2. Learning Objectives 06-01. Know how unemployment is measured.
Know the socioeconomic costs of unemployment.
Know the major types of unemployment.
Know the meaning of “full employment.”
We will visit these objectives to summarize the chapters.

3. The Labor Force
Labor force: all persons age 16 and over who are either employed or actively seeking work.
Out of the labor force: those not working and not actively seeking employment.
Out of the
labor force
We need to identify the base number before we can separate people into employed and unemployed.
The labor force is about ½ the population and has been so for a century or so.
Total
population
Employed
Labor force
Unemployed

4. Impact of Labor Force Growth
The labor force grows due to population growth and immigration, adding 2 million new workers yearly.
The PPC pushes outward, increasing the capacity to produce goods and services.
We need to create 2 million new jobs for the expanding labor force, or we end up at point F inside the PPC.
Labor is one of the resource categories, so as labor increases in size, the PPC will push outward.

5. Unemployment
Unemployment: the inability of labor force participants to find jobs.
This is an idled resource, so the economy operates inside its PPC, in the inefficient zone.
Okun’s Law: a 1 percent increase in unemployment results in a 2 percent decrease in GDP.
Fully employed, we would be operating on or near the PPC.
The higher the unemployment rate, the further inside the PPC we are.
Okun’s Law is an empirical relationship, obtained by regression, which indicates the relationship between GDP growth and unemployment.

6. Measuring Unemployment
A person is counted as unemployed if he or she is not working but is actively seeking work.
Unemployment rate: the proportion of the labor force that is unemployed:
Number of unemployed people
Unemployment rate = Labor force
The textbook fails to include the “x 100” in the formula: #unemployed x 100/# in labor force.
Students might need to be reminded how to make a decimal outcome into a percentage.
It might be useful to elaborate on the “actively seeking work” part of the definition.
Later the discussion will include discouraged workers.
14,825,000
2010 unemployment rate = = %
153,889,000

7. Demographics of Unemployment
The unemployment rate is higher for
Men than women.
Blacks and Hispanics than whites.
Less educated people than higher-educated people.
Teenagers than people older than them.
There is a potential discussion lying in wait for each demographic on the slide.

8. Duration of Unemployment
Duration: how long does joblessness last?
When the economy is growing, both the unemployment rate and the duration decrease.
When the economy stagnates or goes into decline, both the unemployment rate and the duration increase.
This part of the unemployment problem became highly visible during the Great Recession.
Congress extended unemployment compensation payments because the duration was much longer than in previous recessions.

9. Reasons for Unemployment
Job leavers.
They quit to seek other opportunities.
Job losers.
They are laid off or fired.
New entrants.
First-time job seekers.
Reentrants.
They had left the labor force but have returned.
Job leavers – we will see them again as frictional unemployment.
Job losers – they could be either cyclical or structural unemployment.
It might be useful to keep these in mind when the discussion of the types of unemployment comes up.

10. Discouraged Workers
Former job seekers who have given up and no longer actively seek employment.
They drop out of the labor force.
They are no longer counted in unemployment statistics.
When a discouraged worker drops out of the labor force, the denominator (labor force) decreases by one and the numerator (unemployed) drops by one.
If the numbers were 3/10 before, or 30%, then the numbers are 2/9 after, or 22%. The unemployment rate falls when workers become discouraged.
But the discouraged worker still does not have a job.
This is one of the glitches in our measurement of unemployment.

11. Underemployment
People who want full-time work in their field but can find only part-time work or work at jobs below their capability.
They are counted as employed.
Here is another glitch.
Those underemployed people really want to work full-time or in the fields for which they trained.
This is a great example of misuse (or underuse) of available resources.

12. Defining Full Employment
Full employment is not the same as zero unemployment.
There are four categories of unemployment.
Seasonal unemployment.
Fictional unemployment.
Structural unemployment.
Cyclical unemployment.
At full employment, all of these exist except cyclical unemployment.
This concept is difficult for some to grasp.
Why not zero unemployment?
To have zero unemployment, we must eliminate all four unemployment categories.
To eliminate frictional is to forbid anyone from voluntarily leaving his/her job.
To eliminate structural is to forbid any firm from reorganizing in response to market decline or technological change.
Both are freedom issues, and both would require a heavy-handed government.

