Jobs and Unemployment

Jobs and Un-employment

Chapter

1CHAPTER OUTLINE

1. Define the unemployment rate and other labor market indicators.

A. Current Population SurveyB. Population Survey CriteriaC. Two Main Labor Market Indicators

1. The Unemployment Rate2. The Labor Force Participation Rate

D.Alternative Measures of Unemployment1. Marginally Attached Workers2. Part-Time Workers

2.Describe the trends and fluctuations in the indicators of labor market performance in the United States.

A. Unemployment RateB. The Participation RateC. Alternative Measures of UnemploymentD.A Closer Look at Part-Time Employment

3.Describe the sources and types of unemployment, define full employment, and explain the link between unemployment and real GDP.

A. Frictional UnemploymentB. Structural UnemploymentC. Cyclical UnemploymentD.“Natural” Unemployment

1. The Age Distribution of the Population2. The Pace of Structural Change3. The Real Wage Rate4. Unemployment Benefits

D.Unemployment and Real GDP

© 2015 Pearson Education, Inc.

252 Part 4 . MONITORING THE MACROECONOMY

What’s New in this Edition?Chapter 15 expands coverage of women in the labor force in the Eye application and features updated data for 2013 throughout the chapter.

Where We AreIn Chapter 15, we cover how the unemployment rate is calculated, review labor market indicators, trends and fluctuations in the labor market, explore the types of unemployment, define full employment, ex-plore the influences on the natural unemployment rate, and explain the link between unemployment and real GDP using the output gap.

Where We’ve BeenIn the previous chapter, we laid down the building block of how GDP and its components are measured. We continue by examining how labor market vari-ables are measured and how they have evolved over time.

Where We’re GoingThe next chapter concludes the descriptive part of the book by discussing and describing how the price level is measured. We will see how price indices are used to measure the cost of living and to calculate the inflation rate.

IN THE CLASSROOM

Class Time NeededThe material in this chapter can be covered in approximately one and a half class sessions. If you mention current events, such as current labor market data, be sure to use the most current data available. You can check the Foundations and BLS Web sites for these data.

An estimate of the time per checklist topic is:

15.1 Labor Market Indicators—20 to 25 minutes

15.2 Labor Market Trends and Fluctuations—15 to 25 minutes

15.3 Unemployment and Full Employment—30 to 45 minutes


Chapter 15 . Jobs and Unemployment 253

CHAPTER LECTURE

15.1 Labor Market IndicatorsLecture Launcher: A good way to generate student interest and introduce the idea

of unemployment is to start by pointing out to your students that less than half of the U.S. population is employed and ask them if that seems too high or too low? Ask them if everyone in our economy should be employed? Use their responses (and prompting from yourself) to brainstorm a list of people who, in your stu-dents’ opinions, probably should not be employed (children, retirees, students, stay-at-home parents, disabled, inmates, etc.). This will help you introduce the intention of the classification of unemployment. It’s an attempt to measure how an economy is doing at providing jobs for the people who want them, not just the percentage of people in an economy who are not employed.

Lecture Launcher: A good way to introduce the idea that unemployment brings benefits is to think about the unemployment of things rather than people. Look around the campus and notice all the unemployed automobiles in the parking lots/stations. Notice the unemployed class rooms early in the morning and late at night. Notice the unemployed seats in Starbucks at peak lecture times. Look around the city and notice all the unemployed automobiles in the car sales lots. Try to make a reservation at any of the hotels in the city and notice that you can almost always get a room—hence, lots of unemployed hotel rooms.Now ask: does all this unemployment bring benefits? The students quickly see that it would be very costly to organize rental markets in which cars don’t sit idle all day, and so on. Move on by asking: do the same ideas apply to unemployed people? (Be sure to be compassionate about the misery that unemployment can bring. You are not claiming that it is not costly. You’re trying to identify the ben-efits, if any.) You’ll quickly get your students to see that imagining an economy without any unemployment is nearly impossible. If consumers are free to change their decisions about what they want to buy, some goods and services must fall out of favor when others come into favor. The firms making the products falling from favor fall on hard times and often their workers are fired or laid off. Sure, these laid off workers could start work right away, cleaning shoes, selling flow-ers at intersections. But they are better off (in their own opinion) being friction-ally unemployed and searching for new jobs. To eliminate this source of unem-ployment we would need to forbid consumers from changing their buying plans or insist that no one remain idle and get on with doing any job even if it doesn’t earn a wage. Note that if this is how we ran our economy we’d still be using coal-fired stoves and the pony express, and we’d be wearing coonskin caps. There would be no McDonald’s, Federal Express, or Nike shoes.

