Learning Objectives

2. Learning Objectives • 06-01. Know how unemployment is measured. • 06-02. Know the socioeconomic costs of unemployment. • 06-03. Know the major types of unemployment. • 06-04. Know the meaning of “full employment.”

3. The Labor Force • Labor force: all persons age 16 and over who are either employed or actively seeking work. • Out of the labor force: those not working and not actively seeking employment. Out of the labor force Total population Employed Labor force Unemployed

4. Impact of Labor Force Growth • The labor force grows due to population growth and immigration, adding 2 million new workers yearly. • The PPC pushes outward, increasing the capacity to produce goods and services. • We need to create 2 million new jobs for the expanding labor force, or we end up at point F inside the PPC.

5. Unemployment • Unemployment: the inability of labor force participants to find jobs. • This is an idled resource, so the economy operates inside its PPC, in the inefficient zone. • Okun’s Law: a 1 percent increase in unemployment results in a 2 percent decrease in GDP.

6. Measuring Unemployment Number of unemployed people Unemployment rate = Labor force 14,825,000 2010 unemployment rate = = 9.6% 153,889,000 A person is counted as unemployed if he or she is not working but is actively seeking work. Unemployment rate: the proportion of the labor force that is unemployed:

7. Demographics of Unemployment • The unemployment rate is higher for • Men than women. • Blacks and Hispanics than whites. • Less educated people than higher-educated people. • Teenagers than people older than them.

8. Duration of Unemployment • Duration: how long does joblessness last? • When the economy is growing, both the unemployment rate and the duration decrease. • When the economy stagnates or goes into decline, both the unemployment rate and the duration increase.

9. Reasons for Unemployment • Job leavers. • They quit to seek other opportunities. • Job losers. • They are laid off or fired. • New entrants. • First-time job seekers. • Reentrants. • They had left the labor force but have returned.

10. Discouraged Workers • Former job seekers who have given up and no longer actively seek employment. • They drop out of the labor force. • They are no longer counted in unemployment statistics.

11. Underemployment • People who want full-time work in their field but can find only part-time work or work at jobs below their capability. • They are counted as employed.

12. Defining Full Employment • Full employment is not the same as zero unemployment. • There are four categories of unemployment. • Seasonal unemployment. • Fictional unemployment. • Structural unemployment. • Cyclical unemployment. • At full employment, all of these exist except cyclical unemployment.

13. Defining Full Employment • Seasonal unemployment: unemployment due to seasonal changes in employment. • The Labor Department reports seasonally adjusted unemployment rates for every month. • Unemployment data exclude the effects of seasonal unemployment.

14. Defining Full Employment • Frictional unemployment:brief periods of unemployment experienced by people moving between jobs or into the labor market. • Adequate demand for frictionally unemployed. • They have skills required for existing jobs. • The job search period is relatively short.

15. Defining Full Employment • Structural unemployment: unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. • Caused by a change in the market for the product made, or • … a change in the technology or process by which the goods is made.

16. Defining Full Employment • Cyclical unemployment: unemployment caused by a decline in economic activity. • The demand for products decreases and workers get laid off. • Results in an excess supply of workers for the remaining available jobs. • The economy must grow at least as fast as the labor force to avoid cyclical unemployment.

17. Defining Full Employment • Economists think that we are near full employment when rising prices signal that we are nearing production capacity – that is, the PPC. • Inflationary flashpoint: the rate of output at which inflationary pressures intensify. • Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.

18. Defining Full Employment • Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment. • Both frictional and structural unemployment exist at full employment. • Full employment ranges between 4 and 6 percent unemployment, depending on the size of structural unemployment.

19. Changes in Structural Unemployment • Changes in structural unemployment come from changes in society itself. • Growing numbers of youth and women. • Changes in transfer payments for the jobless. • Changes in products demanded by consumers. • Changes in how (and where) products are made. • During periods of change, structural unemployment increases. • When changes are fully absorbed, structural unemployment decreases.

20. The “Natural” Rate of Unemployment • Natural rate of unemployment: long-term rate of unemployment determined by structural forces in labor and product markets.