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Section 3B- Modules 12/13
Unemployment
Unemployment
Chapter Outline
Unemployment
• Calculation of Unemployment
• Categories of Unemployment
• Types of Unemployment
• Full/Natural/Actual Unemployment
LABOR MARKET INDICATORS
Current Population Survey
Every month, 1,600 interviewers working on a joint
project of the Bureau of Labor Statistics (BLS) and the
Bureau of the Census survey 60,000 households to
establish the age and job market status of each
member of the household.
LABOR MARKET INDICATORS
Population Survey Criteria
Employed: Have a job!
The survey counts as employed all persons who,
during the week before the survey:
1. Worked at least 1 hour in a paid job or 15 hours
unpaid in family business.
2. Were not working but who had jobs from which they
were temporarily absent.
LABOR MARKET INDICATORS
Unemployed: Do not have a job!
The survey counts as unemployed all persons who,
during the week before the survey:
1. Had no employment
2. Were available for work, and either:
• Had made efforts to find employment during the
previous four weeks, or
• Were waiting to be recalled to a job from which they
had been laid off.
Unemployment
The Working-age population is divided into those in
the labor force and those not in the labor force.
Labor Force
Individuals aged 16 years or older who either have jobs
or are looking and available for jobs.
Not included in the labor force- homemakers, full time
students, retired persons, in jail, in institutions, armed
forces, disabled.
Labor Force  the employed  the unemployed
LABOR MARKET INDICATORS
Figure
shows
population
labor force
categories.
The figure
shows the
data for May
2005.
Unemployment
Labor Force  the employed  the unemployed
137.24
131.38
(In millions)
5.86
Unemployed
Unemployme nt 
X 100
Labor force
5.86

 4.3%
137.24
The Logic of the Unemployment Rate
People leaving jobs and people
finding jobs is constantly in
flux!
Job leavers > Job finders means unemployment increases.
Unemployment
Because of this movement of job losers/gainers must
look at stocks and flows.
Stocks- The quantity of something (unemployed)
measured at a point in time.
•
•
•
•
How much inventory on hand.
How much money in banks.
Number of people unemployed.
How many people are in the labor force now.
Independent of time. Assessed Now!!!
Unemployment
Flow
A quantity measured over time (job leavers, job finders)
•How much earned in a week.
•Number of people losing jobs every a month.
•Savings rate per year.
Movement over Time!!!
Visualizing Stock and Flows
Unemployment
Unemployment
Categories
1) Job loser
2) Reentrant
3) Job leaver
4) New entrant
Unemployment
Job Loser
An individual whose
employment was
involuntarily terminated
or who was laid off
• 40-60% of the
unemployed
Unemployment
Reentrant
An individual who has
worked a full-time job
before but left the labor
force and has now
reentered it looking for a
job
• 20-30% of the
unemployed
Unemployment
Job Leaver
An individual who
voluntarily ended
employment
• Less than 10% to
around 15% of the
unemployed
Unemployment
New Entrant
An individual who has
never worked a full-time
job for two weeks or
longer
• 10-13% of the
unemployed
SOURCES AND TYPES OF UNEMPLOYMENT
Graph shows
unemployment
by reasons.
Job losers are
the biggest
group, and
their number
fluctuates
most.
A Century of Unemployment
Unemployment
Duration of Unemployment
Typical 15 weeks
26 weeks- Unemployment insuranceextended during severe economic conditions
37.1% -find job within one month
31.8% -find job within 2 months
16.3% -still unemployed after 6 months
LABOR TRENDS AND FLUCTUATIONS
Unemployment
Figure shows
the U.S.
unemployment
rate: 1965–2005
The average
unemployment
rate between
1965 and 2005
was 5.9 percent.
LABOR TRENDS AND FLUCTUATIONS
The
unemployment
rate increases in
recessions and
decreases in
expansions.
LABOR MARKET INDICATORS
Two Main Labor Market Indicators
• The unemployment rate
• The labor force participation rate
Unemployment rate
The percentage of people in the labor force who are
unemployed.
Number of
people unemployed
Unemployment rate =
x 100
Labor force
Unemployment Issues
* Factors that give a false read on the unemployment
rate
 Duration of Unemployment: The average duration for
all employed workers over the past decade is 15.2
weeks. The duration of unemployment increases
when the overall activity slows down and falls when
it speeds up.