Current Population Survey The U.S. Census Bureau measures the population, labor force, and level of

employment. The working-age population is the total number of people aged 16 years and over who are not in jail, a hospital, or some other form of institutional care or in the U.S. Armed Forces. The labor force is the sum of the number of people employed and the number of people unemployed.

To be counted as unemployed, a person must not have a job and be available for work and must be either:



Without work but has made specific efforts to find a job within the previ-ous four weeks

Waiting to be recalled back to a job from which he or she has been laid off

Two Main Labor Market Indicators The unemployment rate is the percentage of the people in the labor force

who are unemployed. It equals

Remember though that those counted in the numerator are people who are unem-ployed but at the same time are actively seeking employment. It’s important to stress that even though an individual may be without work this fact alone does not qualify the person to be classified as unemployed. The unemployed are a specific group of people who are not employed.

Land Mine: Perhaps the most difficult point in this chapter to get across to students is explaining the difference between the layperson’s definition of unemployment and unemployment as measured by the BLS. The layperson typically considers anyone who is not working as unemployed. It is worth reemphasizing that a person is only considered officially unemployed if the per-son is not working and also is actively seeking employment. Here is a good opportunity to ask students a direct question to which they will happily provide several answers. Why might someone be not working and not looking for work? Students will no doubt point to some of the most obvious answers: full-time student, homemaker, retired, disabled, etc.

The labor force participation rate is the percentage of working-age popula-tion who are members of the labor force. It equals

Alternative Measures of Unemployment A marginally attached worker is a person who does not have a job, is

available and willing to work, has not made specific efforts to find a job within the previous four weeks, but has looked for work sometime in the re-cent past. A discouraged worker is a marginally attached worker who has not made specific attempts to find a job within the previous four weeks be-cause previous unsuccessful attempts were discouraging. Other marginally attached workers differ from discouraged workers only in their reasons for not looking for jobs. Marginally attached workers are not included in the la-bor force participation rate or in the unemployment rate.

During the worst part of a very severe and protracted recession, some workers sim-ply grow tired of looking for work and cease their job search efforts altogether, thereby lowering the unemployment rate. This means the unemployment rate may be underestimating the unemployment problem more during recessions than other



phases of the business cycle because of this “hidden unemployment.” When the economy begins to recover, discouraged workers may resume their job search ef-forts which will then actually increase the unemployment rate. This is one reason why the unemployment rate tends to be a lagging indicator when tracking the end of a recession.

Full-time workers are those who usually work 35 hours or more a week. Part-time workers are those who usually work less than 35 hours a week. People who work part time for economic reasons (also known as involun-tary part-time workers) are people who work 1 to 34 hours per week but who are looking for full-time work and cannot find it because of unfavorable busi-ness conditions. These workers are not considered strictly unemployed, but are certainly underemployed – and, like unemployment, they indicate slack in the labor market.

15.2 Labor Market Trends and Fluctuations

Unemployment Rate Since 1929, the unemployment rate in the United States has averaged 7.2

percent. Since 1948, the average U.S. unemployment rate has been 5.8 per-cent, with much higher rates during the Great Depression and the 1973-1975, 1981-1982 and 2008-2009 recessions and lower rates during the ex-pansions of the 1960s and 1990s.

The Labor Force Participation Rate Since 1960, the labor force participation rate for men has decreased and for

women has increased, though in 2013 the labor force participation rate for men (about 70 percent) remains higher than that for women (less than 60 percent). The overall labor force participation rate has increased from about 59 percent in 1960 to about 67 percent in 1999 (though it has dropped below 64 percent by 2013). The cyclical fluctuations in the participation rate are small.

