CHAPTER 7 Measuring Employment and Unemployment Michael Parkin ECONOMICS 5e CHAPTER 7 Measuring Employment and Unemployment Chapter 24 in Economics

Learning Objectives Define the unemployment rate, the labor force participation rate, the employment-to- population ratio, and aggregate hours Describe the trends and fluctuations in the indicators of labor market performance

Learning Objectives (cont.) Describe the sources of unemployment, its duration, and the groups that are most affected by it Describe the relationship between employment, unemployment, and real GDP

Learning Objectives Define the unemployment rate, the labor force participation rate, the employment- to-population ratio, and aggregate hours Describe the trends and fluctuations in the indicators of labor market performance

Employment and Wages Population Survey Every month, the U.S. Census Bureau surveys 60,000 households and asks a series of questions about the age and job market status of its members. Called the Current Population Survey

Employment and Wages Population Survey (cont.) The working age population is the total number of people aged 16 years an over who are not in a jail, hospital, or some other form of institutional care.

Employment and Wages Population Survey (cont.) The working age population is divided into those in the labor force and those not in the labor force. The labor force is divided into the employed and the unemployed.

Employment and Wages To be counted as unemployed, a person must be available for work and must be in one of three categories: 1) Without work but has made specific efforts to find a job within the previous four weeks

Employment and Wages To be counted as unemployed, a person must be available for work and must be in one of three categories: 2) Waiting to be called back to a job from which he or she has been laid off

Employment and Wages To be counted as unemployed, a person must be available for work and must be in one of three categories: 3) Waiting to start a new job within 30 days

Population Labor Force Categories Instructor Notes: 1) The population is divided into the working-age population and the young and institutionalized. 2) The working-age population is divided into the labor force and those not in the labor force. 3) The labor force is divided into the employed and the unemployed

Employment and Wages Three Labor Market Indicators The unemployment rate The labor force participation rate The employment-to-population ratio

Employment and Wages The unemployment rate is the percentage of the people in the labor force who are unemployed. Unemployment rate = Number of people unemployed Labor force  100

Employment and Wages Labor force = Number of people employed + Number of people unemployed

Working age population Employment and Wages The labor force participation rate is the percentage of the working-age population who are members of the labor force. Labor force participation rate = Working age population  100

Employment and Wages Discouraged Workers People who are available and willing to work but have made not made specific efforts to find a job within the previous four weeks.

Employment and Wages The employment-to-population ratio is the percentage of people of working age who have jobs. Employment-to- population ratio = Number of people employed Working-age population  100

Employment, Unemployment, and the Labor Force: 1960–1996 Instructor Notes: 1) The unemployment rate increases in recessions and decreases in expansions. 2) the labor force participation rate and the employment to population ration have upward trends and fluctuate with the business cycle. 3) The employment-to-population ration fluctuates more than the labor force participation rate and reflects cyclical fluctuations in the unemployment rate. 4) Fluctuations in the labor force participation rate arise mainly because of discouraged workers.

Learning Objectives Define the unemployment rate, the labor force participation rate, the employment-to- population ratio, and aggregate hours Describe the trends and fluctuations in the indicators of labor market performance

The Changing Face of the Labor Market Instructor Notes: 1) The upward trends in the labor force participation rate and the employment-to-population ratio are accounted for mainly by the increasing participation of women in the labor market. 2) The male labor force participation rate and employment-to-population ratio have decreased.

Employment and Wages Aggregate Hours The indicators previously studied are useful signs of the health of the economy. However, they do not measure the productivity of labor.

Employment and Wages Aggregate hours are the total number of hours worked by all the people employed, both full time and part time, during a year.

Aggregate Hours: 1960–1998 Instructor Notes: 1) Aggregate hours measure the total labor used to produce real GDP more accurately than does the number of people employed because an increasing proportion of jobs are part time. 2) Between 1960 and 1996, aggregate hours increased by an average of 1.5 percent a year. 3) Fluctuations in aggregate hours coincide with business cycle fluctuations.

Aggregate Hours: 1960–1998 Instructor Notes: Aggregate hours have increased at a slower rate than the number of jobs because the average workweek has shortened, as shown in the graph.

Employment and Wages Wage Rates The real wage rate is the quantity of goods and services that an hour's work can buy. Equals the money wage rate divided by the price level

Real Wage Rates: 1960 – 1998 Instructor Notes: 1) The average hourly real wage rate of private manufacturing nonsupervisory workers peaked in 1978 and then fell through 1993. 2) Broader measures of the average hourly real wage rate increased. 3) All the official measures show a productivity growth slowdown during the 1970s. 4) An unofficial view is that inflation has been overestimated by 1.1 percent a year and the real wage rate has increased at roughly a constant rate.

