1. Unemployment

2. Learning Objectives To learn that unemployment is the natural consequence of labor force dynamics. To learn the differences between the various types of unemployment and the policy consequences of each. To understand Okun’s Law.

3. Unemployment The unemployment rate is the number of unemployed people, expressed as a percentage of the labor force. –Labor Force = (Civilian non-institutional population over age 16 - People not in the labor force (students, homemakers, retirees, discouraged workers) –Unemployed = Labor force - People who are employed. –Unemployment rate = People who are unemployed/Labor force times 100

4. Natural Rate of Unemployment The natural rate of unemployment is the percentage of the labor force that can normally be expected to be unemployed for reasons other than cyclical fluctuations in real GDP. –The natural rate of unemployment is related to the willingness of workers to voluntarily separate from their jobs, job loss, the duration of unemployment periods, the rate of change in the pattern of demand, and changes in technology.

5. The Natural Rate of Unemployment The natural rate of unemployment designates the level of unemployment at which the inflation rate is constant, with no tendency to accelerate or decelerate. The natural rate of unemployment in the United States is approximately 5.5%.

6. Unemployment and Okun’s Law The relationship between unemployment and GDP is expressed by Okun’s Law. Okun’s Law says that the percentage change in real GDP equals 3% – 2 times the change in the unemployment rate. Why? –GDP has grown over the long run by 3%, and Okun found that for every 1% increase in unemployment real GDP growth fell by 2%. % /\ GDP real = 3% – 2 x (8% – 6%) = – 1%

7. Types of Unemployment Cyclical Unemployment –The difference between the actual unemployment rate and the natural rate of unemployment. Frictional/Turnover Unemployment –One of two components of the natural rate of unemployment. Structural/Mismatch Unemployment –One of two components of the natural rate of unemployment.

8. What Causes Unemployment? Frictional /Turnover Unemployment –Job Search Structural/Mismatch Unemployment –Skill Mismatch Unemployed workers’ skills do not match the needs of employers. –Location Mismatch Unemployed workers’ location do not match the location of the jobs. Cyclical Unemployment –Real-Wage Rigidity The failure of wages to adjust until labor supply equals labor demand.

9. Can the Unemployment Rate Be Reduced to Zero? No. –In the real world, where structural unemployment exists, any attempt to increase aggregate demand to push the rate of unemployment down to zero will create job vacancies for the skills that are in short supply and in the locations where labor is scarce, but will have no effect in areas where there is skill mismatch or location mismatch.