Macroeconomics Unemployment

1. Unemployment
Macroeconomics, Chapter 06

2. Learning Objectives
• Know how unemployment is measured.
• Know the socioeconomic costs of unemployment.
• Know the major types of unemployment.
• Know the meaning of “full employment.”
2

3. Unemployment
•Unemployment
• Total number of adults (aged 16 years or older) willing
and able to work and who are actively looking for
work and have not found a job.
3

4. Unemployment (cont'd)
•Labor Force
• Individuals aged 16 years or older who either
have jobs or who are looking and available for
jobs; the number of employed plus the
number of unemployed
7-4

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.
5

6. 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.

7. CALCULATING THE UNEMPLOYMENT
RATE
• To find the Unemployment Rate, we use the following equation:
• For Example, if there are 7 million unemployed people. And there are 150 million
people in the civilian labor force, we have the following rate of Unemployment:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑁𝑢𝑚𝑏𝑒𝑟𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
X 100
7 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
150 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= .047 .047 𝑋 100 = 4.7% 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
7

8. 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.
Total
population
Out of the
labor force
Labor force
Employed
Unemployed
8

9. Unemployment (cont'd)
• Costs of unemployment
• Personal psychological and income effects
• Economic impact includes Lost output, dependency on govt.
support, reduction in tax revenue and rural-urban migration
• Social impact include increase in crimes and use of drugs
e.g. During early 2000s, unemployment rate rose by 2% in USA,
Lost output was $200 billion of goods and services that could have been
produced
7-9

10. More Than a Century
of Unemployment
7-10
Source: U.S. Department of Labor, Bureau of Labor Statistics

11. 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.
11

12. 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.
12

13. 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.

14. TYPES OF
UNEMPLOYMENT
• Frictional
Unemployment: When
people take time to find
a job.
• Example: When someone
is laid off, changes jobs, or
need time to find a job
after graduating from
school.
14

15. TYPES OF UNEMPLOYMENT
• Structural Unemployment: When workers’ skills do not match what jobs
are available for (structure of) the current economy.
• Causes of Structural Unemployment:
• New Technology
• New Resources
• Changes in Consumer Demand
• Globalization- Shift to foreign markets
• Lack of Education
15

16. TYPES OF
UNEMPLOYMENT
• Seasonal Unemployment: When industries slow
or shut down for a season of the year to make
seasonal shifts in production schedules and
people lose their jobs.
• Examples: When people who sell Halloween
costumes or Christmas trees are out of a job
because the holiday has passed.
16

17. TYPES OF UNEMPLOYMENT
• Cyclical Unemployment: Unemployment that goes up during times of
economic turmoil, and goes down during times of economic prosperity.
• Examples: A recession causes people to save more and spend less, because of this
companies may slow down production and lay off workers.
17

18. GOAL: FULL EMPLOYMENT
• Zero Unemployment is always impossible in a market economy.
• But we strive for Full Employment where no cyclical unemployment exists in the
economy.
• An unemployment rate of about 4-6 percent is normal during full employment.
18

19. ASPECTS OF FULL EMPLOYMENT
• Full Employment means everyone who
wants a job has a job.
• But some of those people may be
Underemployed meaning they are
working at a job below their skillset.
• Example: An individual with a
Master’s degree, unable to find work
in their field, and settling for a job at
Publix. 19

20. ASPECTS OF FULL EMPLOYMENT
• Additionally, some people give up
trying to find work, especially during a
long recession.
• When people stop looking for jobs and
rely on other means to sustain
themselves, they are considered a
Discouraged Worker.
• These people are NOT actively seeking
a job and are therefore not included in
the Unemployment Rate.
• If Underemployed and Discourage
Workers were included in the
Unemployment Rate, it would be much
higher.
20

21. Question
How does the existence of discouraged workers bias the
unemployment rate?
DISCOURAGED WORKERS AND
UNEMPLOYMENT RATE
Unemployment rate = x 100
Unemployed
Labor force
= x 100 = 6.6%
10.3
155.7
Assume that there are 3 million discouraged workers.
= x 100 = 4.8%
7.3
152.7
21

22. 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.
22

23. Full Employment and the Natural Rate of
Unemployment (cont'd)
•Natural Rate of Unemployment
• The unemployment rate that is
estimated to prevail in the long-run macroeconomic
equilibrium
• Should not reflect cyclical unemployment
• When seasonally adjusted, the natural rate should
include only frictional and structural unemployment.
7-23

24. Policies for Reducing Unemployment
• Monetary policy – cutting interest rates to boost Aggregate
Demand (AD)
• Fiscal policy – cutting taxes to boost AD.
• Education and training to help reduce structural unemployment.
• Geographical subsidies to encourage firms to invest in depressed
areas.
• Lower minimum wage to reduce real wage unemployment.
• More flexible labor markets, to make it easier to hire and fire
workers.
24

25. Public Policy For Labor Force
• Facilitate Job Search
• Unemployment Insurance programs
• Minimum Wage Laws

26. Thank You