Download Unemployment

Unemployment
Learning Objectives
• To learn that unemployment is the natural
consequence of labor force dynamics.
• To learn the differences between the various
types of unemployment and the policy
consequences of each.
• To understand Okun’s Law.
Unemployment
• The unemployment rate is the number of
unemployed people, expressed as a
percentage of the labor force.
– Labor Force = (Civilian non-institutional
population over age 16 - People not in the labor
force (students, homemakers, retirees,
discouraged workers)
– Unemployed = Labor force - People who are
employed.
– Unemployment rate = People who are
unemployed/Labor force times 100
Natural Rate of Unemployment
• The natural rate of unemployment is the
percentage of the labor force that can normally
be expected to be unemployed for reasons
other than cyclical fluctuations in real GDP.
– The natural rate of unemployment is related to
the willingness of workers to voluntarily separate
from their jobs, job loss, the duration of
unemployment periods, the rate of change in the
pattern of demand, and changes in technology.
The Natural Rate of Unemployment
• The natural rate of unemployment designates
the level of unemployment at which the
inflation rate is constant, with no tendency to
accelerate or decelerate.
• The natural rate of unemployment in the
United States is approximately 5.5%.
Unemployment and Okun’s Law
• The relationship between unemployment and
GDP is expressed by Okun’s Law.
• Okun’s Law says that the percentage change in
real GDP equals 3% – 2 times the change in
the unemployment rate. Why?
– GDP has grown over the long run by 3%, and
Okun found that for every 1% increase in
unemployment real GDP growth fell by 2%.
• % /\ GDPreal = 3% – 2 x (8% – 6%) = – 1%
Types of Unemployment
• Cyclical Unemployment
– The difference between the actual unemployment
rate and the natural rate of unemployment.
• Frictional/Turnover Unemployment
– One of two components of the natural rate of
unemployment.
• Structural/Mismatch Unemployment
– One of two components of the natural rate of
unemployment.
What Causes Unemployment?
• Frictional /Turnover Unemployment
– Job Search
• Structural/Mismatch Unemployment
– Skill Mismatch
• Unemployed workers’ skills do not match the needs of employers.
– Location Mismatch
• Unemployed workers’ location do not match the location of the jobs.
• Cyclical Unemployment
– Real-Wage Rigidity
• The failure of wages to adjust until labor supply equals labor demand.
Can the Unemployment Rate Be
Reduced to Zero?
• No.
– In the real world, where structural unemployment
exists, any attempt to increase aggregate demand
to push the rate of unemployment down to zero
will create job vacancies for the skills that are in
short supply and in the locations where labor is
scarce, but will have no effect in areas where there
is skill mismatch or location mismatch.