consulting

    • Running a business

Alternative Measures of Employment

  • Employment Rate:

    • Definition: Percentage of the civilian noninstitutional population that is employed.

    • Formula: extEmploymentrate=racextnumberofemployedpersonsextciviliannoninstitutionalpopulationext{Employment rate} = rac{ ext{number of employed persons}}{ ext{civilian noninstitutional population}}

  • Labor Force Participation Rate (LFPR):

    • Definition: Percentage of the civilian population that is part of the civilian labor force.

    • Formula: extLFPR=racextcivilianlaborforceextciviliannoninstitutionalpopulationext{LFPR} = rac{ ext{civilian labor force}}{ ext{civilian noninstitutional population}}

Categories of Unemployed Persons

  • Job Loser: Person fired or laid off.

  • Job Leaver: Person who quits their job.

  • Reentrant: Someone who has been out of work and is returning to the labor force.

  • New Entrant: A person who has never held a full-time job for a duration of at least two weeks.

  • Discouraged Workers: Those who stop looking for a job due to difficulties, not counted as unemployed.

Types of Unemployment

  • Frictional Unemployment:

    • Occurs when people are temporarily between jobs or entering the workforce, often voluntary, reflecting a healthy economy.

  • Seasonal Unemployment:

    • Occurs due to seasonal work fluctuations in industries like agriculture, tourism, and retail.

  • Cyclical Unemployment:

    • Linked to the economic cycle, notably during downturns. It rises when the economy contracts and falls during expansions due to increased demand for goods and services.

  • Structural Unemployment:

    • Results from a mismatch of workers' skills and job requirements due to factors such as technological changes or shifts in consumer demand.

Natural Unemployment

  • Natural Unemployment:

    • Defined as unemployment resulting from frictional and structural factors.

    • Natural Unemployment Rate: extNaturalUnemploymentRate=extFrictionalUnemploymentRate+extStructuralUnemploymentRateext{Natural Unemployment Rate} = ext{Frictional Unemployment Rate} + ext{Structural Unemployment Rate}

Full Employment

  • Full Employment:

    • Condition present when the unemployment rate is equal to the natural unemployment rate.

    • Cyclical Unemployment Rate: Difference between overall unemployment rate and natural rate.

Patterns of Unemployment

  • The U.S. unemployment rate shows fluctuation correlating with economic recessions, typically reverting to a range of 4% to 6% over time. No pronounced long-term upward or downward trend.

    • Source: Federal Reserve Economic Data (FRED), Unemployment Rate (UNRATE).

Unemployment Rates by Demographics

  • Gender:

    • Historically, men experienced lower unemployment rates than women, but recent trends show rates for both genders are closely aligned.

    • Source: www.bls.gov

  • Age:

    • Higher unemployment rates are observed among younger individuals, decreasing with age.

    • Source: www.bls.gov

  • Race and Ethnicity:

    • Unemployment rates vary, typically showing that Black individuals face unemployment rates about twice as high as White individuals, with Hispanic rates in between.

    • Source: www.bls.gov

International Unemployment Comparisons

  • The U.S. unemployment rate generally appears better than average internationally, but direct comparisons are complicated by differing definitions, survey methods, and economic contexts.

  • Considerations:

    • Different labor market dynamics exist across countries, especially in low-income nations where informal and temporary work predominates.

Causes of Short-Run Unemployment Changes

  • Cyclical Unemployment is closely associated with economic cycles, with higher rates during recessions.

  • The supply-and-demand model of labor markets presents challenges in understanding unemployment dynamics.

Labor Market Equilibrium

  • In a labor market characterized by flexible wages, equilibrium occurs at:

    • Wage: WeW_e

    • Quantity: QeQ_e

  • At this point, supply (number of job-seekers) equals demand (number of job openings).

Sticky Wages in the Labor Market

  • Sticky wages can cause unemployment when the wage rate remains above equilibrium, leading to a surplus of labor (where desired jobs exceed job openings).

  • Marked by the following variables:

    • Quantity of job-seekers: QsQ_s

    • Quantity of job openings: QdQ_d

Reasons for Sticky Downward Wages

  • Implicit Contracts: Unwritten agreements preventing wage reductions during economic downturns.

  • Efficiency Wage Theory: Higher wages can lead to greater worker productivity.

  • Adverse Selection: Lowering wages can lead to loss of more competent employees.

  • Insider-Outsider Model: Differentiates between current employees who are “insiders” and new hires or applicants seen as “outsiders.”

  • Relative Wage Coordination: Difficulties arise in implementing widespread wage cuts, leading to resistance from workers.

Rising Wages Amid Low Unemployment

  • In scenarios where wages do not fall, a decline in labor demand does not lead to corresponding decreases in employment levels, resulting in increased unemployment among workers who wish to maintain their positions at existing wage levels.

Causes of Long-Run Unemployment Changes

  • Natural Rate of Unemployment: The unemployment that persists in a healthy economy, influenced by various factors.

    • Frictional Unemployment: Transitions as workers change jobs.

    • Structural Unemployment: Skills mismatch between workers and employers.

  • Economists consider full employment to occur when actual unemployment equals the natural rate.

Public Policy and Natural Unemployment Rate

  • Supply-side policies affecting individual incentives, such as:

    • Unemployment insurance may reduce urgency to find work.

    • Duration of benefits (short-term vs. long-term assistance) significantly affects re-employment rates.

    • Assistance programs for job searching or retraining can enhance return to work.

  • Demand-side policies include:

    • Government regulations and rules.

    • Influence of social institutions and labor unions on hiring trends.

Natural Rate of Unemployment Trends

  • The natural rate of unemployment can evolve due to changing economic, social, and political landscapes.

  • Recent estimates of the U.S. natural unemployment rate range from 4.5% to 5.5%, lower than historical estimates, with factors such as:

    • Use of the internet for job searching.

    • Growth of the temporary worker sector.

    • Aging population trends connected to the baby boom generation.