Chapter 7 Labor Market Indicators

1. Chapter 7Labor Market Indicators Current Population Survey:Every month, the U.S. Census Bureau and Bureau of Labor Statistics (BLS) survey 60,000 households regarding the age and labor market status of their members. Based on this survey, the following measures are obtained:

2. Working-age populationThe total number of non-institutionalized people aged 16 years and older. The working-age population is divided into those in the labor force and those not in the labor force. Labor forceThe number of people employed plus the number of people unemployed.

3. The survey counts as employed all members of the labor force who, during the week before the survey, were either working or were temporarily absent from their jobs. The survey counts as unemployed all members of the labor force who, during the week before the survey, were not working but either had made efforts to find employment during the past 4 weeks or were waiting to be recalled to a job from which they had been laid off.

4. Members of the working-age population who are neither employed nor unemployed are classified as “not in the labor force,” e.g., full-time students, homemakers, retired people. “Not in the labor force” also includes discouraged workers, who are individuals who are not working, are available and willing to work, but have made no attempt to seek employment during the past 4 weeks.

5. Working-age populationLabor force Not in the labor force (incl. discouraged workers)Employed Unemployed

6. Using the numbers from the Current Population Survey, the BLS calculates the following two main labor market indicators: The unemployment rate The labor force participation rate

7. Unemployment rate The percentage of people in the labor force who are unemployed Unemployment rate = Number of people unemployed X 100% Labor force

8. Labor force participation rate The percentage of the working-age population who are in the labor force Labor force participation rate = Labor force X 100% Working-age population

9. Categories of workers: Full-time workers are those who normally work 35 hours a week or more. Part-time workers are those who usually work less than 35 hours per week. Involuntary part-time workers are those who work less than 35 hours per week but who are looking for full-time work.

10. Aggregate hours:To determine the total amount of labor employed in the economy we measure labor in hours. Aggregate hours is the total number of hours worked by all people employed, both full- and part-time, during a year. Aggregate hours = no. of employed workers x average hours x no. of workweeks in a year. E.g., in May 2005, 141.6 million people worked an average of 33.9 hours per week. With 50 workweeks per year, aggregate hours were 141.6 million  33.9  50 = 240 billion hours.

11. Unemployment and the business cycle: The business cycle refers to fluctuations in real GDP over time. During business cycle recessions unemployment generally rises and during expansions unemployment generally falls. However, sometimes the initial phase of a business cycle expansion is accompanied by a temporary rise in unemployment as discouraged workers and others outside the labor force enter or re-enter the labor force.

12. Notable trends in the U.S. labor market The labor force participation rate: The participation rate increased from 59% during the 1960s to 67% in 2000, and since 2000 has fallen slightly. Growing labor force participation has been due entirely to an increase in female labor force participation, which increased from 39% in 1965 to 60% in 1999. By contrast, the male participation rate decreased from 81% in 1965 to 73% in 2005.

13. Part-time workers Part-time workers average about 16 to 17% of all employed workers. Involuntary part-time work increases during business cycle recessions and decreases during expansions.

14. Aggregate and average hours Aggregate hours have increased, but not as rapidly as the number of people employed. The reason is that average hours have decreased. The number of people employed doubled, i.e., increased by 100%, from 1965 to 2005, but aggregate hours increased by only 75% over this period. Average hours worked per week fell from 38.5 hours in 1965 to just under 34 hours in 2005.

15. Sources of unemploymentHow do people move into and out of the labor force and into and out of jobs? This process is best described by the following chart:

17. Types of unemployment 1. Frictional2. Structural3. Seasonal4. Cyclical Frictional unemployment:This is unemployment arising from normal labor market turnover – people entering or re-entering the labor force or moving between jobs.

18. Frictional unemployment is sometimes called “search unemployment” because people entering the labor force or between jobs are searching for a job. Employers, too, are searching for the right worker. Search by workers and employers is desirable because it brings about optimal matching of workers with jobs. Even if there were a job vacancy for every job seeker, there would still be search unemployment because it takes time for workers to obtain information about job availability, pay and other attributes, and it takes time for employers to discover information about potential workers’ productivity.

19. The amount of frictional unemployment depends on the rate at which people enter or re-enter the labor force and the rate at which jobs are created or destroyed. It also depends on the generosity of unemployment and welfare benefits, which subsidize longer periods of search. Structural unemployment:This is the unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs.

20. When industries decline (e.g., steel making, auto assembly), jobs are lost. At the same time, other industries are expanding (e.g., information technology, services). It takes time for workers laid off from declining industries to retrain or relocate to obtain jobs in the newly expanding industries. Seasonal unemployment:This is the unemployment that arises because of seasonal weather patterns, e.g., construction workers laid off during the winter, agricultural workers laid off after the harvest.

21. Cyclical unemployment:This is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. The average duration of unemployment varies over the business cycle, rising during recessions and falling during expansions. In general, the lower the average unemployment rate, the shorter is the average duration of unemployment.

22. Demographics of unemployment Teenage unemployment is three to four times that of workers aged 20 and over. This is because teenage workers have less experience, are less likely to be in a job that’s a good match for their skills, and are often hired for short durations on a trial basis.

23. Full employment: It is often said that one of the goals of macroeconomic policy is to achieve “full employment.” What does this mean? Clearly, it does not mean zero unemployment. Zero unemployment is impossible because, no matter how well the economy is doing, there will always be some frictional, structural and seasonal unemployment. Full employment occurs when there is no cyclical unemployment or, equivalently, when all of the unemployment is frictional, structural and seasonal.

24. The unemployment rate when the economy is operating at full employment is called the natural rate of unemployment. For many purposes the natural unemployment rate can be treated as constant, but it does change gradually over time, e.g., when changes in technology bring increases in structural unemployment, or when demographic changes bring changes in frictional unemployment.

25. The natural unemployment rate also varies across different economies. In some countries there are more labor market frictions due to laws and government regulations. For example, the natural unemployment rate is higher in Europe and Canada than in the U.S. due to more generous unemployment and welfare benefits that subsidize search, and due to labor market regulations that raise the cost of hiring, e.g., high minimum wages, lengthy mandated vacation, sick and parental leaves, and restrictions on firing workers.

26. Unemployment and the business cycle: The actual unemployment rate fluctuates around the natural rate over the course of the business cycle. At full employment there is no cyclical unemployment. All unemployment is frictional, structural and seasonal, i.e., the actual unemployment rate equals the natural rate.

27. In a business cycle recession, there is cyclical unemployment in addition to frictional/structural/seasonal. Therefore the actual unemployment rate is above the natural rate. In a business cycle expansion, there is no cyclical unemployment and frictional unemployment decreases because more jobs are created and job seekers find employment more quickly, lowering the duration of search. Therefore the actual unemployment rate is below the natural rate.

28. Potential GDP:This is the level of real GDP that the economy would produce if it were operating at full employment. Because the unemployment rate fluctuates around the natural rate, real GDP fluctuates around potential GDP:

29. When the unemployment rate is equal to the natural rate, i.e., when the economy is operating at full employment, real GDP is equal to potential GDP. When the unemployment rate is above the natural rate (due to cyclical unemployment), real GDP is below potential GDP. When the unemployment rate is below the natural rate (due to lower-than-usual frictional unemployment), real GDP is above potential GDP.

30. How is it possible for the economy to produce a level of real GDP that is temporarily above potential GDP? Businesses and factories operate longer hours and hire overtime labor. The following figure shows the relationship between unemployment and real GDP. As the unemployment rate fluctuates around the natural rate of unemployment (part a), real GDP fluctuates around potential GDP (part b):