1. Unemployment
Barnett
UHS
AP Econ

2. Labor Force Statistics
Produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
Based on regular survey of 60,000 households
Based on “adult population” (16 yrs or older)
BLS also produces the CPI statistics. 2

3. Labor Force Statistics
BLS divides population into 3 groups:
Employed: paid employees, self-employed, and unpaid workers in a family business
Unemployed: people not working who have looked for work during previous 4 weeks
Not in the labor force: everyone else
The labor force is the total # of workers, including the employed and unemployed. 3

5. Labor Force Statistics
Unemployment rate (“u-rate”): % of the labor force that is unemployed
u-rate
# of unemployed
labor force
= 100 x
Labor force participation rate: % of the adult population that is in the labor force
labor force participation rate
labor force
adult population
= 100 x 5

6. ACTIVE LEARNING 1 Calculate labor force statistics
Compute the labor force, u-rate, adult population, and labor force participation rate using this data:
Adult population of the U.S. by group, April 2011
# of employed
139.7 million
# of unemployed
13.7 million
not in labor force
85.7 million
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. ACTIVE LEARNING 1 Answers
Labor force = employed + unemployed = = million U-rate = 100 x (unemployed)/(labor force) = 100 x 13.7/153.4 = 8.9%
Your students may get slightly different answers due to rounding differences.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. ACTIVE LEARNING 1 Answers
Population = labor force + not in labor force = = LF partic. rate = 100 x (labor force)/(population) = 100 x 153.4/239.1 = 64.2%
Your students may get slightly different answers due to rounding differences.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Labor Force Statistics for Whites & Blacks, April 2011
Adults (20 yrs & older)
u-rate
LF part. rate
White, male
7.9%
73.9%
White, female
7.0
59.8
Black, male
17.0
68.6
Black, female
13.4
62.0
Within either racial group, males have higher participation rates than females.
Blacks have far higher unemployment rates than whites. This is of great concern to many economists and policymakers.
Source: Bureau of Labor Statistics, U.S. Department of Labor
look for latest “employment situation” 9

10. Labor Force Statistics for Whites & Blacks, April 2011
Teens (16–19 yrs)
u-rate
LF part. rate
White
22.3%
36.2%
Black
41.6%
26.2%
As one would expect, teens have lower participation rates and higher unemployment rates than adults. What is striking, though, are the racial disparities: the proportion of white teens in the labor force, getting skills and experience that will help them later as adult job market participants, is far higher than the black teen participation rate. And the unemployment rate for black teens is far higher than for white teens.
Source: Bureau of Labor Statistics, U.S. Department of Labor
look for latest “employment situation” 10

11. Labor Force Statistics for Other Groups, April 2011
All ages
u-rate
LF part. rate
Asian
6.4%
64.1%
Hispanic
11.8
66.6
Compared to the national average, unemployment is higher for Hispanics and lower for Asians. The participation rates of these groups are similar to the national average.
Note: Asian is the only demographic group for which seasonally adjusted data were not available. The figures for all other groups are seasonally adjusted. (The seasonal adjustments seem to make relatively little difference in most months.)
Source: Bureau of Labor Statistics, U.S. Department of Labor
look for latest “employment situation”
Asian data remains not seasonally adjusted. 11

12. Labor Force Statistics by Education Level, April 2011
Adults (25 yrs & older)
u-rate
LF part. rate
less than h.s.
14.6%
45.5%
h.s. diploma
9.7
60.4
some college or assoc degree
7.5
69.7
bachelor’s degree or more
4.5
77.0 12

13. Unemployment Demographics

14. LF Participation Rates by Sex, 1950–2009
Men
male
percent
female
Women 14

15. Alternative Measures of Labor Underutilization15

16. ACTIVE LEARNING 2 Limitations of the u-rate
In each of the following, what happens to the u-rate? Does the u-rate give an accurate impression of what’s happening in the labor market?
A. Sue lost her job and begins looking for a new one.
B. Jon, a steelworker who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work.
C. Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientist. Immediately, he takes a part-time job at McDonald’s until he can find another job in his field.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. ACTIVE LEARNING 2 Answers
A. Sue lost her job and begins looking for a new one.
u-rate rises
A rising u-rate gives the impression that the labor market is worsening, and it is.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. ACTIVE LEARNING 2 Answers
B. Jon has been out of work since last year, becomes discouraged, stops looking for work.
Discouraged workers
would like to work but have given up looking for jobs
classified as “not in the labor force” rather than “unemployed”
U-rate falls because Jon is no longer counted as unemployed.
A falling u-rate gives the impression that the labor market is improving, but it is not.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. ACTIVE LEARNING 2 Answers
C. Sam lost his $80,000 job, and takes a part-time job at McDonald’s until he finds a better one.
U-rate unchanged because a person is “employed” whether they work full or part time.
Things are worse, but the u-rate fails to show it.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. What Does the U-Rate Really Measure?
The u-rate is not a perfect indicator of joblessness or the health of the labor market:
It excludes discouraged workers.
It does not distinguish between full-time and part-time work, or people working part time because full-time jobs not available.
Some people misreport their work status in the BLS survey.
Despite these issues, the u-rate is still a very useful barometer of the labor market & economy.
We learned that other macroeconomic indicators were imperfect: GDP is an imperfect indicator of society’s well-being, and the CPI tends to overstate increases in the cost of living. Yet, the unemployment rate remains highly useful. For example, when the unemployment rate rises, it is almost always true that things are getting worse in the labor market.
The BLS computes other measures of joblessness, such as (unemployed plus discouraged workers) as a percentage of (the labor force plus discouraged workers). For more details, refer your students to Table 2 in this chapter of the textbook. 20

