Chapter 9 Part 1 Unemployment

Unemployment rate formula: (# of unemployed/labor force) x 100 

labor force participation rate: the percentage of the working-age population in the labor force

Labor force Participation rate formula: (labor force/working-age population) x 100

Discouraged workers: workers who are available for work, but not actively looking for job

Unemployed: workers who are available for work and are actively looking for job yet have no employment

Shortcomings of unemployment as a measure of labor market indicator

The unemployment rate may understates unemployment by:

• Distinguishing between people who are unemployed and not in the labor force (not including discouraged workers)

• Only measuring employment, not intensity of employment (some people are underemployed)

The unemployment rate may overstate unemployment by

• Including unemployed people who are lying about actively looking for job

• Including people who claim to be unemployed but are members of the underground economy

3 types of unemployment

• Frictional unemployment: short-term unemployment that arises from the process of matching workers with jobs

  • Increases economic efficiency

  • A lifeguard is unemployed because the pool closed for the winter

• Structural unemployment: unemployment that arises from a persistent mismatch between the skills and attributes of workers the requirements of jobs

  • Increases economic efficiency

  • Taxi drivers are losing their jobs as uber becomes an increasingly more popular form of transportation

• Cyclical unemployment: unemployment caused by a business cycle recession

  • Decreases economic efficiency

  • During a recession, people can’t afford to buy homes, so less homes are built, and there is less of a demand for construction workers.  

What is the natural rate of unemployment

• The normal rate of unemployment consisting of frictional unemployment and structural unemployment

  • The U.S. natural rate of unemployment is around 5%

What are the factors that affect the natural rate of unemployment

• Unemployment insurance and benefits

  • The better the unemployment insurance and benefits, the higher the unemployment rates

• Minimum wage laws

  • The higher the minimum wage, the higher the unemployment due to 

• Labor unions

  • The more labor unions the greater the unemployment due to bargaining for higher wages and better working conditions

Establishment Survey vs. Household Survey

• Establishment Survey

  • Conducted with businesses and establishments.

  • Provides data on the number of employees, job vacancies, and hiring trends.

  • Helps in analyzing industry-specific unemployment rates.

  • Useful for understanding overall labor market conditions and trends.

  • May not capture informal or self-employed workers.

• Household Survey

  • Involves interviewing individuals in households.

  • Gathers data on individuals' employment status, including unemployment.

  • Offers insights into demographics, education levels, and duration of unemployment.

  • Helps in calculating the unemployment rate and labor force participation rate.

  • Can capture informal, part-time, and self-employed workers.

  Differences

  • Scope: Establishment survey focuses on businesses, while household survey targets individuals.

  • Data: Establishment survey provides employment figures, while household survey offers individual-level data.

  • Coverage: Household survey captures a broader range of workers, including informal and self-employed individuals.

  • Use: Establishment survey helps in analyzing industry trends, while household survey is crucial for calculating official unemployment rates.