13. Defining Full Employment
Seasonal unemployment: unemployment due to seasonal changes in employment.
The Labor Department reports seasonally adjusted unemployment rates for every month.
Unemployment data exclude the effects of seasonal unemployment.
Examples: city pool lifeguard; Colorado ski instructor; beer seller at the baseball stadium; lawn mower.
Almost all economic data are seasonally adjusted before being made public.

14. Defining Full Employment
Frictional unemployment: brief periods of unemployment experienced by people moving between jobs or into the labor market.
Adequate demand for frictionally unemployed.
They have skills required for existing jobs.
The job search period is relatively short.
This category varies greatly across the world.
In the United States, we are a very mobile people and move toward better opportunities seemingly at the drop of a hat.
In Europe, not so much, except for immigrant workers moving into Europe from the Asia, the Middle East, and Africa.

15. Defining Full Employment
Structural unemployment: unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.
Caused by a change in the market for the product made, or
… a change in the technology or process by which the goods is made.
The firm sees a declining demand for its goods and reorganizes, omitting some product lines and switching to others.
Or technological innovation changes the process by which goods are made.
Either way, the number and type of employees will change. Those who lose their jobs are structurally unemployed.
The mismatch comes when the skilled workers are in one place and the openings that could use their talents are in another.

16. Defining Full Employment
Cyclical unemployment: unemployment caused by a decline in economic activity.
The demand for products decreases and workers get laid off.
Results in an excess supply of workers for the remaining available jobs.
The economy must grow at least as fast as the labor force to avoid cyclical unemployment.
This is the one that macro will focus on.
Those cyclically unemployed lost their jobs because of the economic downturn.
In the old days (pre-1980), the expectation was that when recovery began, these people would be called back to their original jobs.
True in the metal-bending industrial age; not so much in the information age.

17. Defining Full Employment
Economists think that we are near full employment when rising prices signal that we are nearing production capacity – that is, the PPC.
Inflationary flashpoint: the rate of output at which inflationary pressures intensify.
Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.
When there is high unemployment, the trade-off is that a big drop in unemployment is matched with a small increase in inflation.
As we approach full employment, however, the trade-off gets worse; and as unemployment continues to fall, inflation accelerates.
The GDP level where the acceleration begins is the inflationary flashpoint.

18. Defining Full Employment
Full employment: the lowest unemployment rate compatible with price stability; zero cyclical unemployment.
Both frictional and structural unemployment exist at full employment.
Full employment ranges between 4 and 6 percent unemployment, depending on the size of structural unemployment.
The percentage of unemployment at full employment is not steady.
As the economy increases its structural change, the percentage of unemployment at full employment will rise.
Big increases in technology implementation have created new industry and jobs and led to the elimination of old industry and jobs, as in the 1990s.
Major restructuring during the Great Recession probably has caused this to happen again as firms restructure.
Before the Great Recession began, the percentage of unemployment at full employment was about 4.4%. It could jump to 6% or so.

19. Changes in Structural Unemployment
Changes in structural unemployment come from changes in society itself.
Growing numbers of youth and women.
Changes in transfer payments for the jobless.
Changes in products demanded by consumers.
Changes in how (and where) products are made.
During periods of change, structural unemployment increases.
When changes are fully absorbed, structural unemployment decreases.
This slide summarizes how structural unemployment can change.
Frictional unemployment does not change as radically.

20. The “Natural” Rate of Unemployment
Natural rate of unemployment: long-term rate of unemployment determined by structural forces in labor and product markets.
No society expects everybody to work at full pace.
There are institutions that say no to that: the 40-hour week, minimum wage, child labor laws, retirement plans, and so on. Society has rules that affect how many will be in the labor force.
Structures in the product and factor markets also lead to the conclusion that there seems to be a rate of unemployment that is “natural.”