Learning Objectives (cont.) Describe the sources of unemployment, its duration, and the groups that are most affected by it Explain how employment and wage rates are determined by demand and supply in the labor market

Unemployment and Full Employment People become unemployed if they: 1) Lose their jobs and search for another job. 2) Leave their jobs and search for another job. 3) Enter or reenter the labor force to search for a job.

Unemployment and Full Employment Job losers are people who are laid off, either permanently or temporarily. Biggest source of unemployment. Numbers fluctuate considerably. Job leavers are people who voluntarily quit their jobs. Smallest and most stable source of unemployment.

Unemployment and Full Employment Entrants are people who are entering the labor force. Reentrants are people who have previously withdrawn from the labor force. Reentrants/entrants are a large component of the unemployed. Numbers fluctuate mildly.

Labor Market Flows Instructor Notes: 1) Unemployment results form employed people losing or leaving their jobs (job losers and job leavers) and from people entering the labor force (entrants and reentrants). 2) Unemployment ends because people get hired or recalled or because they withdraw from the labor force.

Unemployment by Reasons Instructor Notes: 1) Everyone who is unemployed is either a job loser, a job leaver, or an entrant or reentrant into the labor force. 2) Most of the unemployment that exists results from job loss. 3) The number of job losers fluctuates more closely with the business cycle than do the numbers of job leavers and entrants and reentrants. 4) Entrants and reentrants are the second most commonly unemployed people. 5) Their number fluctuates with the business cycle because of discouraged workers. 6) Job leavers are the least common unemployed people.

Unemployment by Duration Less than 5 weeks 5-14 weeks Business cycle peak 15-26 weeks Business cycle trough Instructor Notes: 1) In the business cycle peak of 1989, when the unemployment rate was 5.3 percent, 49 percent of unemployment lasted for less than 5 weeks and 30 percent lasted for 5 to 14 weeks. 2) So 79 percent of unemployment lasted for less than 15 weeks, and 21 percent lasted for 15 weeks or more. 3) In the business cycle trough of 1983, when the unemployment rate was 9.7 percent, 33 percent of unemployment lasted for less than 5 weeks and 27 percent lasted for 5 to 14 weeks. 4) So 60 percent of unemployment lasted for less than 15 weeks, and 40 percent lasted for 15 weeks or more. 27 weeks and over 10 20 30 40 50 Percentage of unemployment

Unemployment by Demographic Group Black males 16-19 Black females 16-19 White males 16-19 White females 16-19 Business cycle peak Black males 20 and over Black females 20 and over Business cycle trough Instructor Notes: 1) Black teenagers experience unemployment rates that average three times those of white teenagers, and the unemployment rates of teenagers are much higher than those of people aged 20 years and over. 2) Even in a business cycle trough, when unemployment is at its highest rate, only 6 percent of whites aged 20 years and over are unemployed. White males 20 and over White females 20 and over 10 20 30 40 Unemployment rate

Unemployment and Full Employment There are three types of unemployment: 1) Frictional 2) Structural 3) Cyclical

Unemployment and Full Employment Frictional Unemployment Arises from normal labor turnover — people entering and leaving the labor force and the creation and destruction of jobs Influenced by unemployment benefits

Unemployment and Full Employment Structural Unemployment Arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs Typically lasts longer than frictional

Unemployment and Full Employment Cyclical Unemployment Arises from the fluctuations of the business cycle Increases during a recession and decreases during and expansion The natural rate of unemployment excludes cyclical unemployment

Unemployment and Full Employment Full employment exists when the unemployment rate equals the natural rate of unemployment. It fluctuates periodically Economists disagree about the size of the natural rate and the extent to which it fluctuates

Learning Objectives (cont.) Describe the sources of unemployment, its duration, and the groups that are most affected by it Describe the relationship between employment, unemployment, and real GDP

Unemployment and Real GDP Instructor Notes: 1) As real GDP fluctuates around potential GDP (part a), the unemployment rate fluctuates around the natural rate of unemployment (part b). 2) In the deep recession of 1982, unemployment reached almost 10 percent. 3) In the miler recession of 1990-1991, the unemployment rate peaked at less than 8 percent. 4) The natural rate of unemployment decreased during the 1980s and 1990s.

Unemployment and Real GDP Instructor Notes: 1) As real GDP fluctuates around potential GDP (part a), the unemployment rate fluctuates around the natural rate of unemployment (part b). 2) In the deep recession of 1982, unemployment reached almost 10 percent. 3) In the miler recession of 1990-1991, the unemployment rate peaked at less than 8 percent. 4) The natural rate of unemployment decreased during the 1980s and 1990s.

Unemployment and Real GDP As real GDP fluctuates around potential GDP, the unemployment rate fluctuates around the natural rate of unemployment. In the deep recession of 1982, unemployment reached almost 10 percent. In the milder recession of 1990-1991, the unemployment rate peaked at less than 8 percent.

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