1. Unemployment and its Natural Rate
Mar Unemployment data
Chapter28
Unemployment and its Natural Rate
Yes, in all economies there is a natural level of unemployment!

2. Learning Targets
Be able to calculate…
Labor Force
Labor Force Participation Rate
Unemployment Rate
Why can the unemployment rate be misleading?
Understand these concepts
Cyclical Unemployment
Natural Unemployment

3. Breakdown of US labor force in 2001. Some definitions…
Not all adults are considered part of the labor force.
How would you calculate the unemployment rate?
Labor Force = # Employed + # Unemployed
Labor Force Participation rate = Labor Force/Adult Population
= 141.8/211.9
= 67%
=% of adults interested in working
Many people are NOT in the labor force, such as… people who…
Students
Stay-at-home
Stopped looking for work

4. How Is Unemployment Measured?
The unemployment rate is calculated as the percentage of the labor force that is unemployed.
Adult Population = 200 million
Employed = 135 million
Unemployed = 7 million
Labor Force = ?
= 142 million
Unemployment rate = ?
7 million/ 142 million (100) = .05 = 5%

5. A little practice- Worksheet answers
Labor Force 2001 = = million
Labor Force 2002 = = million
b. Labor Force Participation rate 2001 = 112.6/ = 67%
LF Part. Rate 2002 = 112.3/169.5 = 66.2%
c. Unemployment rate 2001 = 7.4/112.6 = 6.6 %
Unemployment rate 2002 = 8.1/ = 7.2%
d. What could cause the labor force participation rate to decrease?
People stopped looking for work (left the work force)
e cyclical unemployment = 0% = fully employed
2002 cyclical unemployment = (7.2% - 6.6%) = .6%, slight economic downturn!!

6. How can the unemployment rate be misleading?
What could make the unemployment rate go down, either though no jobs were created?
What could make the unemployment rate go up, even though nobody lost any jobs?
Overall, the unemployment rate might not be a totally accurate indicator of economic health, if discouraged workers drop out of the labor force, or decide to re-enter the job market.

7. Figure 3 Labor-Force Participation Rates for Men and Women since 1950
Labor Force Adult Population

8. Table 1 The Labor-Market Experiences of Various Demographic Groups
Labor Force Participation Rate = Labor Force Adult Population
5.5%
5.1
12.9
9.9
73% 58 67 62
17.8% 39
33% 24
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9. Let’s test your knowledge so far…
Employment Stats for Country A
Population
100,000
Adult Population
70,000
Number employed
45,000
Unemployed
5,000
Calculate the Labor Force
= # employed + # unemployed
= 45, ,000 = 50,000
Calculate the Labor Force Participation Rate
= Labor Force / Adult Population *100
= 50,000/70,000 *100 = 71%
Calculate the Unemployment Rate
= # Unemployed / Labor Force * 100
= 5,000/50,000 * 100 = 10%

10. 2. Cyclical Unemployment = due to economic cycles
2 Types of Unemployment
1. Natural Unemployment
2. Cyclical Unemployment
= due to economic cycles
Cyclical unemployment
Natural Unemployment
There is always some amount of unemployment!
The “Natural” Unemployment

11. Why is some unemployment natural?
Unemployment due to economic fluctuations is called “CYCLICAL” Unemployment.
Cyclical unemployment
Any unemployment below the natural rate is considered “full employment”
Why is some unemployment natural?

12. Know the difference between the following
Learning Targets
Know the difference between the following
Natural Unemployment vs. Cyclical Unemployment
Why is there a “natural rate of unemployment”?
Frictional Unemployment
Structural Unemployment
What causes structural unemployment?
Workers who need to be retrained
Minimum Wage
Unions
Efficiency Wages

13. Causes of a Natural Rate of Unemployment?
Why there will always be some unemployment
Frictional Unemployment
People switch jobs and it takes TIME to find another one.
Unemployment compensation ADDS to friction!
People tend to find a job when their unemployment checks run out!!
Structural Unemployment
Longer-lasting unemployment, when …
LABOR SUPPLIED > LABOR DEMANDED
Some workers need to be retrained for a new employment environment!

14. Causes of Structural Unemployment
#1. Demand for SKILLS changes
What might cause employers’ demand for workers to change?
Economy changes and workers need to change with it
Some workers need to get re-trained to continue in the job market.

15. #2. Minimum Wage Causes of structural unemployment- cont’d
How does having a minimum wage cause unemployment?
Minimum Wage can cause the wage to be above the equilibrium level
Wages ABOVE equilibrium rate
– creates a SURPLUS of laborers.

16. Figure 4 Unemployment from a Wage above the Equilibrium Level

17. #3 Efficiency Wages
Many employers would rather keep wages ABOVE equilibrium
Why?
Improve worker health (more relevant in developing countries)
Limit worker turnover
Increase worker EFFORT and QUALITY
They make their jobs more attractive and only hire the BEST, but the rest don’t get to work!!!
Henry Ford paid $5/ hour in 1910 (twice the going rate)

18. More Causes of Structural Unemployment…
#4. Unions –
Yes, unions cause unemployment! How?
Keep wages higher for union workers so employers hire less people for those jobs

19. Right to Work States:
Some states do not allow unions to force workers to join a union in order to work at a particular job. 24 states are right to work states.
Right to Work States
Screen clipping taken: 4/1/2014, 4:10 PM

20. How does natural unemployment differ from cyclical unemployment?
Journal Questions
How does natural unemployment differ from cyclical unemployment?
Natural unemployment is the level of unemployment that exists when the economy is running at full employment.
Cyclical unemployment is the level of unemployment caused by economic downturns.
What is Frictional Unemployment?
The temporary unemployment caused when people look for jobs.
What is Structural Unemployment?
Long term unemployment caused when the supply of labor is more than the demand.

21. How would you evaluate the U.S. economy right now!
In your own words, what would you look at to judge whether our Macroeconomy is strong or not.

22. Is our economy growing?
Are we making and selling stuff, which creates income?
What would you look at to evaluate this?
GDP
Real GDP or nominal GDP?
Are we creating jobs?
Are people working who want to work?
UNEMPLOYMENT RATE
LABOR FORCE PARTICIPATION RATE
# of jobs “NON-FARM PAYROLLS”
Are prices remaining stable or is there super high inflation?
CPI

23. What About Non-Farm Payrolls?
Non-farm payrolls reports the number of jobs gained or lost in the non-farm economy in a single month.
Negative non-farm payrolls numbers report that jobs are being LOST.
Yes, we have been losing less jobs, BUT until recently no jobs had been created!

24. Is an increasing CPI a good thing?
What does CPI indicate?
Price changes
A SLIGHT INCREASE IS OK. IT SHOWS THE ECONOMY IS GROWING.
Do we necessarily want prices to increase?
NOT REALLY
Do we want prices to decrease?
ABSOLUTELY NOT!
So what do we want?
WE WANT PRICES TO REMAIN STABLE!

26. CPI and Non-farm Payrolls

27. As long as we’re talking about stocks…
Why didn’t I buy Apple Stock instead of Apple Products. ?