1. Copyright © 2004 South-Western Unemployment and Its Natural Rate Mods 12-13

2. Copyright © 2004 South-Western IDENTIFYING UNEMPLOYMENT Describing Unemployment Three Questions: How does government measure the economy’s rate of unemployment? What problems arise in interpreting the unemployment data? What are the causes and meanings of various types of unemployment?

3. Copyright © 2004 South-Western How Is Unemployment Measured? Unemployment is measured by the Bureau of Labor Statistics (BLS). www.bls.govwww.bls.govwww.bls.gov It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey. Based on answers to survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labor force

4. Copyright © 2004 South-Western How Is Unemployment Measured? The BLS considers a person an adult if he or she is 16 or over.

5. Copyright © 2004 South-Western How Is Unemployment Measured? Employed persons are: All persons who did any work for pay or profit during the survey week. All persons who did at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household. All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons, whether or not they were paid for the time off.

6. Copyright © 2004 South-Western How Is Unemployment Measured? Unemployed persons are: All persons who did not have a job at all during the survey reference week, made at least one specific active effort to find a job during the prior 4 weeks, and were available for work (unless temporarily ill). All persons who were not working and were waiting to be called back to a job from which they had been laid off (they need not be looking for work to be classified as unemployed).

7. Copyright © 2004 South-Western How Is Unemployment Measured? Labor Force The labor force is the total number of workers, including both the employed and the unemployed.

8. Copyright © 2004 South-Western How Is Unemployment Measured? NOT in the Labor Force A person who fits none of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force. Also excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces

9. The BLS Breakdown of the Population for Jan 2014 Copyright©2003 Southwestern/Thomson Learning Adult Population (244.8 million) Labor Force (155.4 million) Not in labor force (91.4 million) Unemployed (10.2 million) Employed 145.2 million

10. Copyright © 2004 South-Western Movement into/out of Pop/Labor Force/UE Diagram on Board

11. Copyright © 2004 South-Western How Is Unemployment Measured? The unemployment rate is calculated as the percentage of the labor force that is unemployed. So…current Unemp rate = 6.6%

12. Copyright © 2004 South-Western The labor-force participation rate is the percentage of the adult population that is in the labor force. Labor force Participation rate = Labor Force x 100 Adult Population How Is Unemployment Measured? So…current Labor Force Part rate = 63%

13. Copyright © 2004 South-Western Does the Unemployment Rate Measure What We Want It To? Understating the true level of unemployment discouraged workers marginally attached workers Underemployed Adding these in makes a new measure: U-6 unemployment So…the BLS reports the unemployment rate to be 6.6% for January 2014(U-3 measure) But…the BLS estimates the U-6 unemployment rate at 12.7% for Jan 2014

14. Copyright © 2004 South-Western Does the Unemployment Rate Measure What We Want It To?

15. The Labor-Market Experiences of Various Demographic Groups over time Copyright©2004 South-Western

16. Labor Force Participation Rates for Men and Women Since 1950 Copyright©2003 Southwestern/Thomson Learning 100 80 60 40 20 0 1950195519601965197019751980198519902000 Labor-Force Participation Rate (in percent) Women Men 1995

17. Copyright © 2004 South-Western Labor Force Participation Rates for Women and Teens Since 1950

18. Copyright © 2004 South-Western Growth and Unemployment Patterns to remember: When the Business Cycle contracts, the Unemployment Rate ??????? Goes UP When the Business Cycle expands, the Unemployment Rate ??????? Goes Down Even when the economy is booming, the Unemployment Rate is never ??????? ZERO

19. Copyright © 2004 South-Western Types of Unemployment Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs. In other words, it takes time for workers to search for the jobs that best suit their tastes and skills. It is caused by the time spent searching for the “right” job. Job search the process by which workers find appropriate jobs given their tastes and skills. results from the fact that it takes time for qualified individuals to be matched with appropriate jobs.

20. Copyright © 2004 South-Western Types of Unemployment Structural unemployment is the unemployment that results because there are more people looking for work than there are jobs at the present wages. This results from jobs available in some labor markets changing due to technology changes in an industry, or resources involve relocations of jobs to other areas

21. Copyright © 2004 South-Western Structural Unemployment Can lead to a persistent surplus due to: Minimum wages Labor Unions above- equilibrium wages Efficiency wages Side effects of public policy

22. Copyright © 2004 South-Western Reasons for Wages above Equilibrium Minimum Wages would keep above-equilibrium wages, thus creating ongoing Structural unemployment Unions often negotiate above-equilibrium wages, thus increasing ongoing Structural unemployment Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. The theory of efficiency wages states that firms operate more efficiently if wages are above the equilibrium level. Worker Health Worker Turnover Worker Effort. Worker Quality

23. Copyright © 2004 South-Western Structural Unemployment

24. Copyright © 2004 South-Western Types of Unemployment Cyclical Unemployment refers to the year- to-year fluctuations in unemployment around its natural rate. It is associated with short-term ups and downs of the business cycle—booms and recessions

25. Copyright © 2004 South-Western Why Are There Always Some People Unemployed? There is a natural rate of unemployment in the economy, although it can change over time It is the amount of unemployment that the economy normally experiences. The CBO says that this rate was/is: 5.3% in the 1950’s 6.3% in the 1970’s 4.8% pre-recession (2007) 6% (2014)

26. Copyright © 2004 South-Western The Natural Rate of Unemployment Natural unemployment = Frictional unemployment + Structural unemployment Actual unemployment = Natural unemployment + Cyclical unemployment

27. Copyright © 2004 South-Western Unemployment Rate Since 1978 Copyright©2003 Southwestern/Thomson Learning 10 8 6 4 2 0 19701975196019651980198519902005 Percent of 19952000 Natural rate of unemployment Unemployment rate

28. Copyright © 2004 South-Western Unemployment Insurance Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. Offers workers partial protection against job losses. Offers partial payment of former wages for a limited time to those who are laid off Can create some amount of ongoing Structural Unemployment