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Chapter Unemployment 15. Unemployment “Natural rate” of unemployment – amount of unemployment that the economy “normally” experiences Average or trend.

Jan 13, 2016



  • UnemploymentNatural rate of unemploymentamount of unemployment that the economy normally experiencesAverage or trend rate over a longer period (years) of timeCorrelated with long-term growth of GNPCyclical unemployment flucutuation of current level of unemployment around natural rateShort-run changes, e.g., business cycles


  • Identifying UnemploymentHow is unemployment measured?Bureau of Labor StatisticsMonthly survey60,000 householdsRespondents are categorized intoEmployed (even part-time)Unemployed (available and looking)Not in labor force Estimate of unemployment rate (survey)


  • Identifying UnemploymentHow is unemployment measured?Labor forceTotal number of workersEmployed UnemployedLabor force = Number of employed + Number of unemployed*

  • Identifying UnemploymentHow is unemployment measured?Unemployment ratePercentage of labor force that is unemployed

    Labor-force participation ratePercentage of adult population that is in the labor force*


    The breakdown of the population in 20071*The Bureau of Labor Statistics divides the adult population into three categories: employed, unemployed, and not in the labor force.


    The labor-market experiences of various demographic groups1*

    Demographic GroupUnemployment RateLabor-force Participation RateAdults (ages 20 and older)White, maleWhite, female Black, male Black, female Teenagers (ages 1619)White, male White, female Black, male Black, female 3.7%


    44.344.629.431.2This table shows the unemployment rate and the labor-force participation rate of various groups in the U.S. population for 2007

  • Identifying UnemploymentLabor-market experiencesWomen ages 20 and olderLower rates of labor-force participation than menOnce in the labor forceMen and women - similar rates of unemploymentBlacks ages 20 and olderSimilar rates of labor-force participation as whitesMuch higher rates of unemploymentTeenagersLower rates of labor-force participationMuch higher rates of unemployment than older workers*


    Unemployment rate since 19602*This graph uses annual data on the U.S. unemployment rate to show the percentage of the labor force without a job. The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates

  • Identifying UnemploymentNatural rate of unemploymentNormal rate of unemployment Around which the unemployment rate fluctuatesCyclical unemploymentDeviation of unemployment from its natural rate*

  • Womens role in American societyChanged dramatically over the past century1950: 33% women 87% men2009: 59% women 72% menNew technologiesReduced the amount of time required to complete routine household tasksImproved birth controlReduced the number of children born to the typical familyChanging political and social attitudesLabor-force participation of men and women in the U.S. economy*

  • Fall in mens labor-force participationYoung men - stay in school longerOlder men - retire earlier and live longerWith more women employedMore fathers now stay at home to raise their childrenCounted as being out of the labor forceFull-time studentsRetireesStay-at-home dadsLabor-force participation of men and women in the U.S. economy*


    Labor-force participation rates for men and women since 19503*This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

  • Identifying UnemploymentDoes the unemployment rate measure what we want it to?Official unemployment rateUsefulImperfect measure of joblessnessMovements into and out of the labor forceCommonMore than one-third of unemployedRecent entrants into the labor force*

  • Identifying UnemploymentDoes the unemployment rate?Some of those who are out of labor forceMay want to workDiscouraged workers Discouraged workersIndividuals who would like to workHave given up looking for a job*


    Alternative measures of labor underutilization2*

    Measure and DescriptionRate U-1





    U-6Persons unemployed 15 weeks or longer, as a percentage of the civilian labor force (includes only very long-term unemployed)Job losers and persons who have completed temporary jobs, as a percentage of the civilian labor force (excludes job leavers)Total unemployed, as a percentage of the civilian labor force (official unemployment rate)Total unemployed, plus discouraged workers, as a percentage of the civilian labor force plus discouraged workersTotal unemployed plus all marginally attached workers, as a percentage of the civilian labor force plus all marginally attached workersTotal unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian labor force plus all marginally attached workers1.6%






    The table shows various measures of joblessness for the U.S. economy. The data are for February 2008. Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers are marginally attached workers who have given a job-market-related reason for not currently looking for a job. Persons employed part-time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

  • Identifying UnemploymentHow long are the unemployed without work?Most spells of unemployment are shortMost unemployment observed at any given time is long-termMost people who become unemployedWill soon find jobsMost of the economys unemployment problemAttributable to the relatively few workers who are jobless for long periods of time*

  • Identifying UnemploymentWhy are there always some people unemployed?Frictional unemploymentResults because it takes time for workers to search for the jobsThat best suit their tastes and skills*

  • Identifying UnemploymentWhy are there always some people unemployed?Frictional unemploymentTakes time to find a jobStructural unemploymentChanges in the structure of the economyGovernment benefits may discourage workers *

  • Job Search (Frictional)Job searchProcess by which workers find appropriate jobs given their tastes and skillsFrictional unemploymentResults from the process of matching workers and jobsWhy some frictional unemployment is inevitableChanges in demand for labor among different firmsChanges in composition of demand among industries or regions (sectoral shifts)*

  • Job SearchPublic policy and job searchReduce time for unemployed to find jobsReduce Natural rate of unemploymentGovernment programsGovernment-run employment agenciesPublic training programs*

  • Job SearchUnemployment insuranceGovernment programPartially protects workers incomesWhen they become unemployedIncreases frictional unemploymentWithout intending to do so*

  • Minimum-Wage LawsStructural unemploymentResults when the number of jobs is insufficient for the number of workersMinimum-wage lawsCan cause unemploymentForces the wage to remain above the equilibrium levelHigher quantity of labor suppliedSmaller quantity of labor demandedSurplus of labor unemployment*


    Unemployment from a wage above equilibrium level4*In this labor market, the wage at which supply and demand balance is WE. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal LE. By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum-wage law, the quantity of labor supplied rises to LS, and the quantity of labor demanded falls to LD. The resulting surplus of labor, LS LD, represents unemployment.

  • Minimum-Wage LawsWages may be kept above equilibrium levelMinimum-wage lawsUnionsEfficiency wagesIf the wage - kept above the equilibrium level Result: unemployment*

  • The Theory of Efficiency WagesWorker qualityFirm pays a high wageAttracts a better pool of workersIncreases the quality of its workforceWorker effortHigh wages make workers more eager to keep their jobsGive workers an incentive to put forward their best effort*

  • Henry Ford - founder of Ford Motor CompanyIntroduced modern techniques of productionBuilt cars on assembly linesUnskilled workers were taught to perform the same simple tasks over and over againOutput: Model T Ford1914, Ford - the $5 workdayTwice the going wageLong lines of job seekersNumber of workers willing to work > number of workers Ford neededHenry Ford and the very generous $5-a-day wage*

  • Fords high-wage policy efficiency wageTurnover fellAbsenteeism fellProductivity roseWorkers so much more efficientFords production costs were lower despite higher wagesProfitable for the firmClosely linked to Fords use of the assembly lineAssembly line - highly interdependent workersHenry Ford and the very generous $5-a-day wage*