1. Unemployment Chapter 6 McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Unemployment
In this chapter we take a look at the problem of unemployment
When is a person “unemployed”?
What are the costs of unemployment?
What’s an appropriate policy goal for “full employment”?
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3. The Labor Force
Labor force: All persons age 16 and over who are either working for pay or actively seeking paid employment
People who are not employed or are not actively seeking work are not considered part of the labor force
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4. The Labor Force
Labor-force participation rate: The percentage of the working-age population working or seeking employment
People who are neither employed nor actively seeking work are called nonparticipants
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5. The Labor Force, 2008
Source: U.S. Bureau of Labor Statistics
Only half the total U.S. population participates in the civilian labor force. The rest of the population is too young, in school, at home, retired, or otherwise unavailable.
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6. A Growing Labor Force
Source: Economic Report of the President, 2009
The labor force expands as births and immigration increase. A big increase in the participation rate of women after 1950 also added to labor-force growth.
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7. Production Possibilities
Labor-force growth expands production possibilities, enabling more production
Need to create more jobs to assure that labor-force participants can find a job
Otherwise, could end up inside the production possibilities curve
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8. Labor Force Growth Consumption Goods (units per year) B A
Investment Goods (units per year) O C
Labor-force growth increases production possibilities H G F
At point F, resources are
unemployed D
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9. Unemployment
To make full use of production capacity an economy’s labor force must be fully employed
Unemployment: The inability of labor-force participants to find jobs
Okun’s Law: 1 percent more unemployment results in 2 percent less output
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10. Measuring Unemployment
U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed
A person is considered unemployed if he or she is not employed and is actively seeking a job
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11. The Unemployment Rate
Unemployment rate: The proportion of the labor force that is unemployed
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12. Unemployment Varies by Race and Sex
Source: U.S. Department of Labor (2008 data)
Minority groups, teenagers, and less-educated individuals experience higher rates of unemployment.
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13. Duration of Unemployment
When the economy is growing, unemployment rates and average duration decline
Duration
Percent of Unemployed
Less than 5 weeks
32.80%
5 to 14 weeks
31.4
15 to 26 weeks
16.0
27 weeks or more
19.7
Median duration
9.4 weeks
Source: U.S. Bureau of Labor Statistics (2008 data)
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14. Reasons for Unemployment
How long a person remains unemployed is affected by the nature of the joblessness
Job leavers
Job losers
Reentrants
New entrants
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15. Reasons for Unemployment
Source: U.S. Labor Department
People become unemployed for various reasons. In recessions, the proportion of job losers shoots up.
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16. Discouraged Workers
Discouraged worker: An individual who isn’t actively seeking employment but would look for or accept a job if one were available
Discouraged workers are not counted as unemployed because they gave up looking for a job
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17. Underemployment
Underemployment: People seeking full-time paid employment who work only part-time or are employed at jobs below their capability
Underemployed workers represent labor resources that are not being fully utilized
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18. The Human Costs Prolonged unemployment can hurt, causing Lost income
Lost confidence
Social stress
Ill health
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19. Defining Full Employment
Full employment is not the same as zero unemployment
There are several types of unemployment
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20. Seasonal Unemployment
Seasonal unemployment: Unemployment due to seasonal changes in employment or labor supply
The Labor Department reports seasonally adjusted unemployment rates for every month
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21. Frictional Unemployment
Frictional unemployment: Brief periods of unemployment experienced by people moving between jobs or into the labor market
Differs from other types of unemployment:
Adequate demand for frictionally unemployed
They have skills required for existing jobs
The job-search period is relatively short
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22. Structural Unemployment
Structural unemployment: Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs
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23. Cyclical Unemployment
Cyclical unemployment: The unemployment attributable to the lack of job vacancies, that is, to an inadequate level of aggregate demand
Not enough jobs to go around due to inadequate demand for goods and services
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24. Slow Growth
The economy must grow at least as fast as the labor force to avoid cyclical unemployment
When economic growth slows below this threshold, unemployment rates start to rise
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25. The Unemployment Record
Source: U.S. Department of Labor
Unemployment rates reached record heights (25 percent) during the Great Depression. In more recent decades, the unemployment rate has varied from 4 percent in full-employment years to over 10 percent in recession years.
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26. The Full-Employment Goal
The Employment Act of 1946 committed the government to pursue maximum employment
The full employment goal presumably means avoiding as much cyclical and structural unemployment as possible, while keeping frictional unemployment reasonably low
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27. Inflationary Pressures
Rising prices are a signal that employment is nearing capacity
During the 1960s, the Council of Economic Advisors placed full employment at a 4% unemployment rate
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28. Changes in Structural Unemployment
During the 1970s and early 1980s structural barriers to full employment increased
More youth and women
Liberal transfer payments
Structural changes in demand
The inflation-threshold unemployment rate was determined to be between 6 and 7 percent
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29. Declining Structural Pressures
The structural barriers that intensified inflationary pressures receded in the 1990s
Became easier to lower unemployment rates without increasing inflation
Bush administration set full-employment threshold at 5.1 percent in 2004
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30. The “Natural” Rate of Unemployment
Natural rate of unemployment: Long-term rate of unemployment determined by structural forces in labor and product markets
The “natural” rate of unemployment consists of frictional and structural components only
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31. Congressional Targets
The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act) set 4% unemployment rate and 3% inflation as a national goal
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32. The Historical Record
As much as one-fourth of the labor force was unemployed during the Great Depression
The unemployment rate fell to 1.2 percent during World War II and has fluctuated from a low of 2.8 percent during the Korean War to a high of 10.8 percent in the recession
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33. The Historical Record
From 1982 to 1989 unemployment fell, but shot up again in the recession
The rate fell steadily during the last half of the 1990s, but rose sharply in late 2001
Subsequent recovery pushed the rate down again in 2006–7
The credit crisis of 2008 wiped out that gain
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34. Unemployment End of Chapter 6 McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.