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MACROECONOMICS

UNEMPLOYMENT AND LABOR

Unemployment occurs when people are without work while actively searching for employment. The
unemployment rate is a percentage, and calculated by dividing the number of unemployed individuals by
the number of all currently employed individuals in the labor force. It is also referred to as joblessness,
occurs when people are without work and actively seeking employment.

Types of Unemployment

• Classical: occurs when real wages for jobs are set above the market-clearing level. It causes the
number of job seekers to be higher than the number of vacancies.

• Cyclical: occurs when there is not enough aggregate demand in the economy to provide jobs for
everyone who wants to work. Demand for goods and services decreases, less production is
needed, and fewer workers are needed.

• Structural: occurs when the labor market is not able to provide jobs for everyone who wants to
work. There is a mismatch between the skills of the unemployed workers and the skills needed for
available jobs. It differs from frictional unemployment because it lasts longer.

• Frictional: the time period in between jobs when a worker is searching for work or transitioning
from one job to another.

• Hidden: the unemployment of potential workers that is not taken into account in official
unemployment statistics because of how the data is collected. For example, workers are only
considered unemployed if they are looking for work so those without jobs who have stopped
looking are no longer considered unemployed.

• Long-term: usually defined as unemployment lasting longer than one year.

Measuring Unemployment

Unemployment is calculated as a percentage by dividing the number of unemployed individuals by the

number of all individuals currently employed in the workforce. The final measurement is called the rate of
unemployment.
Effects of Unemployment

When unemployment rates are high and steady, there are negative impacts on the long-run economic
growth. Unemployment wastes resources, generates redistributive pressures and distortions, increases
poverty, limits labor mobility, and promotes social unrest and conflict. The effects of unemployment can be
broken down into three types:

• Individual: people who are unemployed cannot earn money to meet their financial obligations.
Unemployment can lead to homelessness, illness, and mental stress. It can also cause
underemployment where workers take on jobs that are below their skill level.

• Social: an economy that has high unemployment is not using all of its resources efficiently,
specifically labor. When individuals accept employment below their skill level the economies
efficiency is reduced further. Workers lose skills which causes a loss of human capital.

• Socio-political: high unemployment rates can cause civil unrest in a country.

Reducing Unemployment

There are numerous solutions that can help reduce the amount of unemployment:

• Demand side solutions: many countries aid unemployed workers through social welfare
programs. Individuals receive unemployment benefits including insurance, compensation,
welfare, and subsidies to aid in retraining. An example of a demand side solution is
government funded employment of the able-bodied poor.

• Supply side solutions: the labor market is not 100% efficient. Supply side solutions
remove the minimum wage and reduce the power of unions. The policies are designed to
make the market more flexible in an attempt to increase long-run economic growth.
Examples of supply side solutions include cutting taxes on businesses, reducing regulation,
and increasing education.

Defining Full Employment

Full employment is defined as an acceptable level of unemployment somewhere above 0%; there is no
cyclical or deficient-demand unemployment.

Full Employment

In macroeconomics, full employment is the level of employment rates where there is no cyclical or deficient-
demand unemployment. Mainstream economists define full employment as an acceptable level of
unemployment somewhere above 0%. Full employment represents a range of possible unemployment
rates based on the country, time period, and political biases.
Ideal Unemployment

Full employment is often seen as an “ideal” unemployment rate. Ideal unemployment excludes types of
unemployment where labor-market inefficiency is reflected. Only some frictional and voluntary
unemployment exists, where workers are temporarily searching for new jobs. This classifies the
unemployed individuals as being without a job voluntarily. Ideal unemployment promotes the efficiency of
the economy.

Lord William Beveridge defined “full employment” as the situation where the number of unemployed
workers equaled the number of job vacancies available. He preferred that the economy be kept above the
full employment level to allow for maximum economic production.

Non-Accelerating Inflation Rate of Unemployment (NAIRU)

The full employment unemployment rate is also referred to as “natural” unemployment. In an effort to avoid
this normative connotation, James Tobin introduced the term “Non-Accelerating Inflation Rate of
Unemployment” also known as the NAIRU. It corresponds to the level of unemployment when real GDP
equals potential output. The NAIRU has been called the “inflation threshold. ” The NAIRU states the
inflation does not rise or fall when unemployment equals the natural rate.

As an example, the United States is committed to full employment. The “Full Employment Act” was passed
in 1946 and revised in 1978. It states that full employment in the United States is no more than 3%
unemployment for persons 20 and older, and 4% for persons aged 16 and over.
Philippines-Unemployment Rate in May 2021 is Estimated at 7.7 Percent

