1. Employment and Unemployment
Unemployment Rate
Natural and Cyclical Unemployment
Unemployment and the Labor Market

2. Unemployment Rate
Does the unemployment rate accurately represent unemployment?
All individuals who are part of the working-age population (16+ not in jail, hospital) are classified as
(i) Employed – currently have full/part time job.
(ii) Unemployed – not working but looked for work in past month or temporarily laid off.
(iii) Not in Labor Force

3. Labor Force = # employed + # unemployed
Labor Force Participation Rate =
Unemployment Rate (UR) =

4. Employment 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

5. Slide: Employment Categories
Example: Unemployment rate and Jobs
Types of Unemployment
(1) Frictional – Normal job turn-over. People "in between" jobs and are searching for the best available.
(2) Structural – Unemployed due lack of qualifications, skills, education.
(3) Cyclical - Unemployment caused by business cycles.

6. Natural Unemployment = Frictional + Structural.
Cyclical Unemployment Rate is
Zero when UR = Natural UR
Positive when UR > Natural UR Negative when UR < Natural UR
The economy is at full employment when
(i) Cyclical unemployment = 0
(ii) Unemployment = Natural Unemployment

7. Actual and Natural Unemployment in U.S. Economy
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 , the unemployment rate peaked at less than 8 percent.
4) The natural rate of unemployment decreased during the 1980s and 1990s.

8. Unemployment and Potential GDP
Full employment implies
(i) Actual GDP = Potential GDP
(ii) Labor Market Equilibrium
(iii) UR = Natural UR. (Cyclical UR = 0)

9. 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 , the unemployment rate peaked at less than 8 percent.
4) The natural rate of unemployment decreased during the 1980s and 1990s.

10. Cyclical Unemployment is caused by surplus or shortage of labor in the labor market.
Unemployment rates probably understates the “true” amount of unemployment:
(i) Discouraged workers
(ii) “Underemployed” part time workers

11. Most industrialized countries have unemployment insurance:
(i) Replaces a % of lost income
(ii) Limits for eligibility: Who – people who loose jobs
Time – 6 months
* Feature of FDR’s New Deal
* Financed by payroll taxes

12. Costs of Unemployment Costs of Unemployment: (i) Lost GDP
(i) Individual human costs
(ii) Social costs

13. TABLE 2: The Economic Costs of High Unemployment
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