Macroeconomics

1. Macroeconomics Unit 6 Unemployment Top Five Concepts

2. 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?

3. 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.

4. 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.

5. 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.

6. 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.

7. 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).

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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).

17. 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.

18. 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.

19. 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.

20. Summary • 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