Unemployment

Measuring Unemployment

  • Unemployment: the number of people unemployed

  • Unemployment Rate- the percentage of the labor force that is unemployed

  • Labor Force- the sum of employed and not employed workers in the economy

To calculate the unemployment rate we need to measure:

-The labor force

-The number of people unemployed

Who are not in the labor force

  • Retirees

  • Homemakers

  • Full-Time Students

  • People on Active military service

  • People in prison or mental institutions

  • People who are available for work and have actively looked for a job sometime during the last 12 months, but not during the last 4 weeks. some of these are home with children and others are discouraged workers: they have not looked for jobs during the last 4 weeks because they think there are none available for them.

  • Problem with measuring unemployment: Not counting discouraged and part time workers as (fully or partly) unemployed

Does it pay off to go to college?

Costs: Student loans and college years of no or little income.

Benefits: The unemployment rate for college graduates is much lower than that of those with high school diploma only.

Problems with Unemployment duration

On an individual level:

  • Loss of income

  • Loss of health

  • Depression

  • Loss of Identity

Loss of Skills

Types of Unemployment

(1) Frictional Unemployment - Short term unemployment that arises from the process of matching workers with jobs.

(2) Structural Unemployment- Unemployment arising from a persistent mismatch between the skills and attributes of workers and the requirements of jobs- may take time to correct.

(3) Cyclical Unemployment- Unemployment caused by a business cycle recession.

Full Employment means we only have natural unemployment

Natural rate of unemployment: The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment. ( No unemployment due to the business cycle)

What determines the natural unemployment rate?

  • Unemployment insurance and other payments to the unemployed (unemployment insurance payments and social insurance programs) makes it more attractive to be unemployed.

  • Minimum wage laws - in theory, makes it less attractive to hire.

  • Labor unions - in theory, makes it less attractive to hire.

  • Efficiency wages (a wage paid by firms that is higher than the market wage, believed to motivate workers to be more productive) - makes labor more expensive.