1. Introduction to Macroeconomics Chapter 6 Unemployment and the Labor Market © Tancred Lidderdale Tancred@Lidderdale.com

2. Introduction to Macroeconomics Chapter 6. Unemployment and the Labor Market 1. Employment - Unemployment 2. Labor Market Supply and Demand 3. Applying the Model

3. Introduction to Macroeconomics 1. Employment - Unemployment Measurement Definitions Criticisms of Unemployment Rate Types of Unemployment Natural Rate of Unemployment Government Policy and Unemployment

4. Introduction to Macroeconomics 1. Employment - Unemployment Measurement Employed persons + Unemployed persons = Total labor force + Not in labor force = Civilian noninstitutional population (16 and over)

5. Introduction to Macroeconomics 1. Employment - Unemployment Measurement 217,570,000 Civilian Noninstitutional Population 16 years of age and older Did you work at least 1 hour for pay last week? Did you actively seek work in the last 4 weeks? 72,707,000 not in the labor force 8,378,000 unemployed 136,485,000 employed 2002 Labor Force Statistics Source: Bureau of Labor Statistics www.bls.gov

6. Introduction to Macroeconomics 1. Employment - Unemployment Definitions Unemployment Rate (percent) = Unemployed * 100 Total Labor Force Participation Rate (percent) = Total Labor Force * 100 Civilian Population

7. Introduction to Macroeconomics 1. Employment - Unemployment U.S. Unemployment Rate U.S. Fairfax Co., VA. 1973 - 1975 recession 1981 - 1982 recession 1990 - 1991 recession Great Depression (1929 - 1933) World War II (1941 - 1945) Source: Bureau of Labor Statistics www.bls.gov

8. Introduction to Macroeconomics 1. Employment - Unemployment U.S. Labor Force Participation Rate Men Women Source: Bureau of Labor Statistics www.bls.gov

9. Introduction to Macroeconomics 1. Employment - Unemployment Criticisms of Unemployment Rate Accuracy of Surveys Discouraged Workers Underemployed

10. Introduction to Macroeconomics 1. Employment - Unemployment Types of Unemployment Frictional Unemployment - dynamic labor force in a stable economy with imperfect information. Structural Unemployment - stable labor force in a dynamic economy with mismatch between skills of labor and skills demanded. Seasonal Unemployment - unemployment that results from the normal seasonal change in aggregate economic activity. Cyclical Unemployment - stable labor force in an unstable economy. Unemployment that results from a decline in aggregate economic activity

11. Introduction to Macroeconomics 1. Employment - Unemployment “Natural Rate” of Unemployment Natural Rate of Unemployment - consistent with frictional, structural, and seasonal unemployment. Full Employment Output - total output of economy when unemployment is at the natural rate. During the business cycle total output fluctuates around the full employment level leading to changes in the cyclical unemployment.

12. Introduction to Macroeconomics 1. Employment - Unemployment Government Policy and Unemployment Job Training Unemployment Benefits Fiscal and Monetary Policy

13. Introduction to Macroeconomics 2. Labor Market Model Labor Market Supply and Demand Labor Market Puzzle Minimum Wage Laws Wage Contracts Efficiency Wage Theory

14. Introduction to Macroeconomics 2. Labor Market Model Labor Market Supply and Demand Labor Supply Labor Demand Equilibrium

15. Introduction to Macroeconomics 2. Labor Market Model Equilibrium Change with Demand Shift Labor Supply Labor Demand Decline in labor demand (shift left): - reduced employment - lower real wage rate Lower Real Wage Employment Declines

16. Introduction to Macroeconomics 2. Labor Market Model Labor Market Puzzle Two problems with implications of the model with respect to recessions: Economy always at full-employment output in equilibrium. No cyclical unemployment. Real wage should decline.

17. Introduction to Macroeconomics 2. Labor Market Model Labor Market Puzzle – Wage Floor Labor Supply Decrease In Labor Demand Real Wage Floor Cyclical Unemployment

18. Introduction to Macroeconomics 2. Labor Market Model Labor Market Puzzle - Explanations Possible Explanations for Wage Floor with Cyclical Unemployment and Rigid Real Wage Minimum Wage Laws Wage Contracts Efficiency Wages

19. Introduction to Macroeconomics 3. Applying the Model In-Class Discussion