6-1 Unemployment  We recognize unemployment as one of the two major macroeconomic problems we can face.  When is a person “unemployed”?  What are the costs of unemployment?  What is an appropriate goal for “full employment”?

6-2 Learning Objectives  Know how unemployment is measured.  Know the socioeconomic costs of unemployment.  Know the major types of unemployment.  Know the meaning of “full employment.”

6-3 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. Total population Out of the labor force Labor force Employed Unemployed

6-4 The Labor Force  The labor force comprises about half the population.  The size of the labor force has more than doubled since 1960 due to population growth.  The labor force participation rate increased rapidly due to the increasing numbers of women joining the labor force.

6-5 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.

6-6 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.

6-7 Measuring Unemployment  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: 14,825, unemployment rate = = 9.6% 153,889,000 Number of unemployed people Unemployment rate =Labor force

6-8 Exercise  Calculate the unemployment rate.  #in labor force = 200,000  #unemployed = 10,000  Unemployment rate = (10,000/200,000) x 100 = 5% Number of unemployed people Unemployment rate =Labor force

6-9 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.

6-10 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.

6-11 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.

6-12 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.

6-13 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.

6-14 The Human Costs of Unemployment  Loss of income.  Loss of confidence.  Social stress.  Declining health.

6-15 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.

6-16 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.

6-17 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.

6-18 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.

6-19 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.

6-20 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.

6-21 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.

6-22 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.

6-23 The “Natural” Rate of Unemployment  Natural rate of unemployment: long-term rate of unemployment determined by structural forces in labor and product markets.

6-24 The Economy Tomorrow  Outsourcing jobs: relocation of production (and jobs) to other countries to take advantage of lower production costs.  Cheaper labor.  Low-cost, high-speed communications.  A two-way street. Foreign producers also outsource jobs from their countries when they build production facilities in the United States.  More jobs are “insourced” this way than we outsource.  Production possibilities expand, not contract, with outsourcing.  As world trade expands, we will see more outsourcing – and insourcing – in the economy tomorrow.

6-25 Revisiting the Learning Objectives  Know how unemployment is measured.  The unemployed are part of the labor force who are not working but who are actively seeking work.  It is usually expressed as the unemployment rate, the ratio of unemployed to the labor force.

6-26 Revisiting the Learning Objectives  Know the socioeconomic costs of unemployment.  Okun’s Law estimates there is a 2% decline in output for every 1% increase in unemployment.  The human costs of unemployment include not only financial losses but also social, physical, and psychological costs.  Minorities, teens, and the less educated have higher rates of unemployment.

6-27 Revisiting the Learning Objectives  Know the major types of unemployment.  Seasonal: people who work part of a year, in season, but are unemployed at other times.  Frictional: people who leave a job to pursue better opportunity elsewhere.  Structural: people who lose their job when demand for a product declines or when there are major changes in how the product is produced.  Cyclical: people who lose their job due to an overall decline in demand – that is, a recession.

6-28 Revisiting the Learning Objectives  Know the meaning of “full employment.”  The lowest unemployment rate compatible with price stability.  Zero cyclical unemployment.  Frictional and structural unemployment exist.  Estimated to be in the range of 4 to 6 percent unemployment, depending on structural factors.