ECON 102: Unemployment Formulas

In this document, we present the most important formulas used in Module 6.

Labour Market Characteristics

The variables are
• U: The number of unemployed workers.
• E: The number of employed workers.

• LF: The labour force which is equal to U+E.

• WAP: Number of individuals in or out of the labour force that are old enough to work. When
studying the characteristics of a particular group (males, females, 24 to 35 year old, etc.), WAP
is the number of working age individuals that belong to that group. The working age in Canada
is 15 years and over.

Unemployment Rate (UR)

U
UR = × 100%
LF

Participation rate (PR)

LF
PR = = ×100%
WAP

Employment rate (ER)

E
ER = × 100%
WAP

Relationship Between UR, PR and ER

ER
UR = 1 −
PR

Duration of Unemployment
The variables are

• D: Duration of unemployment, which is the average time new unemployed workers remain un-
employed.
• I: Incidence of unemployment is the proportion of workers in the labour force that become
unemployed over a given period. In other words, it is the number of new unemployed workers
divided by the labour force.

Econ 102 Module 6: Formulas Page 1 of 3

Unemployment Rate Versus Duration
UR = D × I

Dynamics of the Labour Market

We illustrate the dynamics with this numerical example:
• LF = 1,000.
• Every month, 10 workers become unemployed for 1 month.
• Every month, 20 workers become unemployed for 2 months.
• Every month, 15 workers become unemployed for 3 months.
• Every month, 12 workers become unemployed for 6 months.

Incidence of Unemployment (I)

It is the total number of workers who become unemployed each month divided by the labour force:
10 + 20 + 15 + 12
I= = 5.7%
1, 000

Steady State
The steady state is reached when the number of workers who become unemployed is equal to the
number of unemployed workers who become employed. It is a steady state because the UR is constant.
If UR=0 in month 0, and the above dynamics starts on month 1, the steady state is reached during
the sixth month (the highest of all duration lengths)

The Number of Unemployed at the Steady State in Each Group

At the steady states we have the following number of unemployed workers from each group:
• Number of unemployed workers that remain unemployed for 1 month: 10 × 1 = 10.
• Number of unemployed workers that remain unemployed for 2 months: 20 × 2 = 40.
• Number of unemployed workers that remain unemployed for 3 months: 15 × 3 = 45.
• Number of unemployed workers that remain unemployed for 6 months: 12 × 6 = 72.

The Unemployment Rate at the Steady State

At the steady states, the unemployment rate is the total number of unemployed workers in each group
divided by LF:
10 + 40 + 45 + 72 167
UR = = = 16.7%
1, 000 1, 000

The Average Duration at the Steady State

The average duration can be computed using the UR and I:
UR 16.7%
D= = = 2.9298 months
I 5.7%

Econ 102 Module 6: Formulas Page 2 of 3

Alternative Approach
The duration can be computed directly as the total number of months new unemployed workers will
remain unemployed divided by the number of new unemployed each month:

(10 × 1 month) + (20 × 2 months) + (15 × 3 months) + (12 × 6 months)

D =
10 + 20 + 15 + 12
167 months
=
57 new unemployed workers
= 2.9298 months per new unemployed workers

Then, the steady state UR can be computed using the duration formula

U R = 2.9298 × 5.7% = 16.7%

Econ 102 Module 6: Formulas Page 3 of 3