Download Unemployment handout

Unemployment
Objectives:
1)
2)
3)
4)
5)
6)
7)
distinguish between the types of unemployment
define and explain the concept of the natural rate of unemployment
define full employment
explain GDP gap and Okun's law; use Okun's law to calculate the GDP gap
identify economic and noneconomic costs of unemployment
define/explain: labor force; employed; unemployed; part-time worker; out of the labor force; discouraged
worker; false information.
calculate (given data) : the number of people in the labor force; the unemployment rate
Frictional Unemployment
Individuals who are frictionally unemployed are temporarily without a job. Also called search unemployment, frictionally
unemployed workers are "in-between" jobs or "searching" for their first jobs. These unemployed workers have
marketable (salable) skills, and it is just a matter of time before they will find a job. This type of unemployment is
somewhat desirable in an economy because it reflects the economic freedom of workers to change jobs to improve their
job status. Frictional unemployment is also inevitable. There will always be people looking for work or changing jobs.
During frictional unemployment, the number of job seekers equals the number of jobs available (labor markets are in
balance); they are just temporarily mismatched.
Seasonal unemployment is a type of frictional unemployment that occurs due to seasonal changes. Migrant farm
workers, construction workers, and life guards are workers who are often seasonally unemployed. These individuals'
skills are marketable (in demand) only during certain times of the year.
I.
Indicate if the statements below are true or false concerning frictional unemployment:
_____. a.
_____ b.
It is also called search unemployment because people are either “in between jobs” or looking for their
first jobs.
It is lengthy in duration
_____ c.
Skills of the unemployed are marketable.
_____ d.
undesirable and unlikely to happen in our economy
_____ e.
Jobs are available for job seekers; it is just a temporary mismatch between job seekers and the jobs
available.
_____ f.
only
Frictional unemployment includes those who are seasonally unemployed -- their skills are in demand
at certain times of the year.
Structural Unemployment
Structural unemployment occurs as a result of changes in particular industries or sectors of the economy. The demand
for labor is derived from the demand for products produced by that labor; therefore, a decline in demand for a particular
product may cause lay-offs in the industry producing that good. Structural change may also occur as a result of increased
competition in an industry. The American automotive industry and the steel industry have suffered losses in recent
decades due to successful foreign competition. Certain industries may also respond to technological change in way that
result in unemployment. Workers may lose their jobs due to automation, such as being replaced by computers or a robot.
This type of structural unemployment is sometimes called technological unemployment.
Technological change has also rendered certain products obsolete such as slide rules being replaced by calculators.
Workers in the slide rule industry lost their jobs while jobs opened up in the calculator industry. Unfortunately, for these
structurally unemployed workers, their skills may not be directly transferable to the new jobs. To obtain marketable skills
needed in the new jobs, these workers need retraining or further education. They might also have to relocate to a
different geographic area, such as moving from the Rust Belt (Northeast/Midwest) to the Sun Belt
(South/Southwest/West). Structural unemployment may entail long-term hardships (i.e. When a large number of workers
in an industry lose their jobs it may be difficult or impossible to absorb them into other industries, even in the best of
times) for the individual involved; however, structural change is inevitable in a dynamic and growing economy.
Theoretically, during structural unemployment, the number of workers looking for jobs is equal to the number of new jobs
opening up; it just takes long term retraining and geographic relocation to match up workers with jobs. Unfortunately, the
match does not always occur; thus, structural unemployment entails serious economic and noneconomic costs to the
worker involved.
II.
Check all of the following that characterize structural unemployment:
_____ a.
_____ b.
_____
_____
_____
_____
_____
_____
c.
d.
e.
f.
g.
h.
inevitable in a dynamic economy.
can result from a decrease in demand for a particular product, thus causing lay-offs in the
industry.
is short-term and does not entail a serious hardship for the unemployed worker.
can and does result from stiff foreign competition.
can result from technological change such as automation.
requires workers to get additional training or education and/or to relocate geographically.
is caused by the recession phase of the business cycle.
workers' skills are directly transferable to new jobs.
Cyclical Unemployment
Cyclical unemployment occurs when there is a deficiency in aggregate demand in the economy. This type of
unemployment is associated with downturns in the business cycle. During these recessions, unemployment may be
widespread and lengthy in duration. Unfortunately, this type of unemployment indicates a labor market out of balance:
the number of job seekers is greater than the number of jobs available. Cyclical unemployment entails serious economic
and noneconomic costs to society.
III.
