Unemployment Chapter 6

Unemployment The unemployment rate is the number of people who are willing and able to work but are not working.

Unemployment Cyclical unemployment is that which results from fluctuations in economic activity. Structural unemployment is that caused by economic restructuring making some skills obsolete.

Unemployment as a Social Problem The Industrial Revolution created the possibility of cyclical unemployment. It brought a change in how families dealt with unemployment. What had previously been a family problem, became a social problem.

Unemployment as Government’s Problem As capitalism evolved, capitalist societies no longer saw the fear of hunger as an acceptable answer to unemployment.

Unemployment as Government’s Problem Full employment – an economic climate in which just about everyone who wants a job can have one.

Unemployment as Government’s Problem Frictional unemployment is the unemployment caused by: –New entrants into the job market, and –People quitting a job just long enough to look for and find another one.

Unemployment as Government’s Problem The target rate of unemployment is the lowest sustainable rate of unemployment that policymakers believe is achievable under existing conditions. It is sometimes called the natural rate of unemployment.

Unemployment as Government’s Problem In the 1980s and 1990s, the target rate of unemployment was been between 5 and 7 percent. Today, the target rate of unemployment is about 5 percent.

Why the Target Rate of Unemployment Changed In the 1970s and early 1980s, a low inflation rate seemed to be incompatible with a low unemployment rate. Demographics have changed – different age groups have different rates of unemployment.

Why the Target Rate of Unemployment Changed Social and institutional structures have changed. Governmental institutions also changed.

Whose Responsibility Is Unemployment? Classical economists believe that individuals are responsible for their own jobs. Keynesian economists tend to say that society owes people jobs commensurate with their training or past job experience.

How Is Unemployment Measured? The unemployment rate is published by the U.S. Department of Labor's Bureau of labor Statistics.

Unemployment Rate Since 1900 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Target rate

Calculating the Unemployment Rate The unemployment rate – the number of unemployed individuals divided by the number of people in the civilian labor force then multiplied by 100.

Calculating the Unemployment Rate The labor force – those people in an economy who are willing and able to work. The labor force excludes those incapable of working and those not looking for work.

Unemployment/Employment Figures (in millions) Total civilian population (288.4 million) Noninstitutional population (214.0 million)Labor force (142.5 million) Employed (134.3 million) Not in labor force (71.4 million) Unemployed (8.3 million) Incapable of working (74.4 million) McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

How Accurate Is the Official Unemployment Rate? The unemployment rate does not include discouraged workers. Discouraged workers – people who do not look for a job because they feel they do not have a chance of getting one.

How Accurate Is the Official Unemployment Rate? The unemployment rate counts as employed those who are underemployed. Underemployed – part-time workers who would prefer full-time work.

How Accurate Is the Official Unemployment Rate? The unemployment rate includes as unemployed, people who say they are looking for a job who are really not. Many are “working off the books, others are vacationing.

How Accurate Is the Official Unemployment Rate? The Bureau of Labor Statistics uses the labor force participation rate and the employment rate to gauge the state of the labor market.

How Accurate Is the Official Unemployment Rate? The labor force participation rate measures the labor force as a percentage of the total population at least 16 years old. The employment rate measures the number of people who are working as a percentage of the labor force.

Unemployment and Potential Output The capacity utilization rate indicates how much capital is available for economic growth. –Capacity utilization rate – the rate at which factories and machines are operating compared to the maximum sustainable rate at which they could be used.

Unemployment and Potential Output Potential output – output that would be achieved at the target rates of unemployment and of capacity utilization.

Unemployment and Potential Output Okum's rule of thumb is used to determine the effect changes in the unemployment rate will have on income. –A one percent change in unemployment will cause output to change in the opposite direction by two percent.

Microeconomic Categories of Unemployment Microeconomic policies are sometimes used to supplement macroeconomic policies for dealing with unemployment.

Microeconomic Categories of Unemployment The following categories of unemployment are analyzed by economists: –How people become unemployed. –Demographic unemployment. –Duration of unemployment. –Unemployment by industry.

Unemployment by Microeconomic Subcategories, million (15.4%) million (9.2%) Male – 4.5 million (6.0%) Unemployment rate by age – 4.8 million (4.7%) 55 and over 0.8 million (3.8%) Female – 3.7 million (5.6%) Unemployment rate by sex Total unemployment – 8.3 million (5.8%) Total unemployment rate McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Unemployment by Microeconomic Subcategories, 2002 Job losers – 4.5 million Less than 5 weeks – 2.8 million White – 6.1 million (5.1%) Duration of unemployment Unemployment rate by race* Black – 2.2 million (9.1%) 5-14 weeks – 2.5 million Reason for unemployment Job leavers 0.9 million Re-entrants – 2.4 million More than 15 weeks 2.9 million New entrants 0.5 million McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.