21. The Duration of Unemployment
Most spells of unemployment are short:
Typically 1/3 of the unemployed have been unemployed under 5 weeks, 2/3 have been unemployed under 14 weeks.
Only 20% have been unemployed over 6 months.
Yet, most observed unemployment is long term.
The small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the unemployment observed over time.
Most of the economy’s unemployment is attributable to relatively few workers who are jobless for long periods of time 21

22. Cyclical Unemployment vs. the Natural Rate
There’s always some unemployment, though the u-rate fluctuates from year to year.
Natural rate of unemployment
the normal rate of unemployment around which the actual unemployment rate fluctuates
Cyclical unemployment
the deviation of unemployment from its natural rate
associated with business cycles, which we’ll study in later chapters 22

23. U.S. Unemployment, 1960–2011 Unemployment rate
percentage of labor force
Natural rate of unemployment

24. Explaining the Natural Rate: An Overview
Even when the economy is doing well, there is always some unemployment, including:
Frictional unemployment
occurs when workers spend time searching for the jobs that best suit their skills and tastes
short-term for most workers
Structural unemployment
occurs when there is a mismatch between workers’ skills and available jobs
Mankiew - occurs when there are fewer jobs than workers (Min Wage, Unions, Efficiency Wages)
usually longer-term 24

25. Job Search
Workers have different tastes & skills, and jobs have different requirements.
Job search is the process of matching workers with appropriate jobs.
Sectoral shifts are changes in the composition of demand across industries or regions of the country.
Such shifts displace some workers, who must search for new jobs appropriate for their skills & tastes.
The economy is always changing, so some frictional unemployment is inevitable. 25

26. Public Policy and Job Search
Govt employment agencies provide information about job vacancies to speed up the matching of workers with jobs.
Public training programs aim to equip workers displaced from declining industries with the skills needed in growing industries. 26

27. Unemployment Insurance
Unemployment insurance (UI): a govt program that partially protects workers’ incomes when they become unemployed
UI increases frictional unemployment. To see why, recall one of the Ten Principles of Economics: People respond to incentives.
UI benefits end when a worker takes a job, so workers have less incentive to search or take jobs while eligible to receive benefits. 27

28. Unemployment Insurance
Benefits of UI:
Reduces uncertainty over incomes
Gives the unemployed more time to search, resulting in better job matches and thus higher productivity 28

29. unemployment—Recent History
December 2007 start of the recession:
Unemployment 5.0 %
September %
January %
Total current unemployment 16.4 %
Currently over 14 million unemployed
6 million have been unemployed for six months = post WWII record
4.3 million unemployed more than a year
Discouraged workers = 6.4 million

32. Explaining Structural Unemployment
Structural unemployment occurs when not enough jobs to go around.
unemp-loyment W L S
actual wage W1 D WE
Occurs when wage is kept above eq’m.
There are three reasons for this…
On this graph, WE is the equilibrium wage. 32

33. 1. Minimum-Wage Laws
The min. wage may exceed the eq’m wage for the least skilled or experienced workers, causing structural unemployment.
But this group is a small part of the labor force, so the min. wage can’t explain most unemployment. 33

34. 2. Unions
Union: a worker association that bargains with employers over wages, benefits, and working conditions
Unions exert their market power to negotiate higher wages for workers.
The typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work. 34

35. 2. Unions
When unions raise the wage above eq’m, quantity of labor demanded falls and unemployment results.
“Insiders” – workers who remain employed, are better off
“Outsiders” – workers who lose their jobs, are worse off
Some outsiders go to non-unionized labor markets, which increases labor supply and reduces wages in those markets. 35

36. 2. Unions Are unions good or bad? Economists disagree.
Are unions good or bad? Economists disagree.
Critics: Unions are cartels. They raise wages above eq’m, which causes unemployment and/or depresses wages in non-union labor markets.
Advocates: Unions counter the market power of large firms, make firms more responsive to workers’ concerns. 36

37. 3. Efficiency Wages
The theory of efficiency wages: Firms voluntarily pay above-equilibrium wages to boost worker productivity.
Different versions of efficiency wage theory suggest different reasons why firms pay high wages.
In the case of unions and minimum wage laws, firms that pay above-equilibrium wages do so involuntarily. The theory of efficiency wages, however, suggests that firms may willingly pay extra-high wages in order to increase the productivity of their workers. 37

