1 Unemployment Here we look at the measurement of unemployment and issues related to measurement.

2 Unemployment Let’s think about how unemployment is measured. People(16 years old or older and not in an institution) can be classified basically one of three ways(call it labor force status): 1) employed, 2) those wanting to work and currently looking for work but not working- this is what we call unemployed, 3) those who don’t want to work - like retired people or those seeking an education or a discouraged worker(we will see later). This third group could be called not in the labor force. Now the labor force = those employed + those unemployed.

3 Unemployment rate The unemployment rate = (those unemployed/labor force)100. Example: 60 people employed, 2 unemployed and 38 not in labor force. The unemployment rate = (2/62)100 = 3.2%. Note: labor force participation rate = (employed + unemployed) Divided by (employed + unemployed + those not in the labor force), then the whole thing times 100. Note: whether or not you collect unemployment payments is NOT an issue in calculating the unemployment rate.

4 Unemployment rate The unemployment rate can be misleading because 1) if someone is underemployed( working part time, but wanting full time work, or working in a job that does not fully utilize their skills) the unemployment rate is too low – We don’t count partial unemployment, 2) if someone is discouraged(someone who was looking for work, but has finally quit looking and is thus treated like a retired person) the unemployment rate is also too low. Let’s see how: (exaggerated example) 50 people working, 50 people unemployed, unemployment rate = 50/( ) =.5 or 50%. Now say 25 unemployed get discouraged and quit looking: rate = 25/( ) =.33 or 33% - this is lower than the 50%.

5 Types of unemployment There are three types of unemployment: 1) Frictional, 2) structural, and 3) cyclical. Frictional unemployment includes those searching for and/or waiting to take jobs. A fresh out of school graduate may not get a job right away. During the search process this individual would be considered unemployed - provided they were not working elsewhere. Some people don’t accept the first job offer and thus wait. This is unemployment as well.

6 Types of unemployment Structural unemployment occurs when the structure of the economy changes and people lose jobs. An example of this would be at the turn of the century (19 th to 20 th ) when people in the US started buying cars. The blacksmith was no longer needed in the way they were in the past. This structure of demand change meant a loss of jobs. There could be supply changes as well. I don’t want you to think frictional and structural unemployment are painless. They are very painful to those involved. But these types of unemployment seem inevitable in an economy like ours. It takes time to find a job and we sometimes stop buying certain goods.

7 Types of unemployment Cyclical unemployment is that unemployment that occurs during the recessionary phase of the business cycle. If the swings in the business cycle could be eliminated we wouldn’t have this type of unemployment.

8 Full employment The term full employment has a special meaning in macroeconomics. It does NOT mean everyone is working. Full employment is said to occur when there is no cyclical unemployment. There is still frictional and structural unemployment, but it is hard to do anything about that. We could force people to buy stuff they don’t want or we could force you to take the first job offered. But it seems we don’t want to do these things, so some unemployment is inevitable. There is a feeling among economists that the business cycle can be managed and thus cyclical unemployment can be eliminated.

9 The natural rate of unemployment When cyclical unemployment has been eliminated, not only do we have full employment, we say the rate of unemployment is at the natural rate. By the way, the RGDP = potential RGDP when the natural rate of unemployment is achieved.