1. Principles of Macroeconomics Chapter 15
Unemployment

2. Labor Force Statistics
Labor force: % of the labor force that is unemployed LF
# of unemployed + # of employed =
Many of the following slides abbreviate “unemployment rate” as “u-rate” to reduce slide clutter and to reduce the note-taking burden on students. 2

3. Labor Force Statistics
Unemployment rate (μ): % of the labor force that is unemployed μ
# of unemployed
labor force
= 100 x
Labor force participation rate (LFPR): % of the adult population that is in the labor force
Many of the following slides abbreviate “unemployment rate” as “u-rate” to reduce slide clutter and to reduce the note-taking burden on students.
LFPR
labor force
adult population
= 100 x 3

4. Labor-Force Participation Rate
Application 1
Based on the following information, can you complete the table?
Country
Adult Population
Labor Force
Employed People
Unemployed People
Unemployment Rate
Labor-Force Participation Rate
Country A
74,938
53,930
5,130
Country B
38,530
2,429
8.80%
71.60%

5. Labor-Force Participation Rate
Country
Adult Population
Labor Force
Employed People
Unemployed People
Unemployment Rate
Labor-Force Participation Rate
Country A
74,938
53,930
48,800
5,130
9.51%
72.00%
Country B
38,530
27,600
25,171
2,429
8.80%
71.60%

6. Finding GDP Data Go to http://databank.worldbank.org/data/home.aspx
Click on “World Development Indicators”
Choose your main country from the list
In series – Choose Unemployment, Labor Force Participation, Employment to Population Ratio
In Time – Choose 2000 – 2015 (or recent 15 years)
Download the data
Download option  Excel
Open Excel File
Copy data  paste in new sheet (Transpose)
Add Year column in Column A
Create a line graph
Can you analyze the data that you have downloaded? What other measures of unemployment are available to you?

7. Limitations of the Unemployment Rate
It excludes discouraged workers.
It does not distinguish between full-time and part-time work, or people working part time because full-time jobs not available.
Some people misreport their work status in the BLS survey
Cannot account for the difficulty in finding a job after a long break in employment

8. Cyclical Unemployment vs. the Natural Rate
Natural rate of unemployment
The normal rate of unemployment around which the actual unemployment rate fluctuates
Cyclical unemployment
The deviation of unemployment from its natural rate
Associated with business cycles
Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately.
We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.”
The next slide shows U.S. data on both since 1960. 8

9. U.S. Unemployment, 1960–2012 Unemployment rate
percentage of labor force
Natural rate of unemployment
Cyclical unemployment is the gap between the two lines. In recessions, the actual unemployment rate is higher than the natural rate, and cyclical unemployment is positive. In booms, unemployment is below the natural rate and cyclical unemployment is negative.
Sources: Unemployment rate from FRED, series UNRATE, quarterly (average of monthly rates)
Natural rate of unemployment from CBO, scroll down to Table 2-2.

10. Why a Natural Rate of Unemployment?
Even when the economy is doing well, there is always some unemployment:
Frictional factors
Occurs when workers spend time searching for the jobs that best suit their skills and tastes
Short-term for most workers
Structural factors
Occurs when there is a mismatch between skills of workers and skills required for jobs
Industries expand or contract with new technology creating new employment opportunities that make some products and jobs obsolete
Barriers exist in the labor market that create unemployment
In later chapters, we will study short-run economic fluctuations and learn more about the causes and possible cures of cyclical unemployment. For the rest of this chapter, our job is understanding the various causes of the natural rate of unemployment.
* * WARNING: If you are teaching with Mankiw for the first time, please note that his definition of structural unemployment may be different than the definition you’ve seen in other textbooks.
Other books commonly define structural unemployment as arising from a mismatch between the skills or locations of workers and the skill requirements or locations of jobs. Such textbooks assert that such unemployment results from sectoral shifts.
Mankiw’s position is as follows: If all wages were flexible, then they would adjust after structural changes so that all workers with any given skill set in any given location would be employed. The cause of “structural unemployment” therefore cannot be changes in the structure of demand and production; the cause must be wages that fail to adjust following these changes. 10

11. Structural vs. Frictional Unemployment
Jeremy graduated from his MBA in December. He is looking for a job in Boston.
Minimum wage laws increase in NYC to $15 per hour. McDonald’s replaces its service staff with electronic terminals where customers can place their order.
Sarah was laid off from her position in a publishing house. She is applying to different positions to make a career change.
The employment situation for US workers whose manufacturing firm has moved operations to Mexico.

12. Structural vs. Frictional Unemployment
FRICTIONAL: Jeremy graduated from his MBA in December. He is looking for a job in Boston.
STRUCTURAL: Minimum wage laws increase in NYC to $15 per hour. McDonald’s replaces its service staff with electronic terminals where customers can place their order.
FRICTIONAL: Sarah was laid off from her position in a publishing house. She is applying to different positions to make a career change.
STRUCTURAL: The employment situation for these workers.

13. Some Causes of Structural Unemployment
Technological Advancements -- Automation of jobs eliminates the demand for labor to fill those positions
Trade Agreements – Free trade agreements may move some jobs out of the country, creating joblessness within an industry

14. Some Causes of Structural Unemployment
Unemployment Insurance – Government provides temporary payment transfers to alleviate the hardship of unemployment
Minimum Wage Laws – Mandates on wages create a mismatch between workers that want jobs and jobs available at the minimum wages
Unions – Collective bargaining and union representation makes it difficult for employers to adjust their demand for labor in response to market conditions

15. Some Causes of Structural Unemployment
Efficiency Wages - Employers sometimes choose to pay workers more than the equilibrium wage
Promotes worker effort
Attracts higher quality applicants for the position
Minimizes worker turnover

16. Key Takeaways
Unemployment in the economy is inevitable – there is always someone in between jobs or looking for the next job
The level of natural unemployment varies between countries because of structural unemployment or certain barriers that exist in the labor market
The unemployment rate differs from the natural rate due to short term fluctuations in the economy (business cycles) which also reflect fluctuations in output