Check all of the following that are accurate statements concerning cyclical unemployment:
_____ a.
occurs when there is too much overall demand in the economy.
_____ b.
occurs when there is not enough overall demand in the economy to purchase the output that is
produced.
_____
occurs during recessions (downturns in the business cycle)
c.
_____ d.
This type of unemployment is costly to society and to the individuals involved.
_____ e.
During cyclical unemployment, plenty of jobs are available if people would just look for them.
_____ f.
During cyclical unemployment labor markets are not in balance. There are more workers seeking
employment than jobs available.
Full Employment
Full employment in the U.S. economy does not mean that 100% of the labor force is employed. At any point in time,
some individuals are in-between jobs (frictional unemployment), just entering the labor force (frictional unemployment), or
forced out of a job due to technological or other change (structural unemployment) in the industry . Because these
changes are inevitable in a free economy and to some degree desirable, a natural rate of unemployment exists. This
natural rate of unemployment consists of the amount of frictional (including seasonal) and structural (including
technological) unemployment in the economy, usually representing 4-6% of the labor force. Full employment in the
economy, therefore, means that all members of the labor force are employed except for those that are frictionally and
structurally unemployed. At the natural rate of unemployment, labor markets are theoretically in balance: job seekers =
jobs available. Time (frictional), retraining (structural) and/or relocation (structural) are necessary to match the job
seekers with the jobs available.
When the unemployment rate exceeds the 4-6% natural rate of unemployment, cyclical unemployment is occurring. The
economy is at less than full employment during these recessionary periods. Because of a deficiency in aggregate
demand, labor markets are out of balance. Less than full employment or a rate of unemployment greater than the natural
rate entails serious economic and noneconomic costs to society, especially in terms of lost output. At less than full
employment, there is a gap (called the GDP gap) between the economy's potential output and its actual output. This
shortfall (potential output - actual output) is called the GDP gap. Economist Arthur Okun states that for every one percent
increase in unemployment above the natural rate, there is generated approximately a 2.0% GDP gap. This means that if
the natural rate of unemployment is 6% and the actual rate of unemployment is 7%, 1% of cyclical unemployment exists.
This 1% cyclical unemployment would result in ≈2.0% GDP gap. When the economy is experiencing the cyclical
unemployment associated with a recession, it is not fulfilling the economic goals of full employment and economic growth.
INSTRUCTIONS:
Read the follow sections in McConnell-Brue, 15th Edition, pp. 141-146: “Measurement of Unemployment,” “Economic Cost
of Unemployment,” and “Noneconomic Costs Use this handout and your textbook to assist you in answering the
questions. You may work in groups of two to complete this assignment.
Multiple Choice. Select the Best Answer.
_____ 1.
Which of the following would be considered frictionally unemployed?
a.
A recent college graduate who is looking for his first job.
b.
A steelworker who is laid off because of declining auto sales.
c.
A high school teacher who cannot find work during the summer.
d.
A high school dropout who has given up looking for a job.
_____ 2.
A worker who loses his job at a petroleum refinery because consumers and business firms switch
from the use of oil to the burning of coal is an example of:
a.
frictional unemployment
b.
structural unemployment
c.
cyclical unemployment
d.
disguised unemployment
_____ 3.
A worker who quit one job and is taking two weeks off before reporting to a new job is an example of:
a.
frictional unemployment
b.
structural unemployment
c.
cyclical unemployment
d.
seasonal unemployment
_____ 4.
Insufficient aggregate demand results in:
a.
frictional unemployment
b.
c.
cyclical unemployment
d.
structural unemployment
seasonal unemployment
_____ 5.
The full-employment unemployment rate in the economy has been achieved when:
a.
frictional unemployment is zero b.
structural unemployment is zero
c.
cyclical unemployment is zero d.
the natural rate of unemployment is zero.
_____ 6.
The labor force includes those who are:
a.
under 16 years of age
b. in mental institutions
c.
not seeking work
d. unemployed.
_____ 7.
If the actual rate of unemployment is 9 percent and the natural rate is 6%, the GNP gap is:
a.
_____ 8.
2.5%
b.
c.
6%
d.
7.5%
c.
blacks
d.
males
The burden of unemployment is least felt by:
a. white-collar workers b)
_____9.
5%
teenagers
If the GDP gap were equal to 10% of the GDP, the actual unemployment rate would exceed the
natural rate of unemployment by:
a.
two percentage points
b.
three percentage points
c.
four percentage points
d.
five percentage points.