You might want to get students to explore the economic forces that lie behind the social attitudes and changes that have take place in the labor market. Get them to think about the technological advances that have contributed to more women being in the labor force. Many goods that were previously produced in the household are now mass-produced and available for purchase—most items of prepared food, for ex-ample. New appliances have increased productivity in the home enabling household production in less time—laundry, kitchen, and cleaning equipment for example. The market provides new goods and services that households want but can’t readily make at home—home entertainment equipment (TV, CD, DVD, etc) for example. These changes lead to many families deciding to have two income-earners rather than the older tradition of one. It is interesting to let students discuss what they think will happen to the labor force participation rates in the future and whether or not they think they will ever be equal—or unequal in the opposite direction!



Alternative Measures of Unemployment Because the unemployment rate does not include marginally attached work-

ers and people who work part time for economic reasons, the BLS also now provides three broader measurements of unemployment (or underemploy-ment). U-3 is the official unemployment rate. U-4 is U-3 plus discouraged workers. U-5 is U-4 plus other marginally attached workers. U-6 is U-5 plus employed part time for economic reasons.

The broader the measurement, the higher the rate at any given time period, though all of these measurements tend to have similar fluctuations over the course of the business cycle.

A Closer Look at Part-Time Employment Since 1980, the number of people who are part-time workers for noneco-

nomic reasons has remained roughly constant at about 13 to 14 percent of total employment and changes very little over the business cycle. The num-ber of people who work part-time for economic reasons (involuntary part-time workers), while consistently being much smaller than part-time for noneconomic reasons, experiences large swings over the business cycle, in-creasing during recessions and decreasing during expansions.

15.3 Unemployment and Full Employment

Types of Unemployment Frictional unemployment is the unemployment that arises from normal la-

bor turnover as people enter and leave the labor force, quit jobs to find bet-ter ones, and from the ongoing creation and destruction of jobs. These work-ers are searching for jobs and unemployment related to this search process is a permanent phenomenon in a dynamic, growing economy. Frictional unem-ployment increases when more people enter the labor market or when unem-ployment benefits increase.

Structural unemployment is the unemployment that arises when changes in technology or international competition change the skills needed to per-form jobs or change the locations of jobs. Sometimes there is a mismatch be-tween skills demanded by firms and skills provided by workers, especially when there are great technological changes in an industry. Structural unem-ployment generally last longer than frictional unemployment.

Cyclical unemployment is the fluctuating unemployment over the business cycle. Cyclical unemployment increases during a recession and decreases during an expansion.

“Natural” Unemployment Full employment does not mean that there is no unemployment. Full em-

ployment occurs when there is no cyclical unemployment or, equivalently, when all the unemployment is frictional and structural.

The unemployment rate at full employment is called the natural unemploy-ment rate. The term “natural” refers to the idea that some positive level of



unemployment is the outcome in any dynamic economy. The most important factors that influence the natural unemployment rate are:

The Age Distribution of the Population: An economy with a young popula-tion has a large number of new job seekers and a high level of frictional unemployment.

The Pace of Structural Change: An increase in the pace of technological change and international competition will lead to a higher level of struc-tural unemployment.

The Real Wage Rate: A real wage rate higher than the equilibrium real wage rate (such as from minimum wage or efficiency wages) will create a surplus of labor and increases the natural unemployment rate.

Unemployment Benefits: Unemployment benefits lower the opportunity cost of job search and can increase the natural unemployment rate.

There are two controversies that surround the natural rate of unemployment. The first is the use of the term “natural,” which offends many who believe any unemploy-ment is always a bad thing. From the perspective of an unemployed individual who has yet to find the job he or she wants, unemployment is bad. However, there is some level of unemployment that is good for society because it will help create more productive matches between firms and workers, allow for “creative destruction” as new firms replace unsuccessful firms, and allow for international trade and techno-logical changes that lead to economic growth. The second controversy is what level of unemployment corresponds to the natural rate. Because this number is unob-served, it must be estimated. Some estimates imply the natural rate is stable and changes only slowly over time. Others imply that most of the fluctuations in unem-ployment are “natural”. These differences are important for macroeconomic policy because one of the typical goals of policy is to keep the unemployment rate from wide swings around the natural rate.

