13e

Chapter 06:
Unemployment

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Unemployment
We recognize unemployment as one
of the two major macroeconomic
problems we can face.
When is a person unemployed?
What are the costs of unemployment?
What is an appropriate goal for full
employment?

6-2

Learning Objectives
06-01. Know how unemployment is
measured.
06-02. Know the socioeconomic costs
of unemployment.
06-03. Know the major types of
unemployment.
06-04. Know the meaning of full
employment.
6-3

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
Employed
Labor force
Unemployed

6-4

The Labor Force

The labor force comprises about half the
population.
The size of the labor force has more
than doubled since 1960 due to
population growth.
The labor force participation rate
increased rapidly due to the increasing
numbers of women joining the labor
force.
6-5

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.

6-6

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.
Okuns Law: a 1 percent increase in
unemployment results in a 2 percent
decrease in GDP.
6-7

Measuring Unemployment
A person is counted as unemployed if
he or she is not working but is actively
seeking work.
Unemployment rate: the proportion
of the labor force that is unemployed:
Number of unemployed
people
Unemployment rate =
2010 unemployment rate =

Labor force
=

14,825,000
9.6%
153,889,000

6-8

Exercise
Number of unemployed
people
Unemployment rate =

Labor force

Calculate the unemployment rate.

#in labor force = 200,000
#unemployed = 10,000
Unemployment rate = (10,000/200,000) x 100
= 5%

6-9

Demographics of
Unemployment
The unemployment rate is higher for
Men than women.
Blacks and Hispanics than whites.
Less educated people than highereducated people.
Teenagers than people older than them.

6-10

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.
6-11

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.
6-12

Discouraged Workers
Former job seekers who have given
up and no longer actively seek
employment.
They drop out of the labor force.
They are no longer counted in
unemployment statistics.

6-13

Underemployment
People who want full-time work in
their field but can find only part-time
work or work at jobs below their
capability.
They are counted as employed.

6-14

The Human Costs

of Unemployment

Loss of income.
Loss of confidence.
Social stress.
Declining health.

6-15

Defining Full Employment

Full employment is not the same as zero
unemployment.
There are four categories of
unemployment.
Seasonal unemployment.
Fictional unemployment.
Structural unemployment.
Cyclical unemployment.

At full employment, all of these exist

except cyclical unemployment.
6-16

Defining Full Employment

Seasonal unemployment:
unemployment due to seasonal
changes in employment.
The Labor Department reports
seasonally adjusted unemployment
rates for every month.
Unemployment data exclude the effects
of seasonal unemployment.
6-17

Defining Full Employment

Frictional unemployment: brief
periods of unemployment experienced
by people moving between jobs or
into the labor market.
Adequate demand for frictionally
unemployed.
They have skills required for existing jobs.
The job search period is relatively short.
6-18

Defining Full Employment

Structural unemployment:
unemployment caused by a mismatch
between the skills (or location) of job
seekers and the requirements (or
location) of available jobs.
Caused by a change in the market for the
product made, or
a change in the technology or process by
which the goods is made.
6-19

Defining Full Employment

Cyclical unemployment: unemployment
caused by a decline in economic activity.
The demand for products decreases and
workers get laid off.
Results in an excess supply of workers for the
remaining available jobs.
The economy must grow at least as fast as the
labor force to avoid cyclical unemployment.

6-20

Defining Full Employment

Economists think that we are near full
employment when rising prices signal that
we are nearing production capacity that
is, the PPC.
Inflationary flashpoint: the rate of
output at which inflationary pressures
intensify.
Full employment: the lowest
unemployment rate compatible with price
stability; zero cyclical unemployment.

6-21

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.
6-22

Changes in Structural
Unemployment
Changes in structural unemployment come
from changes in society itself.

Growing numbers of youth and women.

Changes in transfer payments for the jobless.
Changes in products demanded by consumers.
Changes in how (and where) products are made.

During periods of change, structural

unemployment increases.
When changes are fully absorbed, structural
unemployment decreases.
6-23

The Natural Rate of

Unemployment
Natural rate of unemployment:
long-term rate of unemployment
determined by structural forces in
labor and product markets.

6-24

The Economy Tomorrow

Outsourcing jobs: relocation of production (and
jobs) to other countries to take advantage of lower
production costs.
Cheaper labor.
Low-cost, high-speed communications.

A two-way street.

Foreign producers also outsource jobs from their countries when they build
production facilities in the United States.

More jobs are insourced this way than we outsource.

Production possibilities expand, not contract, with

outsourcing.
As world trade expands, we will see more outsourcing
and insourcing in the economy tomorrow.
6-25

Revisiting the Learning

Objectives
06-01. Know how unemployment is
measured.
The unemployed are part of the labor
force who are not working but who are
actively seeking work.
It is usually expressed as the
unemployment rate, the ratio of
unemployed to the labor force.

6-26

Revisiting the Learning

Objectives
06-02. Know the socioeconomic costs
of unemployment.
Okuns Law estimates there is a 2% decline
in output for every 1% increase in
unemployment.
The human costs of unemployment include
not only financial losses but also social,
physical, and psychological costs.
Minorities, teens, and the less educated
have higher rates of unemployment.
6-27

Revisiting the Learning

Objectives
06-03. Know the major types of
unemployment.
Seasonal: people who work part of a year, in
season, but are unemployed at other times.
Frictional: people who leave a job to pursue
better opportunity elsewhere.
Structural: people who lose their job when
demand for a product declines or when there
are major changes in how the product is
produced.
Cyclical: people who lose their job due to an
overall decline in demand that is, a recession.
6-28

Revisiting the Learning

Objectives
06-04. Know the meaning of full
employment.
The lowest unemployment rate compatible
with price stability.
Zero cyclical unemployment.
Frictional and structural unemployment
exist.
Estimated to be in the range of 4 to 6
percent unemployment, depending on
structural factors.
6-29