1. Chapter 8 Unemployment Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 12-2 Employment and Wages The working-age population is divided into two groups: those in the labour force and those not in the labour force. The labour force is also divided into two groups: the employed and the unemployed. The labour force is the sum of the employed and the unemployed

3. 12-3 The Unemployment Rate The unemployment rate is the percentage of the people in the labour force who are unemployed. Unemployment rate = X 100 Number of People unemployed Number of People unemployed Workforce Workforce

4. 12-4 The Economic Activity Rate The number of people who join the workforce is an indicator of the willingness of the people of working age to take jobs. The economic activity rate is the percentage of the working-age population who are members of the workforce. Activity rate Workforce Working-age population Workforce Working-age population = X 100

5. 12-5 The Employment-to-Population Ratio The employment-to-population ratio is the percentage of people of working age who have jobs.

6. 12-6 The Anatomy of Unemployment Job losers are people who are laid off, either permanently or temporarily. Job leavers are people who voluntarily quit their jobs.

7. 12-7 Frictional Unemployment Even a well-functioning competitive economy experiences frictional unemployment, because some workers will unavoidably be “ between ” jobs.

8. 12-8 Structural Unemployment Structural unemployment arises when there is an imbalance between the supply of workers and the demand for workers or when unemployment arises because of a mismatch between worker skills and the skills needed by firms.

9. 12-9 The Rate of Unemployment The steady-state rate of unemployment depends on the transition probabilities among employment, unemployment, and the nonmarket sector.

10. 12-10 Full Employment Full employment exists when the unemployment rate equals the natural rate of unemployment. The natural rate of employment is the unemployment rate less cyclical unemployment

11. 12-11 Job Search The asking wage makes the worker indifferent between continuing his search activities and accepting the job offer at hand. An increase in the benefits from search raises the asking wage and lengthens the duration of the unemployment spell. An increase in search costs reduces the asking wage and shortens the duration of the unemployment spell.

12. 12-12 Unemployment Insurance Unemployment insurance lengthens the duration of unemployment spells and increases the probability that workers are laid off temporarily.

13. 12-13 The Phillips Curve A downward-sloping Phillips curve can only exist in the short run. In the long run, there is no trade-off between inflation and unemployment.

14. 12-14 The Phillips Curve Unemployment Rate Rate of Inflation 3 4 B A The Phillips curve describes the negative correlation between the inflation rate and the unemployment rate. The curve implies that an economy faces a trade-off between inflation and unemployment.

15. 12-15 The Short-Run and Long-Run Phillips Curves 35 0 A B 7 Short Run Long Run Rate of Inflation Unemployment Rate

16. 12-16 End of Chapter 8