Highlights of the May 2021 Labor Force Survey

a. The country’s unemployment rate in May 2021 was estimated at 7.7 percent, the second
lowest reported since the start of the year, following the 7.1 percent reported in March
2021. The unemployment rate in May 2021 was lower than the unemployment rate in April
2021 at 8.7 percent. This was also lower than the unemployment rate in January 2021
(8.7%) and February 2021 (8.8%). (Table A)
b. Total number of unemployed individuals 15 years old and over decreased by 408 thousand
individuals during the month, from 4.14 million in April 2021 to 3.73 million in May 2021.
(Table A)
c. The labor force participation rate (LFPR) in May 2021 was placed at 64.6 percent,
equivalent to 48.45 million individuals who were either employed or unemployed. This is
higher than the LFPR reported in the months of January (60.5%), February (63.5%), and
April (63.2%) of 2021. (Table A)
d. Employment rate in the country in May 2021 (92.3%) rebounded from the previous month,
although slightly lower than the highest employment rate this year at 92.9 percent in
March. The May 2021 employment rate is higher than the rates reported in January
(91.3%), February 2021 (91.2%), and April 2021 (91.3%). (Table A)
Total employed persons were posted at 44.72 million in May 2021 or 1.45 million increases in
employment from the previous month’s level of 43.27 million. Employed persons reported with job
 but not at work dropped to 1.4 percent in May 2021 from 2.5 percent in April 2021. (Tables A and
2)
e. The average weekly hours worked by an employed person in May 2021 increased to 39.0
hours, from 38.0 hours in April 2021. It was, however, lower than the 39.7 hours per week
in March 2021. (Table 2)
f. Underemployment rate in May 2021 was estimated at 12.3 percent. This was the lowest
reported since January 2021. In terms of magnitude, about 5.49 million persons were
reported underemployed in May 2021. The highest estimate was reported in February
2021 at 7.85 million. (Table A)
g. Among men and women, the LFPR has been consistently higher among men than women.
LFPR for men in May 2021 was 76.1 percent while it was 52.9 percent for women.
Employment rate for men was 92.3 percent while it was 92.4 percent for women.
Moreover, men had higher underemployment rate at 14.1 percent than women at 9.7
percent. (Table D)
h. By broad industry group, the services sector continued to account for the largest share
with 57.8 percent of the total employed persons in May 2021. The agriculture and the
industry sectors accounted for 23.8 percent and 18.4 percent of the total employed
persons, respectively. (Table 1)
The following are the top five sub-sectors with the highest number of employed persons:
a. Wholesale and retail trade; repair of motor and motorcycles (10.24 million);
b. Agriculture and forestry (9.49 million);
c. Construction (4.40 million);
d. Manufacturing (3.55 million); and
e. Transportation and Storage (2.91 million). (Table B)
i. Youth LFPR was estimated at 38.4 percent in May 2021. Youth employment rate
increased to 85.5 percent in May 2021 from 84.2 percent reported in April 2021. On the
other hand, youth underemployment rate decreased to 10.0 percent in May 2021 from 15.5
percent a month ago. Youth unemployment was registered at 14.5 percent of the total
youth labor force in May 2021. (Table A)

LABOR

Labor is the amount of physical, mental, and social effort used to produce goods and services in an
economy. It supplies the expertise, manpower, and service needed to turn raw materials into finished
products and services.

Learn more about different types of labor, how it works, how it is measured, and its impact on the U.S.
economy.

Labor is the number of workers in the economy, and the effort they put into producing goods and services.
Labor can be categorized in many different ways. First is by skill level; the most basic is unskilled labor that
does not require training.1

Though it's usually manual labor, such as farmworkers, it can also be service work, such as custodial staff.
The next type is semi-skilled labor, which may require some education or training. An example
is manufacturing jobs.

Labor can also be categorized by the nature of the relationship with the employer. Most workers are wage
employees. This means they are supervised by a boss. They also receive a set weekly or bi-weekly wage
and often receive. benefits.

Contract labor is when a contract specifies the work to be produced. It’s up to the worker to define how it
gets done. The amount paid is either commission or a set fee for the work. Benefits are not paid.

How Labor Works

In return for their labor, workers receive a wage to buy the goods and services they don't produce
themselves. Those without desired skills or abilities often don't even get paid a living wage. Many countries
have a minimum wage to make sure their workers earn enough to cover the costs of living.

Labor is one of the four factors of production that drive supply. The other three are:

1. Land. This is short for the natural resources or raw materials in an economy.
2. Capital. This is an abbreviation of the capital goods, such as machinery, equipment, and chemicals
that are used in production.
3. Entrepreneurship. This is the drive to profit from innovation.

In a market economy, companies use these components of supply to meet consumer demand.

The economy runs most efficiently when all members are working at a job that uses their best skills. It also
helps when they are paid according to the value of the work produced.

The ongoing drive to find the best match between skills, jobs, and pay keeps the supply of labor very
dynamic. For this reason, there's always some level of natural unemployment. For example, frictional
unemployment allows workers the freedom to quit a job in search of a better one.

How Labor Is Measured

Labor is measured by the labor force or labor pool. To be considered part of the labor force, you must be
available, willing to work, and have looked for work recently. The size of the labor force depends not only
on the number of adults but also on how likely they feel they can get a job. It is the number of people in a
country who are employed plus the unemployed.5

Not everyone who is jobless is automatically counted as unemployed. Many are jobless by choice and
aren't looking for work. Examples include stay-at-home moms, retired seniors, and students. Others have
given up looking for work. These are discouraged workers.
The real unemployment rate measures everyone who would like a full-time job.6 It includes the discouraged
workers. It also includes those who are working part-time only because they can't get a full-time job. It's
called the real unemployment rate because it gives a broader measure of unemployment.

The labor force is used to help determine the unemployment rate. The unemployment rate formula is the
number of unemployed divided by the labor force. It tells you how many people in the labor force are
jobless but are actively looking for work.

The labor pool shrinks during and after a recession. Even though many would like a job, they aren't looking
for work. They aren't counted in the labor force.

The labor force participation rate is the labor force divided by the civilian non-institutionalized population. It
tells you how many people are available and looking for work.

The amount of goods and services that the labor force creates is called productivity. If a certain amount of
labor and a fixed amount of capital creates a lot, that's high productivity. The higher the productivity, the
greater the profit. High productivity gives the worker, company, industry, or country a competitive
advantage.