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Macroeconomics
Unit 6
Unemployment
Top Five Concepts
Introduction
This unit discusses the causes and problems associated with
unemployment. You will also learn the types of unemployment
and who is included when the unemployment rate is calculated.
Did you know that some people who are unemployed may not
be counted or included in the unemployment rate?
Concept 1: The Labor Force
The labor force consists of all persons
over the age of 16 who are either
working for pay or actively seeking paid
employment.
About half of the U.S. population
participates in the civilian labor force.
People who are not employed and not
actively seeking employment are not
counted as part of the labor force.
Concept 1: The Labor Force
Here are some interesting statistics about our labor force:
Out of a total population of 291,000,000 in 2003, 147,000,000
people are part of the civilian labor force (50.5%).
In the year 2003, 137,800,000 people were employed in the
civilian labor force and 8,800,000 people were unemployed.
People not included in the civilian labor force include
homemakers, students, retired people, and others.
Concept 1: The Labor Force
The labor-force participation rate is the percentage of the
working-age population working or seeking employment.
Since 1960, the labor-force participation rate has increased by
100%. The increase in the rate has come from the increased
participation of women in the workforce.
Participation rates for men have fallen from 86.4% in 1950 to
73.5% in 2004. Participation rates for women have increased
from 33.9% in 1950 to 59.5% in 2004.
Concept 1: The Labor Force
Increases in the labor force produces an outward shift in the
production possibilities curve.
Larger labor forces increase the capacity of the economy to
produce goods and services.
In order for the economy to be producing at it’s full capacity, the
labor force must be fully employed. If the labor force
participation rate is declining, it is an indication that the number
of people working and/or actively seeking employment is
declining.
Concept 2: Unemployment
Unemployment is the inability of labor-force participants to find
jobs.
As the labor force grows, making sure that all participants are
fully employed becomes a critical issue.
Okun’s Law states that for each additional 1 percent increase
in unemployment there is a corresponding 2 percent decline in
output (GDP).
Concept 2: Unemployment
The unemployment rate is the proportion of the labor force
that is unemployed. To calculate the rate, you need to know
the number of people unemployed and the number of people in
the labor force.
Unemployment rate =
number of unemployed people / labor force
8,800,000 unemployed / 147,000,000 civilian labor force =
6.0% unemployment rate.
Concept 2: Unemployment
There are many reasons for unemployment:
• A person may be just entering the labor force
• A person was laid off from full employment
• A person could quit full time employment or be fired
Some people are no longer counted as being unemployed.
They are called discouraged workers. They are considered
people who are not actively seeking employment but would
look for or accept a job if one was available.
Concept 2: Unemployment
Other employment problems include those individuals who are
either working part-time and seeking full-time employment, or
are employed at jobs below their capacity.
People in this situation are called underemployed.
Examples of underemployment include a college graduate with
a Bachelor’s degree in business working as a cook at a fast
food restaurant, and a teacher who is unable to find a full-time
job working as a substitute teacher.
Underemployed people are counted as being employed and not
included in the unemployment rate.
Concept 2: Unemployment
Another employment problem occurs when people indicate that
they are actively seeking employment but are not really
interested in finding a job.
These people are called the phantom unemployed.
The phantom unemployed are counted as part of the
unemployment rate even though they are not really interested
in working.
Concept 3: Types Of Unemployment
There are four types of unemployment: Seasonal, Frictional,
Structural, and Cyclical.
Seasonal unemployment is unemployment due to seasonal
changes in employment or labor supply.
Examples include students employed during the summer at
Mackinaw Island in northern Michigan, employment in the
construction industry, and people employed at Cedar Point
Amusement Park in Ohio.
Concept 3: Types of Unemployment
Frictional unemployment is a brief period
of unemployment experienced by people
moving between jobs or into the labor
market. People have the skills and
knowledge necessary to get a job, and the
jobs are available.
Examples of frictionally unemployed people
include new college graduates and people
quitting a job and looking for something
different or better.
Concept 3: Types of Unemployment
Structural unemployment is unemployment caused by a
mismatch between the skills or location of job seekers and the
requirements or location of available jobs.
Jobs may be available in other geographic areas or for
individuals with specific skills and abilities.
Examples include laid off steelworkers in the 1980s and
defense contractors in the 1990s. Also teenagers and others
with a lack of job skills are included.
Concept 3: Types of Unemployment
Cyclical unemployment is
unemployment caused by a lack of job
vacancies; an inadequate level of
aggregate demand.
Cyclical unemployment commonly
occurs during recessions. Companies
cut back on workers due to reduced
sales, fears of an economic recession,
and insufficient consumer demand.
Concept 4: Full Employment
The overall economic goal of the U.S. economy is for full
employment.
Full employment is defined as the lowest rate of
unemployment compatible with price stability; usually between
4 – 6 percent unemployment.
As the economy nears full employment, rising prices may occur
(wages and the price of goods increase as demand increases).
Concept 4: Full Employment
Generally, there is a natural rate of unemployment which is
determined by structural forces in labor and product markets.
Some unemployment will always occur as people change jobs,
new people enter the work force, and due to seasonal labor
demands. This is essentially the amount of frictional and
structural unemployment added together.
Concept 5: Outsourcing/Insourcing
Outsourcing is a process where business moves the
production of goods outside the U.S. to benefit from lower
costs, taxes, and fewer regulations. An example of
outsourcing is when a consumer products company moves
its telephone customer service agents to India to benefit from
lower costs.
Insourcing is a process where business moves the
production of goods to the U.S. to become closer to other
manufacturers, consumers, and more beneficial costs. An
example of insourcing occurs when a foreign parts supplier
to the U.S. automotive industry builds a plant in the U.S. to
be closer to the manufacturers.
Concept 5: Outsourcing/Insourcing
The issue with outsourcing relates to the loss of U.S. jobs to
other countries. For many businesses facing increasing
costs and competition, outsourcing lowers costs and keeps
prices lower.
However insourcing is a benefit to the U.S. economy in that
the number of U.S. jobs increases. Companies build
facilities here to be closer to their customers and save costs.
Summary
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Labor Force
Labor Force Participation Rate
Okun’s Law
Unemployment Rate
Discouraged workers
Underemployment
Four types of unemployment
Full employment
Natural Rate of employment
Outsourcing/Insourcing