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Chapter 12 Unemployment
When more and more people are thrown
out of work, unemployment results.
—Calvin Coolidge(1930)
12.1 Employment and Unemployment Statistics
Employed Persons
 Employed persons includes those 16
years of age and older who are either:
employed by a private firm or a government
unit
 self-employed
 had jobs but were not working because of
illness, bad weather.

12.1 Employment and Unemployment Statistics
Employment-Population Ratio
12.1 Employment and Unemployment Statistics
Unemployed Persons
 Unemployed persons includes those 16 years
of age and older, who are not working but are
available for work, and either:
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(1) engaged in some job-seeking activity in the past
4 weeks.
(2) were waiting to be called back to a job from
which they were temporarily laid off.
(3) would have been looking for job but were
temporarily ill.
(4) waiting to report for a new job within 30 days.
12.1 Employment and Unemployment Statistics

Unemployment Rate
12.1 Employment and Unemployment Statistics

Employment-Population Ratio
12.1 Employment and Unemployment Statistics

Unemployment Rate
12.1 Employment and Unemployment Statistics
Advantages of Household Survey
 The unemployment rate and employmentpopulation ratios come from a monthly
household survey which has the following
advantages:
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Time-consistent and large survey
Time lag in obtaining data is short.
Data is available on a disaggregated basis.
The unemployment rate provides information about
the business cycle.
12.1 Employment and Unemployment Statistics
Disadvantages of Household Survey
 The monthly household survey has the
following disadvantages:
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Part-time workers are counted as fully employed
even if they wanted to work as a full-time worker.
Unemployed persons must be actively seeking
work.
It does not measure persons who are subemployed.
Persons may provide false information.
12.1 Employment and Unemployment Statistics
Disadvantages of Household Survey
All unemployed persons are counted equally.
 The data contain no information about
minimum acceptable wages.

12.1 Employment and Unemployment Statistics

Stock-Flow Model
12.1 Employment and Unemployment Statistics
Determining Full Employment
 Some unemployment is voluntary and some
unemployment is involuntary.
 The natural rate of unemployment is
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The unemployment rate at which there is neither
excess demand nor excess supply in the labor
market or
The unemployment rate that will occur in the long
run if he expected and actual rates of inflation are
equal.
The natural rate of unemployment changes
over time.
12.2 Macroeconomic Output and
Employment Determination
Aggregate Demand
 Aggregate demand for goods and
services indicates the total quantity of
goods and services that domestic
consumers, businesses, government,
and foreign buyers will collectively desire
to purchase at each price level.
12.2 Macroeconomic Output and
Employment Determination
Aggregate Demand
 The aggregate demand curve slopes
downward because of the
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Interest rate effect
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A lower price level will reduce money demand and thus
interest rates.
The lower interest rate will increase spending on goods
such as housing.
Wealth or real balances effect

A lower price level will increase the real value of assets
whose value is fixed in nominal terms and thus raise
spending.
12.2 Macroeconomic Output and
Employment Determination

Aggregate Demand

Foreign purchases effect

A lower price level will reduce the price of U.S.
goods relative to foreign goods and so
foreigners will increase their spending on U.S.
goods.
12.2 Macroeconomic Output and
Employment Determination
Aggregate Supply
 Aggregate supply of goods and services is the
relationship between the price level and total
quantity of real output that firms are willing to
produce and offer for sale.

The aggregate supply curve is upward sloping
below the natural rate of output.

Since wages are inflexible downward, a decrease in
demand will result in layoffs and reduce output.
12.2 Macroeconomic Output and
Employment Determination

Aggregate Supply

The aggregate supply curve is vertical at the
natural rate of output.

Greater demand increases can’t increase output
since the economy is at full-employment
12.2 Macroeconomic Output and
Employment Determination

Real Output Determination
12.2 Macroeconomic Output and
Employment Determination

Employment Determination
12.3 Frictional Unemployment
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Frictional Unemployment
 Frictional unemployment is unemployment due
to voluntary quits, job switches, and new
entrants or reentrants into the labor force.
 Sources of frictional unemployment:

Search unemployment which is caused by
individuals searching for the best wage offer and
firms searching for workers to fill job openings.
12.3 Frictional Unemployment

Wait unemployment which is caused by the excess
supply of workers that results from non-market
clearing wages.
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Temporary layoffs
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Union job queues
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Workers on temporary layoff usually don’t search for another
job
Workers may wait in a union job queue rather than take a
nonunion job
Efficiency wages

Efficiency wages contribute to frictional unemployment since
firms pay high wages to increase worker productivity.
12.4 Structural Unemployment
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Structural Unemployment
 Structural unemployment is unemployment
due:
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Mismatch between the skills required for available
job openings and the skills possessed by those
seeking work.
Geographic mismatch between the locations of job
openings and job seekers.
Workers losing jobs because of permanent plant
closing or job cutbacks.
12.5 Demand-Deficient Unemployment

Demand Deficient Unemployment
12.5 Demand-Deficient Unemployment
Wage Rigidity
 Nominal wages are inflexible downward
is unemployment due to:
Unions
 Bias toward layoffs by firms
 Implicit contracts
 Insider-Outsider theories

12.6 The Distribution of Unemployment
Distribution of Unemployment
 Unemployment rates are higher for:
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Less skilled workers
Teenagers
Blacks.
Mean and women now have unemployment
rates that are very similar.
 The percentage of persons unemployed for a
long duration (15+ weeks) rises during
recessions.
12.7 Reducing Unemployment: Public
Policies
Reducing Unemployment
 Expansionary fiscal and monetary policy
can used to reduce demand-deficient
unemployment.
 Complications arise from conducting
stabilization policy.
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Time lags
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It takes time for changes in policy to affect the
unemployment rate
12.7 Reducing Unemployment: Public
Policies

Reducing Unemployment
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Crowding out effect
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Higher government spending causes the
government to borrow more funds and thus raise
interest rates and reduce private spending.
Tendency to create inflation.