 Discouraged worker: A person who does not have a
job, is available to work, but has not made efforts to
find a job within the previous four weeks. Not
counted as part of the labor force. Makes the
unemployment rate lower than it actually is, would
be higher if counted.
Unemployment Issues
 Semi-Hidden Unemployment- Part-time workers who
would rather work full-time, but cannot find a fulltime job. These workers are counted as fully
employed, but should be counted as half a worker.
Understates the unemployment rate.
 Overemployment- Persons who work more than 40
hours a week or who have two jobs. These workers
are only counted as one worker. Should be counted
as two workers. Overstates the unemployment rate.
LABOR MARKET INDICATORS
Labor force participation rate
The percentage of the working-age population who are
members of the labor force.
Labor force
participation rate =
Labor force
Working-age population
x 100
LABOR TRENDS AND FLUCTUATIONS
The Participation Rate
The participation rate increased from 59 percent during
the 1960s to 67 percent the 2000.
Since 2000, the participation rate has fallen slightly.
Between 1965 and 1999, the participation rate for
women increased from 39 percent to 60 percent.
Between 1965 and 2005, the participation rate for men
decreased from 81 percent to 73 percent.
LABOR TRENDS AND FLUCTUATIONS
Figure 21.3
shows the
changing
face of the
labor market.
The labor
force
participation
rate of women
has increased.
LABOR TRENDS AND FLUCTUATIONS
The labor force
participation
rate of men
has decreased.
The average
participation
rate of both
sexes has
increased.
SOURCES AND TYPES OF UNEMPLOYMENT
Types of Unemployment
Frictional unemployment
The unemployment that arises from normal labor
turnover—from people entering and leaving the labor
force and from the ongoing creation and destruction of
jobs.
Structural unemployment
The unemployment that arises when changes in
technology or international competition change the skills
needed to perform jobs or change the locations of jobs.
SOURCES AND TYPES OF UNEMPLOYMENT
Seasonal unemployment
The unemployment that arises because of seasonal
weather patterns.
Cyclical unemployment
The fluctuating unemployment over the business cycle
that increases during a recession and decreases during
an expansion.
Unemployment
Wait Unemployment
Unemployment that is caused by wage rigidities
• Minimum Wage
• Unions Contracts –bargain for wages above the market
wage, won’t allow workers to work for a lower wage
• Efficiency Wages- incentives to work harder- creates an
artificially higher wage- creates more unemployment
• Public Policy (unemployment compensation- reduces the
incentive to find work)
Minimum Wage and Unemployment
Figure 13.2 The Effect of a Minimum Wage on the Labor Market
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
SOURCES AND TYPES OF UNEMPLOYMENT
Full Employment
Full employment
When there is no cyclical unemployment or,
equivalently, when all the unemployment is frictional or
structural.
Natural unemployment rate
The unemployment rate when the economy is at full
employment.
Actual Unemployment rate
Full employment + cyclical unemployment
SOURCES AND TYPES OF UNEMPLOYMENT
Unemployment and Real GDP
Cyclical unemployment is the fluctuating unemployment
over the business cycle—unemployment increases
during recessions and decreases during expansions.
At full employment, there is no cyclical unemployment.
At the business cycle trough, cyclical unemployment is
positive.
At the business cycle peak, cyclical unemployment is
negative.
SOURCES AND TYPES OF UNEMPLOYMENT
Figure shows the unemployment rate in the United States
from 1975 to 2005.
As the unemployment
rate fluctuates
around the natural rate
unemployment, …
Cyclical unemployment
is negative (shaded
blue) and positive
(shaded red).
SOURCES AND TYPES OF UNEMPLOYMENT
Potential GDP is the level of real GDP that the
economy would produce if it were at full employment.
Because the unemployment rate fluctuates around the
natural unemployment rate, real GDP fluctuates around
potential GDP:
• When the unemployment rate is above the natural
rate, real GDP is below potential GDP.
• When the unemployment rate is below the natural
unemployment rate, real GDP is above potential
GDP.
SOURCES AND TYPES OF UNEMPLOYMENT
Figure shows the
relationship between
unemployment and real
GDP.
As the unemployment rate
fluctuates around the
natural rate unemployment
in part (a), real GDP
fluctuates around potential
GDP in part (b).