4/8/2021

Principles of Economics
Global Edition

Chapter 22
Unemployment

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The Macro Economy

DETERMINANTS OUTCOMES

Jobs
Internal market
forces
Prices

MACRO
External shocks Growth
ECONOMY
Output
Policy levers
International
balances

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Look for the answers to these questions:

• How is unemployment measured?
• What is the “natural rate of unemployment”?
• Why are there always some people
unemployed?
• How is unemployment affected by unions
and minimum wage laws?
• What is the theory of efficiency wages, and
how does it help explain unemployment?

Unemployment
Measuring Unemployment
• employed Any person 16 years old or older
(1) who works for pay, either for someone else or in his or
her own business for 1 or more hours per week,
(2) who works without pay for 15 or more hours per week
in a family enterprise, or
(3) who has a job but has been temporarily absent with or
without pay.
• unemployed A person 16 years old or older who is not
working, is available for work, and has made specific
efforts to find work during the previous 4 weeks.
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Measuring Unemployment (1 of 2)
• not in the labor force A person who is not looking for
work because he or she does not want a job or has given
up looking.
• labor force The number of people employed plus the
number of unemployed.

labor force  employed  unemployed

population  labor force  not in labor force

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Measuring Unemployment (2 of 2)
• unemployment rate The ratio of the number of people
unemployed to the total number of people in the labor
force.
unemployed
unemployment rate 
employed  unemployed

• labor force participation rate The ratio of the labor force

to the total population 16 years old or older.
labor force
labor force participation rate 
population

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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)

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management system for classroom use.

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
• Labor force = Employed + Unemployed
– The total # of workers

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Population, labour force, employment and

unemployment in the EU27 (in millions), 2008
Source: Eurostat

How BLS Measures Employment Status

Worked one or
more hours Yes
for pay? Employed
No

Temporary Yes
layoff? Unemployed

No

Searched for Yes

work? Unemployed

No

Not in Labor Force

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Labor Force Statistics

• Unemployment rate (“u-rate”):
– % of the labor force that is unemployed
# of unemployed
u−rate = 100 ×
Labor force
• Labor-force participation rate
– % of the adult population that is in the labor
force
Labor force
Labor−force participation rate = 100 ×
Adult population

11

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The Duration of Unemployment

Table 22.3 Average Duration of Unemployment, 1970-2017
Blank Weeks Blank Weeks Blank Weeks
1970 8.6 1986 15.0 2002 16.6
1971 11.3 1987 14.5 2003 19.2
1972 12.0 1988 13.5 2004 19.6
1973 10.0 1989 11.9 2005 18.4
1974 9.8 1990 12.0 2006 16.8
1975 14.2 1991 13.7 2007 16.8
1976 15.8 1992 17.7 2008 17.9
1977 14.3 1993 18.0 2009 24.4
1978 11.9 1994 18.8 2010 33.0
1979 10.8 1995 16.6 2011 39.3
1980 11.9 1996 16.7 2012 39.4
1981 13.7 1997 15.8 2013 36.5
1982 15.6 1998 14.5 2014 33.7
1983 20.0 1999 13.4 2015 29.2
1984 18.2 2000 12.7 2016 27.5
1985 15.6 2001 13.1 2017 25.0

Source: U.S. Bureau of Labor Statistics.

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The Costs of Unemployment (1 of 4)

• There are three categories of unemployment:
– Frictional unemployment
– Structural unemployment
– Cyclical unemployment

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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.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 15
management system for classroom use.

What Does the

U-Rate Really Measure?
• The u-rate:
– 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
– Still a very useful barometer of the labor
market & economy.
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Job Search
Workers have different tastes & skills, and
jobs have different requirements.
• Job search
– Process of matching workers with appropriate
jobs
• Sectoral shifts
– Changes in the composition of demand across
industries or regions of the country.
– Displace some workers, who must search for
new jobs appropriate for their skills & tastes.
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Public Policy and Job Search

• Government 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.

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Unemployment Insurance
• Unemployment insurance (UI):
– A government program that partially
protects workers’ incomes when they
become unemployed
– Increases frictional unemployment.
• 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.

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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

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 30
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Explaining Structural Unemployment

Structural
unemployment occurs unemp-
when there are not W loyment S
enough jobs to go actual
W1
around. wage

WE
Occurs when wage
is kept above
equilibrium.
D
There are three L
reasons for this…
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 31
management system for classroom use.

1. Minimum-Wage Laws
• The minimum wage
– May exceed the equilibrium 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.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 32
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The Costs of Unemployment (4 of 4)

Social Consequences
• The costs of unemployment are neither evenly distributed
across the population nor easily quantified.
• The social consequences of the Depression of the 1930s are
perhaps the hardest to comprehend:
– At the bottom were the poor and the fully unemployed,
about 25% of the labor force.
– Even those who kept their jobs found themselves working
part time.

– Many people lost all or part of their savings as the stock

market crashed and thousands of banks failed.
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Cyclical Unemployment
vs. the Natural Rate
There’s always some unemployment, though
the u-rate fluctuates from year to year.
• Natural rate of unemployment
– Normal rate of unemployment around which the
actual unemployment rate fluctuates
• Cyclical unemployment
– Deviation of unemployment from its natural rate
– Associated with business cycles, which we’ll
study in later chapters

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 24
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U.S. Unemployment, 1960–2016

Unemployment rate
percentage of labor force

Natural rate of
unemployment

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 25
management system for classroom use.

