Ch 28 Unemployment

N.
GREGORY MANKIW NINTH EDITION
PRINCIPLES OF
ECONOMICS
CHAPTER
Unemployment
28
Interactive PowerPoint Slides by:
V. Andreea Chiritescu
Eastern Illinois University
© 2021 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
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IN THIS CHAPTER
• 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?
© 2021 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 2
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Bureau of Labor Statistics, BLS
• Produced by Bureau of Labor Statistics
(BLS), in the U.S. Dept. of Labor
– Based on a monthly survey of 60,000
households: Current Population
Survey
– Based on “adult population” (16 yrs. or
older)
How Is Unemployment Measured?
• 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 number of workers
Unemployment Rate and LFPR
• Unemployment rate, u-rate
– Percentage of labor force that is unemployed
# of unemployed
u−rate = 100 ×
Labor force
• Labor-force participation rate, LFPR
– Percentage of adult population that is in the
labor force
Labor force
Labor−force participation rate = 100 ×
Adult
population
Active Learning 1: Calculate labor force statistics
Compute the labor force, u-rate, adult

population, and labor force participation rate
using this data:
Adult population of the U.S.

by group, August 2019
# of employed 157.9 million
# of unemployed 6.0 million
not in labor force 95.5 million
Active Learning 1: Answers
Labor force = employed + unemployed =

= 157.9 + 6 = 163.9 million
u-rate = 100 x (unemployed)/(labor force) =
= 100 x 6/163.9 = 3.7%
Adult population = labor force + not in
labor force
= 163.9 + 95.5 = 259.4 million
LFPR = 100 x (labor force)/(adult
population)
= 100 x 163.9/259.4 ‘= 63.2%
Various demographic groups, August 2019
u-rate LFPR
Men Women Men Women
Adults (20 yrs. and older)
White 3% 3.2%
71.8% 58%
Black 5.9 4.4
68.3 62.1
u-rate LFPR
Teens (16-19 yrs. old)
White 11.8 37.9
Black 15.7 29.2
All ages
Asian 2.8 64
Hispanic 4.2 66.7
Employment status by education, August 2019
Adults (25 yrs. and older)