Unemployment and Real GDP The quantity of real GDP at full employment is called potential GDP. Poten-

tial GDP is the value of real GDP when all the economy’s factors of produc-tion—labor, capital, land, and entrepreneurial ability—are fully employed.

When the economy is at full employment, the unemployment rate equals the natural rate of unemployment (no cyclical unemployment) and real GDP equals potential GDP. When the unemployment rate is less than the natural rate of unemployment (negative cyclical unemployment), real GDP is greater than potential GDP. And when the unemployment rate is greater than the natural rate of unemployment (positive cyclical unemployment), real GDP is less than potential GDP. Real GDP minus potential GDP expressed as a per-centage of potential GDP is called the output gap.

Students often have an innate sense of an asymmetry in business cycle fluctuations around potential GDP because they often think that the economy is almost always below potential GDP. It is important for them to understand that it is possible for the economy to temporarily rise above potential GDP so that the unemployment rate is less than natural rate of unemployment. One (small) example of this state of affairs



occurred in Silicon Valley in the late 1990s when workers who became dissatisfied with a job could quit and be assured of new job (often at higher pay!) within a few days. Indeed, firms paid for expensive radio advertisements “begging” for workers to apply for jobs.



USING EYE ON THE U.S. ECONOMY

The Current Population Survey

Many students think that the government counts every unemployed person each month. To do this, every home in the country would have to be contacted—just as in the population census every 10 years. You might explain that this procedure would cost too much and take too long. One of the advantages of this measurement is that it can be cal-culated every month and is typically released the first Friday of the next month – making it a much more timely measurement than GDP, which is only calculated quarterly and goes through a nearly 3 month process of collecting and revising data after the quarter has ended be-fore the final reading is reported. In addition, if the entire population were surveyed then people would soon grow tired of having a census taker come to their homes every month, year after year, to ask about job-related activities! Also you might wish to explain that because un-employment insurance records relate only to persons who have ap-plied for such benefits, the government prefers to gather the data through a survey. Students might be skeptical that such a survey can actually work when only a very small fraction of the population is in-terviewed. You can respond by arguing that polls conducted on Elec-tion Day to project the winner are done in very much the same way. Usually, only a few hundred people are interviewed but typically the results are remarkably accurate because those who are chosen to par-ticipate come from an independent and random population. In other words, each member of the larger population had an equal chance of being chosen in the survey.

USING EYE ON THE GLOBAL ECONOMY

Unemployment Around the World

It would be instructive for students to focus on the Japanese unem-ployment rate because it reveals a nation undergoing massive struc-tural change. Until recently, how Japan’s economy and the U.S. econ-omy made adjustments in the labor market over the business cycle were very different. In Japan, at least until recently, a substantial seg-ment of the working population had unwritten “life time” employment contracts. In other words, there was a tacit understanding between many employers and workers that workers would remain on the pay-roll even during hard economic times. In addition, Japan made great use of a large contingent of part-time workers who were laid off dur-ing recession but did not actively seek work because they did not be-lieve they would find it. But, because the Japanese have suffered through over a decade of very low growth, the Japanese labor market is changing and becoming more flexible, like the U.S. labor market. Now in Japan, there are fewer implied contracts so the adjustment



process in the labor market falls more directly on full-time workers through layoffs during recessions. In addition, to these trends, it is in-teresting to illustrate the differences in cultural responses to unem-ployment–for example, in Japan large numbers of women who are tem-porary or casual workers withdraw from the labor force when they lose their jobs, rather than becoming unemployed. This action might be because they believe that their efforts to look for work will be in vain. Regardless of the reason, this withdrawal will lead to differences in the calculated unemployment rates based on the way in which un-employment is measured.

This Eye also serves as an opportunity to point out the persistently higher rates of unemployment in Canada and the Eurozone than the U.S. Discuss how unemployment rates tend to be higher in countries with less flexible labor markets because firms are less willing to hire people if they are restricted in their ability to fire them later if needed. Higher unemployment benefits may also lead to higher unem-ployment rates as individuals take longer to find work.

