Module The Meaning and Calculation of Unemployment 12 Module The Meaning and Calculation of Unemployment KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson

What you will learn in this Module: How unemployment is measured How the unemployment rate is calculated The significance of the unemployment rate for the economy The relationship between the unemployment rate and economic growth

Defining and Measuring Unemployment Employed Unemployed Labor Force Note: it might be interesting to find the latest monthly employment report and bring relevant tables into the class to show the students how these statistics are presented by the Bureau of Labor Statistics.   http://www.bls.gov/bls/unemployment.htm The BLS narrows the population by categorizing only those citizens above the age of 16 who are not institutionalized (not in prisons, the Armed Forces, etc). The population is then divided into three groups: those who are working at least one hour per week (Employed) those who were not working at least one hour, but were seeking work (Unemployed) and those “not in labor force,” The Labor Force = Employed + Unemployed Two important measures can then be derived. labor force participation rate: the percentage of the working­ -­ age population that is in the labor force, is calculated as follows: LFPR% = 100*(LF)/(civilian population 16 and older) Unemployment rate: the percentage of the labor force that is not employed. UR% = 100*(# unemployed)/(# Labor Force) Labor Force Participation Rate Unemployment Rate

The Significance of the Unemployment Rate Indicator of employment opportunity Note: Remind the students of the business cycle that shows the ebb and flow of the macroeconomy. Discuss what is happening when the economy is weakening. This is also a good opportunity to review the circular flow model.   Example of a recession: Firms are producing less output because consumers are buying fewer products. With fewer customers, firms need fewer workers. As workers are laid off, the unemployment rate begins to rise. So a weakening economy shows up as a rising unemployment rate. But the UR is not a perfect measure of the true strength or weakness of the labor market and economy. Example: The economy is weak and Jim has had his hours cut from 40 per week to 10. Jim is still employed, but he has certainly seen a decrease in his weekly income. Terri has a Master’s degree, but can only find work as a barista in a coffee shop. She is also employed, but not in a job that matches her skills. The unemployment rate will not capture these forms of underemployment. Jerome has been unsuccessfully seeking work for nearly a year, and finally decides to give up. People like Jerome are classified as discouraged workers and are not counted as unemployed, they are out of the labor force. The presence of underemployed workers and discouraged workers causes the official unemployment rate to appear lower (better) than the actual labor market conditions. Note: you can find the number of discouraged workers in the BLS reports. Show the students what happens to the UR when you add discouraged workers to the ranks of the unemployed.

The Significance of the Unemployment Rate Overstating the true level of unemployment Understating the true level of unemployment discouraged workers marginally attached workers underemployed Note: Remind the students of the business cycle that shows the ebb and flow of the macroeconomy. Discuss what is happening when the economy is weakening. This is also a good opportunity to review the circular flow model.   Example of a recession: Firms are producing less output because consumers are buying fewer products. With fewer customers, firms need fewer workers. As workers are laid off, the unemployment rate begins to rise. So a weakening economy shows up as a rising unemployment rate. But the UR is not a perfect measure of the true strength or weakness of the labor market and economy. Example: The economy is weak and Jim has had his hours cut from 40 per week to 10. Jim is still employed, but he has certainly seen a decrease in his weekly income. Terri has a Master’s degree, but can only find work as a barista in a coffee shop. She is also employed, but not in a job that matches her skills. The unemployment rate will not capture these forms of underemployment. Jerome has been unsuccessfully seeking work for nearly a year, and finally decides to give up. People like Jerome are classified as discouraged workers and are not counted as unemployed, they are out of the labor force. The presence of underemployed workers and discouraged workers causes the official unemployment rate to appear lower (better) than the actual labor market conditions. Note: you can find the number of discouraged workers in the BLS reports. Show the students what happens to the UR when you add discouraged workers to the ranks of the unemployed.

BLS Unemployment data Figure 12.2 Alternative Measures of Unemployment, 1994–2010 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

The Significance of the Unemployment Rate

Unnumbered Figure 12.1 Rocky Mountain Low Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Growth and Unemployment Recessions and unemployment Economic expansions and unemployment Relationship between economic growth and unemployment Note: ask the students construct a graph with real GDP on the x-axis and the unemployment rate on the y-axis and draw a curve that might show how these two macro measures are related. If they have read the chapter, this will not be much of a challenge, but a good thought experiment anyway.   Have the students think about what the curve should look like. Again, you can relate this to the circular flow model. Students should draw a downward sloping function. The instructor can now refer the students to the same scatter graph in the text. Note that the growth rate of real GDP is on the horizontal axis and that growth rate can be negative, but unemployment rates cannot. Even when the economy is very strong, the unemployment rate is not zero.

Figure 12.5 Growth and Changes in Unemployment, 1949–2009 Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

September's Dismal Jobs