u-rate LFPR
Less than high-school 5.4% 47.1%
High-school diploma 3.6 57.3
Some college or 3.1 65.6
assoc. degree
Bachelor’s or more 2.1 73.9
Unemployment
• Natural rate of unemployment
– The normal rate of unemployment around
which the unemployment rate
fluctuates
• Cyclical unemployment
– The deviation of unemployment from its
natural rate
U.S. Unemployment rate 1960 – 2019
Unemployment rate
Natural rate
of
unemployment
LF participation rates of men and women, 1948–2019
LFPR men
LFPR women
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. Hailey lost her job and begins looking for a new
one.
B. Josiah, a steelworker who has been out of work
since his mill closed last year, becomes
discouraged and gives up looking for work.
C. Karim, 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 13
© 2021 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
Active Learning 2: Answers, A
A. Hailey lost her job and begins looking for a
new one.
u-rate rises
Number of unemployed increases, labor
force stays the same.
A rising u-rate gives the impression that the
labor market is worsening, and it is.
Active Learning 2: Answers, B
B. Josiah, steelworker, has been out of work
since last year, becomes discouraged,
stops looking for work.
Discouraged workers would like to work but have
given up looking for jobs. Classified as “not in the
labor force” rather than “unemployed”
U-rate falls because Josiah is no longer counted
as unemployed.
A falling u-rate gives the impression that the
labor market is improving, but it is not.
Active Learning 2: Answers, C
C. Karim lost his $80,000 job, and takes a
part-time job at McDonald’s until he finds a
better one.
U-rate unchanged because a person is
“employed” whether they work full or part
time.
Number of unemployed and labor force stay
the same.
Things are worse, but the u-rate fails to
show it.
Measuring the Unemployment Rate
• 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.
How Long Are the Unemployed without Work?
• Most spells of unemployment are short:
– Typically 1/3 of the unemployed have been
unemployed under 5 weeks, 2/3 have
been unemployed under 14 weeks.
– Only 21% have been unemployed over 6
months.
• Most observed unemployment is long
term.
– The small group of long-term unemployed
persons has fairly little turnover, so it accounts
for most of unemployment observed over
time.
18
Why Are Always Some People Unemployed?
• 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 the number of jobs available in
some labor markets is insufficient to
provide a job for everyone who wants one
– Usually longer-term
Job Search
• Job search
– Process by which workers find appropriate
jobs given their tastes and skills
• Some frictional unemployment is inevitable
– Sectoral shifts: changes in the
composition of demand among industries
or regions
– Changing patterns of international trade
– Because the economy is always
changing
Public Policy and Job Search – 1
• Government-run employment agencies
– Provide information about job vacancies
• Public training programs
– Equip displaced workers with skills
needed in growing industries
• Advocates:
– Keeps the labor force more fully
employed
– Reduce the inequities inherent in a
constantly changing market economy
21
Public Policy and Job Search – 2
• Critics:
– Should the government get involved with
the process of job search?
– Is better to let the private market match
workers and jobs
– The government is most likely worse:
• Disseminating the right information to the
right workers
• Deciding what kinds of worker training would
be most valuable
Unemployment Insurance – 1
• Unemployment insurance, UI
– A government program that partially
protects workers’ incomes when
they become unemployed
– Reduces the hardship of
unemployment
– Increases unemployment
• UI benefits end when a worker takes a job, so
workers have less incentive to search or take
jobs while eligible to receive benefits.
Unemployment Insurance – 2
• Benefits of UI:
– Reduces income uncertainty
– Unemployed have more time to search
– Unemployed can look for jobs that better
suit their tastes and skills
– Improves the ability of the economy to
match each worker with the most
appropriate job
Explaining structural unemployment
Structural
unemployment occurs unemployment
when there are not W S
enough jobs to go actual
W1
wage
around.
• Occurs when wage WE
is kept above
equilibrium.
• There are three
D
reasons for this. L
1. Minimum-Wage Laws
• The minimum wage
– May exceed the equilibrium wage for the
least skilled and least experienced
workers, causing structural unemployment
– Quantity of labor supplied exceeds the
quantity of labor demanded
– Workers are unemployed because they
are waiting for jobs to open up
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 10-20% higher
wages and gets more benefits than a
nonunion worker for the same type of work.
The Economics of 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.
Are Unions Good or Bad for the Economy?
• Critics:
– Unions are cartels: they raise wages above
equilibrium, which causes
unemployment and depresses wages in
non-union labor markets
– Inefficient and inequitable
• Advocates:
– Unions counter the market power of large
firms
– Make firms more responsive to workers’
concerns
– Keep a happy and productive workforce
29
3. Efficiency Wages
• The theory of efficiency wages:
– Firms voluntarily pay above-equilibrium
wages to boost worker productivity
and increase firm profitability
• Different types of efficiency wage
theory
– Suggest different reasons why firms pay
high wages.
Efficiency Wage Theory – 1
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.
2. Worker turnover
– Hiring & training new workers is costly
– Paying higher 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.
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 equilibrium wage,
there aren’t enough jobs to go around, so
workers have more incentive to work not
shirk.
Active Learning 3: Structural or frictional unemployment?
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.
Active Learning 3: Answers A, B, C
A. The government eliminates the minimum
wage.
– Likely to reduce structural unemployment,
not frictional unemployment.
B. The government increases unemployment
insurance benefits.
– Likely to increase frictional unemployment,
not reduce it.
C. A new law bans labor unions.
– Likely to reduce structural unemployment,
not frictional unemployment.
Active Learning 3: Answers D, E
D. More workers post their resumes
at LinkedIn.com, and more employers
use LinkedIn.com to find suitable
workers to hire.
– Likely to speed up the process of matching
workers & jobs, which would reduce frictional
unemployment.
E. Sectoral shifts become more frequent.
– Likely to increase frictional unemployment, not
reduce it.
THINK-PAIR-SHARE
While watching the news, the news anchor
says, “Unemployment statistics released by the
Department of Labor today show an increase in
unemployment from 6.1 to 6.2%. This is the third
month in a row where the unemployment rate has
increased.” Your roommate says, “Every month there
are fewer and fewer people with jobs. I don’t know
how much longer the country can continue like this.”
A. Can your roommate’s statement be deduced
from the unemployment rate statistic? Why or
why not?
B. What information would you need to determine
whether there are really fewer people with jobs?
CHAPTER IN A NUTSHELL
• The unemployment rate
• Percentage of those who would like to work who
do not have jobs.
• Calculated monthly by the BLS, based on a
survey of thousands of households.
• Imperfect measure of joblessness. Some people
who call themselves unemployed may
actually not want to work, and some people
who would like to work are not counted as
unemployed because they have left the
labor force after an unsuccessful search.
CHAPTER IN A NUTSHELL
• Most people who become unemployed find work
within a short period of time.
• Most unemployment observed at any given time is
attributable to the few people who are
unemployed for long periods of time.
• Frictional unemployment: it takes time to search for
jobs. Increases with unemployment insurance.
• Structural unemployment: quantity of labor
demanded is smaller than the quantity of labor
supplied. Caused by: minimum-wage laws, the
market power of unions, and efficiency wages.

Ch 28 Unemployment

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N.

GREGORY MANKIW NINTH EDITION

Compute the labor force, u-rate, adult

Adult population of the U.S.

# of employed 157.9 million

# of unemployed 6.0 million

not in labor force 95.5 million

Labor force = employed + unemployed =

Adults (25 yrs. and older)

Which of the following would be most likely to

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