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“Foundations of
Economics”
Unemployment
1
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Introduction
What do we mean by unemployment?
2
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employed, Not Employed
and Unemployed
• Unemployment data
– Statistics Canada
– Labour Force Survey
• Monthly survey – 54,000 households
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employed, Not Employed
and Unemployed
• Who is counted?
– Non-institutional people 15 years of age or
older
• Classifications
– Employed
– Unemployed
– Not in the labor force
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Labor Market Decisions
Working-age Population
Seeks
employment
(in the labor force)
Accepts
employment
(employed)
Does not seek
employment
(not in the labor force)
Does not accept
employment
(unemployed)
5
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employed, Not Employed
and Unemployed
• Unemployed
– In the non-institutional population.
– age 15 or older.
– Without employment during survey week.
– Made efforts to find employment during the
last 4 weeks.
– Be available for work.
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employed, Not Employed
and Unemployed
• Deriving Unemployment Data
– Total population
– under age 15 or institutionalized
= non-institutional population
– Minus those not in labor force
= labour force
– employed
= unemployed
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment Rates
and Employment Rates
• Unemployment Rate (UR) =
# unemployed / labor force
• Employment-to-Population Ratio (ER) =
# employed / non-institutional population
• Labor Force Participation Rate (PR) =
Labor Force / non-institutional population
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employment and
Unemployment
–Figure 21.1 shows the
labour force categories. In
2010:
–Population: 34.1 million
–Working-age population:
27.7 million
–Labour force: 18.5 million
–Employment: 17 million
–Unemployment: 1.5 million
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employment and
Unemployment
–Figure 21.2 shows the unemployment rate: 1960–
2010.
–The unemployment rate increases in a recession.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Employment and
Unemployment
•Figure 21.3 shows the labour force participation rate and
employment-to-population ratio both trend upward rapidly
before 1990 and slowly after1990.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Labor Force Participation Rate
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment
• Discouraged Workers
– Individuals who have dropped out of the
labour force and are no longer looking for a
job because they believe the job market
has little to offer them.
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Cost of Unemployment
• Unemployment results in a large loss of
GDP.
• Unemployment also results in hardship
and lost self-respect for those who are
unemployed.
15
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
–Unemployment can be classified into three
types:
 Frictional unemployment
 Structural unemployment
 Cyclical unemployment
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
–Frictional Unemployment
–Frictional unemployment is unemployment that
arises from normal labour market turnover.
–The creation and destruction of jobs requires that
unemployed workers search for new jobs.
–Increases in the number of people entering and
reentering the labour force and increases in
unemployment benefits raise frictional unemployment.
–Frictional unemployment is a permanent and healthy
phenomenon of a growing economy.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
–Structural Unemployment
–Structural unemployment is unemployment
created by changes in technology and foreign
competition that change the skills needed to perform
jobs or the locations of jobs.
–Structural unemployment lasts longer than frictional
unemployment.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
–Cyclical Unemployment
–Cyclical unemployment is the higher than normal
unemployment at a business cycle trough and lower
than normal unemployment at a business cycle peak.
–A worker laid off because the economy is in a
recession and is then rehired when the expansion
begins experiences cycle unemployment.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
•“Natural” Unemployment
•
Natural unemployment is the unemployment that
arises from frictions and structural change when there is no
cyclical unemployment.
•
Natural unemployment is all frictional and structural
unemployment.
–The natural unemployment rate is natural
unemployment as a percentage of labour force.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
–Full employment is defines as the situation
in which the unemployment rate equals the
natural unemployment rate.
–When the economy is at full employment,
there is no cyclical unemployment or,
equivalently, all unemployment is frictional
and structural.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
•Real GDP and Unemployment Over the Cycle
–Potential GDP is the quantity of real GDP produced
at full employment.
–Potential GDP corresponds to the capacity of the
economy to produce output on a sustained basis.
–Real GDP minus potential GDP is the output gap.
–Over the business cycle, the output gap fluctuates
and the unemployment rate fluctuates around the
natural unemployment rate.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Unemployment and Full
Employment
Figure 21.5 shows the
output gap and …
the fluctuations of
unemployment around the
natural rate.
When the output gap is
negative, unemployment
exceeds the natural
unemployment rate.
Copyright © 2013 Pearson Canada Inc., Toronto, Ontario
© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko
Labor Market Policies
• What can the government do to lower
unemployment?
– Reduce economic fluctuations.
– Job skills training.
– Abolish unemployment compensation.
– Improve quality of information on the
economy.
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© 2006 Prentice Hall Business Publishing
The Economic Way of Thinking, 11/e
Heyne/Boettke/Prychitko