Women in the Labor Force

As the figure demonstrates, labor force participation rates of women vary substantially across the nations surveyed. Here you might want to ask students what would be some of the cultural differences be-tween the countries that might help explain the observed differences. In addition, you might wish to ask them how an overall increase in the number of women with a college degree across all the nations might bring about a convergence of these labor force participation rates. Also it might be useful to point out that part of the reason for the so-called “gender gap” (the wage rate differential between men and women) in some countries has to do with their delayed entry into the labor force and the greater propensity to exit and reenter the labor force and work part-time due to child rearing. By delaying entry, working part-time, and having interrupted stints in the labor force, women often do not have the same opportunity to have acquired the human capital levels that men have who have been more continuously active participants in the labor force. In the United States, the aver-age full-time female worker has 40 percent less job experience than the average full-time male worker. In other words, because of this lack of experience, women tend to earn lower wages. But this lower wage is tied to their lower productivity.

USING EYE ON THE UNEMPLOYED

How Long Does it Take to Find a New Job?

Use this Eye to highlight the fact that the headline-grabbing unem-ployment rate fails to capture how different groups of workers and different regions of the country experience unemployment in different



ways and severities. In addition to differing durations of unemploy-ment, unemployment rates are highly correlated with various worker characteristics, such as race, gender, age, region, and education level. For example, in July 2013 the national unemployment rate was 7.4 percent, though it was lower for Asians (5.7 percent) and whites (6.6 percent) and much higher for Hispanics (9.4 percent) and blacks (12.6 percent). The unemployment rate for males 7.7 percent, while for women it was only 7.0 percent. It was 23.7 percent for teenagers. North Dakota, South Dakota, and Nebraska had unemployment rates around 3-4 percent, while it was around 9 percent in Illinois, Michi-gan, Nevada, North Carolina, and Rhode Island. We also see dramati-cally different levels of unemployment for high school dropouts (11 percent), high school graduates with no college (7.6 percent), workers with some college or an associate’s degree (6.0 percent), and those with a bachelor’s degrees or beyond (3.8 percent)—an excellent re-minder of why your students are probably sitting in your classroom! Current data can be found on the BLS Web site and should be pre-sented to students to help them better understand how the national unemployment rate can fail to capture the experiences of groups within the U.S. at any given point in time. Also, you may find it helpful to select a few of the differentials and ask students to try to explain why the rates are higher or lower for these different groups.

Analyzing how the duration of unemployment fluctuates with the busi-ness cycle can also generate discussion concerning controversial gov-ernment assistance programs like unemployment benefits. As high-lighted earlier in the chapter, one of the reasons the United States tends to have a lower rate of unemployment than Canada or the Euro-zone is due to the relatively lower levels of U.S. unemployment bene-fits and the short duration in which workers are eligible to collect (typically capped at 26 weeks). The goal of unemployment benefits in the United States is to provide temporary income assistance to help workers who have lost their job take time to search for a new job that matches up with their skill sets. The benefits help so that workers aren’t forced into the first job that becomes available and promotes a better utilization of human capital. However, the fairly limited dura-tion of eligibility is also used to push workers into getting back to work and not “milking the system.” Ask your students to explain the rationale behind extending unemployment benefits during recessions or having different durations of eligibility in different states (as our Congress typically does during a recession – eligibility was capped at 99 weeks in response to the 2008-2009 recession). Do they agree with basing the duration of eligibility for unemployment compensation off the amount unemployment, or does that only lead to higher rates of unemployment? If you really want to stir debate, ask those who agree with granting greater eligibility for states with higher levels of unem-ployment if they also agree with granting greater eligibility for groups with higher levels of unemployment? Should unemployment eligibility also be based off of race, gender, age, and education level, as unem-



ployment rates are also correlated with these characteristics of work-ers?