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 are fewer jobs than workers
– Usually longer-term

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 26
management system for classroom use.

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2. Unions
Are unions good or bad? Economists disagree.
• Critics:
– Unions are cartels.
– They raise wages above equilibrium, 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.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 35
management system for classroom use.

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.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 36
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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.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 37
management system for classroom use.

Four reasons why firms

might pay efficiency wages:
2. Worker turnover
– Hiring & training new workers is costly.
– Paying high wages gives workers more
incentive to stay, reduces turnover.
3. Worker quality
– Offering higher wages attracts better job
applicants, increases quality of the firm’s
workforce.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 38
management system for classroom use.

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 4/8/2021

Four reasons why firms

might pay efficiency wages:
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 equilibirum wage,
there aren’t enough jobs to go around, so
workers have more incentive to work not
shirk.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 39
management system for classroom use.

Active Learning 3 Applying the concepts

Which of the following would be most likely to
reduce frictional unemployment?
A. The government eliminates the minimum
wage.
B. The government increases unemployment
insurance benefits.
C. A new law bans labor unions.
D. More workers post their resumes at
LinkedIn.com, and more employers use
LinkedIn.com to find suitable workers to hire.
E. Sectoral shifts become more frequent.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 40
management system for classroom use.

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2. Unions
• Union:
– Worker association that bargains with
employers over wages, benefits, and
working conditions
– 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.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 33
management system for classroom use.

2. Unions
• Unions raise the wage above equilibrium:
– 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.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 34
management system for classroom use.

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 4/8/2021

2. Unions
Are unions good or bad? Economists disagree.
• Critics:
– Unions are cartels.
– They raise wages above equilibrium, 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.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 35
management system for classroom use.

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.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 36
management system for classroom use.

18
 4/8/2021

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.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 37
management system for classroom use.

Four reasons why firms

might pay efficiency wages:
2. Worker turnover
– Hiring & training new workers is costly.
– Paying high wages gives workers more
incentive to stay, reduces turnover.
3. Worker quality
– Offering higher wages attracts better job
applicants, increases quality of the firm’s
workforce.

© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 38
management system for classroom use.

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 4/8/2021

Four reasons why firms

might pay efficiency wages:
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 equilibirum wage,
there aren’t enough jobs to go around, so
workers have more incentive to work not
shirk.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 39
management system for classroom use.

Active Learning 3 Applying the concepts

Which of the following would be most likely to
reduce frictional unemployment?
A. The government eliminates the minimum
wage.
B. The government increases unemployment
insurance benefits.
C. A new law bans labor unions.
D. More workers post their resumes at
LinkedIn.com, and more employers use
LinkedIn.com to find suitable workers to hire.
E. Sectoral shifts become more frequent.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 40
management system for classroom use.

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 4/8/2021

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
• Even if there are enough jobs to go around
– Structural unemployment: when wage is
above equilibrium, not enough jobs
• 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.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 41
management system for classroom use.

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EDR - elderly dependency ratio

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Summary
• The unemployment rate is the percentage of
those who would like to work who do not have
jobs.
• Unemployment and labor force participation
vary widely across demographic groups.
• The natural rate of unemployment is the normal
rate of unemployment around which the actual
rate fluctuates. Cyclical unemployment is the
deviation of unemployment from its natural rate
and is connected to short-term economic
fluctuations.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 47
management system for classroom use.

Summary
• The natural rate includes frictional
unemployment and structural unemployment.
• Frictional unemployment occurs when
workers take time to search for the right jobs.
• Structural unemployment occurs when
above- equilibrium wages result in a surplus
of labor.
• Three reasons for above-equilibrium wages
include minimum wage laws, unions, and
efficiency wages.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, 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 or school-approved learning 48
management system for classroom use.

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CHAPTER Quick Quiz

The population of Ectenia is 100 people: 40 work full-
time, 20 work half-time but would prefer to work full-
time, 10 are looking for a job, 10 would like to work but
are so discouraged they have given up looking, 10 are
not interested in working because they are full-time
students, and 10 are retired. What is the number of
unemployed?
a. 10
b. 20
c. 30
d. 40

The population of Ectenia is 100 people: 40

work full-time, 20 work half-time but would
prefer to work full-time, 10 are looking for a job,
10 would like to work but are so discouraged
they have given up looking, 10 are not
interested in working because they are full-time
students, and 10 are retired. What is the size of
Ectenia’s labor force?
a. 50
b. 60
c. 70
d. 80

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The main policy goal of the unemployment

insurance system is to reduce the

a. search effort of the

unemployed.
b. income uncertainty
that workers face.
c. role of unions in
wage setting.
d. amount of frictional
unemployment.

In a competitive labor market, when the

government increases the minimum wage,
the result is a(n) __________ in the quantity
of labor supplied and a(n) __________ in the
quantity of labor demanded.

a. increase, increase
b. increase, decrease
c. decrease, increase
d. decrease, decrease

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Unionized workers are paid about _____

percent more than similar nonunion workers.

a. 2
b. 5
c. 15
d. 40

According to the theory of efficiency

wages,
a. firms may find it
profitable to pay above
equilibrium wages.
b. an excess supply of labor
puts downward pressure
on wages.
c. sectoral shifts are the
main source of frictional
unemployment.
d. right-to-work laws
reduce the bargaining
power of unions.

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