38. 3. Efficiency Wages
Four reasons why firms might pay efficiency wages:
1. Worker health In less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, makes them healthier, more productive. 2. Worker turnover Hiring & training new workers is costly. Paying high wages gives workers more incentive to stay, reduces turnover.
1. This is clearly not relevant in rich countries like the U.S., where equilibrium wages for nearly all workers are way more than enough to provide for the workers’ nutritional requirements. But rich countries have a fairly small proportion of the world’s population.
2. Besides the costs of placing ads, interviewing candidates, and training new hires, new workers are usually less productive in their first few months on the job—it takes time to learn how to perform their duties efficiently. For all of these reasons, turnover is costly to firms. 38

39. 3. Efficiency Wages Four reasons why firms might pay efficiency wages:
Four reasons why firms might pay efficiency wages:
3. Worker quality Offering higher wages attracts better job applicants, increases quality of the firm’s workforce. 4. Worker effort Workers can work hard or shirk. Shirkers are fired if caught. Is being fired a good deterrent? Depends on how hard it is to find another job. If market wage is above eq’m wage, there aren’t enough jobs to go around, so workers have more incentive to work not shirk.
3. If firms responded to the surplus of labor by reducing wages, then the most competent applicants may choose not to apply as they may have better opportunities elsewhere.
4. In case you’re not familiar with efficiency wage theory, here’s the Cliff Notes version.
In many jobs, each worker can choose how hard he or she works. For simplicity, suppose there are just two choices: working hard, or shirking—neglecting one’s duties and responsibilities at work.
Clearly, the firm suffers when its workers shirk: output and hence revenue & profit are lower. So, the firm fires workers caught shirking. However, monitoring worker effort is costly and imperfect, and workers know there’s a good chance they won’t be caught if they shirk.
Paying workers an above-equilibrium wage gives them an incentive to work hard rather than shirk. If their firm is the only firm paying efficiency wages, then they stand to lose a particularly good job if caught shirking. If all firms are paying efficiency wages, then there will be structural unemployment due to the market wage being above its equilibrium level. In this case, the incentive to work rather than shirk is the prospect of an extended spell of unemployment. This is why Shapiro & Stiglitz titled their 1984 AER article “Equilibrium Unemployment as a Worker Discipline Device.” 39

40. ACTIVE LEARNING 3 Applying the concepts
Which of the following would be most likely to reduce frictional unemployment?
A. The govt eliminates the minimum wage.
B. The govt increases unemployment insurance benefits.
C. A new law bans labor unions.
D. More workers post their resumes at Monster.com, and more employers use Monster.com to find suitable workers to hire.
E. Sectoral shifts become more frequent.
This would be a good exam question. Answering it correctly requires the following knowledge and skills:
Knowing the definitions of “frictional unemployment” and “sectoral shifts”
Knowing that minimum wage laws and labor unions affect structural, not frictional, unemployment
Knowing that unemployment insurance increases frictional unemployment
Being able to match policies and events to the various causes of unemployment discussed in the preceding slides and in the textbook
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

41. ACTIVE LEARNING 3 Answers
Which of the following would be most likely to reduce frictional unemployment?
A. The govt eliminates the minimum wage.
C. A new law bans labor unions.
These are likely to reduce structural unemployment, not frictional unemployment.
The minimum wage and labor unions are two reasons why the actual wage might be above the equilibrium wage, which causes structural unemployment (as Mankiw defines it), not frictional unemployment.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

42. ACTIVE LEARNING 3 Answers
Which of the following would be most likely to reduce frictional unemployment?
B. The govt increases unemployment insurance benefits.
E. Sectoral shifts become more frequent.
These are likely to increase frictional unemployment, not reduce it.
Unemployment insurance increases frictional unemployment by reducing the opportunity cost of being unemployed, and reducing the urgency of finding work.
Because workers have different skills and jobs have different skill requirements, it takes time for workers displaced from declining industries to get jobs in the younger, growing industries. While they are searching, these workers are frictionally unemployed. If sectoral shifts become more frequent, then we would see more of this type of unemployment.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

43. ACTIVE LEARNING 3 Answers
Which of the following would be most likely to reduce frictional unemployment?
D. More workers post their resumes at Monster.com, and more employers use Monster.com to find suitable workers to hire.
Likely to speed up the process of matching workers & jobs, which would reduce frictional unemployment.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

44. Explaining the Natural Rate of Unemployment: A Summary
The natural rate of unemployment consists of
frictional unemployment
It takes time to search for the right jobs
Occurs even if there are enough jobs to go around
structural unemployment
When wage is above eq’m, not enough jobs
Due to min. wages, labor unions, efficiency wages
In later chapters, we will learn about cyclical unemployment, the short-term fluctuations in unemployment associated with business cycles. 44