USING EYE ON YOUR LIFE

Your Labor Market Status and Activity

Helping your students identify how the BLS would classify them can be a bit trickier (and more controversial) than it seems. If they are employed, that’s a pretty straightforward classification that super-sedes their status as a student. If they are not employed and not seek-ing employment, then they are not in the labor force. If they are a part-time student looking for part-time or full-time employment, then they are unemployed since their part-time status makes them cur-rently available for either type of employment. If they are a full-time student looking for part-time employment, then they are unemployed since they are available for part-time employment and are searching. However, if they are a full-time student looking for full-time employ-ment, then they are considered not in the labor force. The assumption is that full-time students are not available for full-time employment at that time, so the students searching for full-time employment are look-ing for the time after they are done being a full-time student—which means they are not currently available for work and so they are not counted as unemployed. I imagine you have a few students who may disagree with that last one…To practice identifying different types of unemployment, ask your class if anyone they know has been laid off. Then discuss whether los-ing a job creates frictional, structural, seasonal or cyclical unemploy-ment. Look at your local examples. If you live in a steel-producing area, for example, you can talk about local structural unemployment arising from the closing of a steel manufacturer due to international competition. For cyclical unemployment, ask students how they think the business cycle and cyclical unemployment is related to full-time enrollment at higher education institutions. Students often don’t think there is any relationship. But nationally during a recession the growth rate of full-time enrollment increases. Ask students if they can explain this relationship. The answer is that during a recession and due to the increase in cyclical unemployment, the opportunity cost of school de-creases. This is a great way to keep students thinking about marginal benefits and costs.



ADDITIONAL EXERCISES FOR ASSIGNMENT

Questions Checkpoint 15.1 Labor Market Indicators1. Assume the following people are interviewed by a representative

of the Bureau of Labor Statistics. Classify each as either em-ployed, unemployed, or not in the labor force.

1a. Nancy Lopez reported to the interviewer that last week she worked 30 hours as a sales manager for the Coca-Cola Bottling company.

1b. Bill Stevens lost his job when the local plant of Arco Steel Com-pany was closed down. Since then, he has been visiting the per-sonnel offices of the other factories in the town trying to find a job.

1c. Patricia Hunter is a homemaker. Last week, she was occupied with her normal household chores. She neither held a job nor looked for a job. Her 75-year old father, Jake Jackson, lives with her and has not worked nor looked for work because of a disabil-ity.

1d. Julie Simon is an autoworker. Last week she was not working be-cause her union is on strike against the local automaker.

1e. Tom Nguyen is a personnel director. Last week he was not work-ing because he had problems finding child care for his two small children.

2. The BLS reported that in July 2000, the labor force was 140.4 million, employment was 134.7 million, and the working-age pop-ulation was 209.8 million. Calculate for that month the:

2a. Unemployment rate.2b. Labor force participation rate.

3. Statistics Canada reported that in July 2000, the Canadian labor force was 15.95 million, Canadian employment was 14.87 million, and the Canadian working-age population was 24.31 million. Cal-culate for that month the Canadian:

3a. Unemployment rate.3b. Labor force participation rate.

Checkpoint 15.3 Unemployment and Full Employment4. Using the factors that influence the natural unemployment rate,

explain what could cause the natural unemployment rate to in-crease.

Answers Checkpoint 15.1 Labor Market Indicators1a. Nancy is employed.1b. Bill is unemployed.1c. Patricia and Jake are not in the labor force.



1d. In spite of the fact that Julie was not working last week, she is still counted as employed because she was on strike.

1e. Tom also is considered employed because of the nature of his ab-sence.

2a. Unemployment rate = (140.4 million – 134.7 million) 140.4 mil-lion 100 = 4.1 percent.

2b. Labor force participation rate = (140.4 million 209.8 million) 100 = 66.9 percent.

3a. Unemployment rate = (15.95 million – 14.87 million) 15.95 mil-lion 100 = 6.8 percent.

3b. Labor force participation rate = (15.95 million 24.31 million) 100 = 65.6 percent.

Checkpoint 15.3 Unemployment and Full Employment4. A younger population that increases the number of job seekers

would create more frictional unemployment and increase the nat-ural unemployment rate. A more rapid pace of technological change or international competition would create more structural unemployment and increase the natural unemployment rate. Real wage rates higher than equilibrium as a result of higher mini-mum wage or efficiency wages will increase the natural unem-ployment rate. More generous unemployment benefits will in-crease the natural unemployment rate.




Jobs and Unemployment

Business

types of unemployment

unemployment rateb

unemployment of things

classification of unemployment

unemployment rate2

unemployment benefitsd

source of unemployment

labor market trends