macro 6

Chapter 6- Unemployment
Unemployment
We recognize unemployment as one of the two major macroeconomic problems we can face.
The other one is inflation.
• When is a person “unemployed”?
• When they don’t have jobs, but want to work, actively looking for jobs.
• Rate are measured and reported by Bureau of Labor and Statistics (BLS)
• What are the costs of unemployment?
• Monetary costs, social costs, mental health costs.
• What is an appropriate goal for “full employment”?
• What is the optimal level of unemployment (low level) to keep prices
down. Too much spending can trigger inflation.
Labor force (LF): all persons age 16 and over who are either employed or actively seeking work.
1. LF = # employed + # unemployed
Employed are people who have jobs
Unemployed are people without jobs, but who want to work
Note: people without jobs who don’t want to work and not looking for jobs don’t count
in LF and don’t count as unemployed.
1. Who is in the labor force: employed and unemployed looking for jobs
2. Who is not in the labor force
a. Younger than 16
b. Retired
c. Don’t want a job
d. Disabled
e. Full time students
Out of US’s population of 332 million, how many are in the labor force?
Labor force participation rate (LFPR) is the percentage of population in the labor
force.
2. LFPR (%) = LF/ Population
Recent data in US: 62.5% in December 2023; 37.5% was out of LF (younger, retired...)

• The labor force participation rate increased rapidly due to the increasing numbers of
women joining the labor force.
Unemployment rates
Unemployment: the inability of labor force participants to find jobs. (# unemployed
in the LF; want jobs but cannot find them)
3. Unemployment rate (%) = # unemployed/ LF
1. Suppose the following data describe a nation’s population:
Year 1 Year 2
Population 200 million 204 million
Labor force 120 million 123 million
Unemployment rate 6 percent 6 percent
(a) How many people are unemployed in each year?
Unemployment rate (%) = # unemployed/ LF
Year 1: .06= # unemployed/ 120 million, # unemployed = 120 million* 0.06 =7.2 million
Year 2: # unemployed= 7.38 million
b) How many people are employed in each year? LF = # employed + # unemployed
Year 1: 120-7.2= 112.8 million
Year 2: 123-7.38 = 115.62
c) Compute the labor force participation rate (LFPR) in each year. LFPR = LF/Population
Year 1: LFPR=60%
Year 2: LFPR= 60.3%
Demographics of Unemployment
The unemployment rate is higher for:
• Men than women because some specialized jobs for men go through business
cycle and loss of jobs; more females go for higher education.
• Blacks and Hispanics than whites.
• Less educated people than higher-educated people.
• Teenagers than people older than them.
Duration: how long does joblessness last?
When the economy is growing, both the unemployment rate and the duration
decrease.
When the economy stagnates or goes into decline (recession, pandemic), both the
unemployment rate and the duration increase.

In 2023 unemployment rate is less than 4% compare to 14% in 2020.
Reasons for Unemployment
1. Job leavers.
• They quit to seek other opportunities.
2. Job losers: biggest group
• They are laid off or fired.
3. New entrants.
• First-time job seekers: turn 16, graduates
4. Reentrants: parents going back to work, medical leave
They had left the labor force
• There are four categories (types) of unemployment:
1. Seasonal unemployment
2. Fictional unemployment
3. Structural unemployment
4. Cyclical unemployment

1. Seasonal unemployment: unemployment due to seasonal changes in
employment.
The Labor Department reports seasonally adjusted unemployment rates for every
month.
Jobs: life guards, landscapers, delivery drivers, agriculture, salt truck drivers
No long-lasting effects on the economy
2. Frictional unemployment: brief periods of unemployment experienced by
people moving between jobs or into the labor market.
• Adequate demand for frictionally unemployed.
• They have skills required for existing jobs.
• The job search period is relatively short.
• No long-lasting effects on the economy
2. Structural unemployment: unemployment caused by a mismatch between the
skills (or location) of job seekers and the requirements (or location) of available
jobs.
• Caused by a change in the market for the product made, or ...
• A change in the technology or process by which the goods is made.
Jobs: Steel industry in Pittsburgh, Auto industry in Michigan, automatization in agriculture
To be able to find jobs, people have to train for new skills, move to different locations where
those jobs are.
Structural unemployment has long-lasting effects on the economy
4.Cyclical unemployment: unemployment caused by a decline in economic activity (recession)
• The demand for products decreases and workers get laid off in many jobs.
• Results in an excess supply of workers for the remaining available jobs.
• The economy must grow at least as fast as the labor force to avoid cyclical
unemployment.
• Cyclical unemployment has long-lasting effects on the economy because it take a while
for the economy to recover.
Problems with measuring and reporting unemployment data by BLS:
1. Discouraged Workers: Former job seekers who have given up and no longer actively
seek employment.
They drop out of the labor force.
They are no longer counted in unemployment statistics.
BLS: discouraged workers do not count in labor force and do not count in
unemployment rates.
Real unemployment rate HIGHER is compared to the reported unemployment rate by
BLS.

2. Underemployment People who want full-time work in their field but can find only part-
time work or work at jobs below their capability.
They are counted as employed.
Reality, they are partially unemployed.
Real unemployment rate is HIGHER is compared to the reported unemployment rate by
BLS.
Defining Full Employment
• Full employment: the lowest unemployment rate compatible with price stability; zero
cyclical unemployment.
That level of unemployment that keeps prices down
Historically between 2-4%.