Measurement of Economic Performance: Unemployment

1. Measurement of Economic Performance: Unemployment AP Economics Mr. Bordelon

2. Defining and Measuring Unemployment • Employed. People are currently holding a job in the economy, either full-time or part-time. • Unemployed. People are actively looking for work but aren’t currently employed. • This definition for unemployed has some significant differences between what the average person would define unemployment as vs. an economist. Just because a person isn’t working doesn’t mean that person is unemployed.

3. Defining and Measuring Unemployment • Employed. People are currently holding a job in the economy, either full-time or part-time. • Unemployed. People are actively looking for work but aren’t currently employed. • This definition for unemployed has some significant differences between what the average person would define unemployment as vs. an economist. Just because a person isn’t working doesn’t mean that person is unemployed.

4. Defining and Measuring Unemployment • When calculating the unemployment rate, you must have an understanding of the labor force. More specifically, who is in the labor force, and how many people make up that labor force from the population as a whole…but not everybody in the population is in the labor force. • Must be of working age and not retired. • Must be eligible to work. • Must be able to work. • Labor Force = Employed + Unemployed

5. Defining and Measuring Unemployment • Labor force participation rate. Percentage of population is 16 or older that is in the labor force. • LFPR = (LF/16+ and not retired) x 100% • Unemployment rate. Percentage of labor force that is not employed. • UR = (# unemployed/# LF) x 100%

6. Significance ofUnemployment Rate • Unemployment is connected to GDP. • If unemployment rate is high, GDP is lower than what it should be. We’re producing fewer goods and services. • If unemployment rate is low, GDP is higher than what it should be. We’re producing more goods and services. • Be careful though…unemployment by itself does not mean the labor market is strong or weak, it may be in transition. • Also, there are ways to overstate and understate the unemployment rate.

7. Significance ofUnemployment Rate • Overstate. A person who has skills in high demand may take a bit longer to find a job, however confident that person may be, and we make the assumption that they will find a job guaranteed. This person would be counted in the unemployment rate. • Understate (the real problem) • Underemployed. People who work part-time because they cannot find full-time jobs. Do not count in unemployment rate—they have jobs. • Marginally-attached. People who would like to be employed and have looked for a job recently, but not currently looking. Do not count in unemployment rate—not actively looking for work. • Discouraged workers. People who are capable of working, but have given up looking for work due to a poor economy. Do not count in unemployment rate—not actively looking for work.

8. Significance ofUnemployment Rate • Does this mean the unemployment rate is inaccurate? • Yes. Going by these categories just mentioned, then yes, this is a problem. However, mathematically, these may be outliers and would not affect the over total. In any case, the Bureau of Labor Statistics does calculate two separate unemployment rates, one of which would include the underemployed, marginally-attached, and discouraged. • No. Economists need a discrete, objective model to work with so as to make predictions. Going into questions of, “How bad do you want a job?” is a matter of looking into men’s (and women’s) souls. So to maintain that objectivity, economists make strict categorizations.

9. Growth and Unemployment • For the connection between real GDP and unemployment, we can expect the following relationships: • Unemployment high. Real GDP will be lower than where it should be. The economy is producing less than what it is capable of. • Unemployment low. Real GDP is higher than where it probably should be. The economy is producing more than what we expect it to. • Unemployment just right. Think Goldilocks. What we mean here is that unemployment and real GDP match up to where they should be.

10. Wait…? • Does that mean there is an expectation of unemployment? That we’ll always have unemployment? • Yes, Katie, there is an unemployment Santa Claus. We call him the natural rate of unemployment.

11. Natural Rate of Unemployment • How can there be a natural rate of unemployment? The goal is to get everybody employed, right? • Well, sure. If we were communists. But we’re not communists. So, no. • Think of it another way. • Would you want to pay to keep someone in a job if that job is pointless? Probably not. • Would you like to see new jobs in new fields created to replace outdated jobs? Probably so. • What we’re talking about here is job creation and job destruction. Jobs go through this process all the time as the nature of the economy changes. And there are different types of employment that describes this process of creation and destruction.

12. Natural Rate of Unemployment • Structural unemployment. Unemployment that occurs when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate. • Undesirable. We’ve got more people looking for jobs than jobs are available, and typically a weaker economy, either locally or nationally. Couple of reasons for this. • Weak local economy where the job market and skills of workers don’t match, or worse, don’t exist. • Minimum wage • Unions • Efficiency wage • Unemployment benefits and other public policies

13. Natural Rate of Unemployment • Weak local economy. This is a situation where we have an industry that has either moved or disappeared due to changes in the business cycle. • Detroit. Car industry has modernized its equipment, so that less workers are needed to make cars. • New Orleans. Oil and gas industry, as well as shipbuilding, have moved out of the area. • Rust belt. Cities from Cleveland to Buffalo which were invested heavily in industry have struggled since the 1980s when the focus went from steel to silicon.

14. Natural Rate of Unemployment Minimum wage. Government mandated price floor on labor. Price floors naturally create surpluses of labor. Employers have to pay above the equilibrium wage, WE and pay at WF. They will only hire workers at the demand quantity, QD, but that leaves out the remaining workers up to QS, the supply quantity. That difference between QS and QDis structural unemployment (the surplus of workers).

15. Natural Rate of Unemployment Labor unions. Negotiate with employers on behalf of the workers through collective bargaining. The goal is to raise wages above market equilibrium. As such, this creates structure unemployment in the same way as the minimum wage does. The labor that would be hired would be QD and true to form, that QD would belong to the labor union.

16. Natural Rate of Unemployment Efficiency wages. Wages that employers set above equilibrium wage rate as an incentive for better employee performance. Or in reality, to keep workers at the business, so that the employer doesn’t have to fork over money to train a new employee. This typically happens in specialized industries, electronics, nuclear, engineering, architecture, law, medicine. This can have the same effect as a minimum wage!

17. Natural Rate of Unemployment • Public policy. Unemployment insurance benefits paid to those laid off can tide people over until they find a job. Unfortunately, it can also reduce the incentive to find a new job quickly. Allowing people to keep receiving these benefits can increase both structural and frictional unemployment. • Efficiency vs. equity. Should we allow the families to fend for themselves and potentially be ruined, or should we as a society choose to assist them in a time of need to avoid that?

18. Natural Rate of Unemployment • Natural rate of unemployment. Unemployment rate that arises from the effects of frictional and structural unemployment. In other words, job creation and job destruction. • NU = FU + SU • NU in turn is considered with cyclical unemployment, unemployment arising from the changes in the business cycle. • Actual unemployment = NU + CU

19. Changes inNatural Rate of Unemployment • Changes in labor force characteristics. Unemployment rates are lower for experienced than for inexperienced workers. Experienced workers will likely stay in a job longer than an inexperienced one. However, as the workforce ages, natural rate of unemployment declines. • Changes in labor market institutions. Influence of labor unions has declined, which has weakened their ability to increase wages, which in turn decreases structural unemployment. Temporary employment agencies have reduced frictional unemployment by helping get workers jobs. Technology, of course, will also play a role.

20. Changes inNatural Rate of Unemployment • Change in government policies. High minimum wages and generous unemployment benefits can increase structural and frictional unemployment. Reducing the natural rate is also possible, for example, job training and employment subsidies. Programs to retrain workers with obsolete skills also reduce natural unemployment.