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

Chapter

Unemployment

15

Unemployment

• “Natural rate” of unemployment– amount of unemployment that the economy

“normally” experiences• Average or trend rate over a longer period (years) of

time• Correlated with long-term growth of GNP

• “Cyclical” unemployment– flucutuation of current level of unemployment

around “natural” rate• Short-run changes, e.g., business cycles

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Identifying Unemployment• How is unemployment measured?

– Bureau of Labor Statistics• Monthly survey• 60,000 households

• Respondents are categorized into– Employed (even part-time)– Unemployed (available and looking)– Not in labor force

• Estimate of unemployment rate (survey)

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Identifying Unemployment

• How is unemployment measured?• Labor force

– Total number of workers• Employed • Unemployed

• Labor force = Number of employed + Number of unemployed

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• How is unemployment measured?• Unemployment rate

– Percentage of labor force that is unemployed

• Labor-force participation rate– Percentage of adult population that is in the

labor force

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100force Labor

unemployed of Number rate ntUnemployme

100population Adult

force Labor rate ionparticipat force-Labor

Figure

The breakdown of the population in 2007

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

Table

The labor-market experiences of various demographic groups

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Demographic Group Unemployment Rate Labor-force Participation Rate

Adults (ages 20 and older)White, maleWhite, female Black, male Black, female Teenagers (ages 16–19)White, male White, female Black, male Black, female

3.7%3.67.96.7

15.712.133.825.3

76.3%60.171.264.0

44.344.629.431.2

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


• Labor-market experiences– Women ages 20 and older

– Lower rates of labor-force participation than men

– Once in the labor force– Men and women - similar rates of unemployment

– Blacks ages 20 and older– Similar rates of labor-force participation as whites– Much higher rates of unemployment

– Teenagers– Lower rates of labor-force participation– Much higher rates of unemployment than older workers

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Figure

Unemployment rate since 1960

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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


• Natural rate of unemployment– Normal rate of unemployment – Around which the unemployment rate

fluctuates• Cyclical unemployment

– Deviation of unemployment from its natural rate

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• Women’s role in American society– Changed dramatically over the past century

• 1950: 33% women – 87% men• 2009: 59% women – 72% men

– New technologies• Reduced the amount of time required to complete routine

household tasks

– Improved birth control• Reduced the number of children born to the typical family

– Changing political and social attitudes

Labor-force participation of men and women in the U.S. economy

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• Fall in men’s labor-force participation– Young men - stay in school longer– Older men - retire earlier and live longer– With more women employed

• More fathers now stay at home to raise their children

• Counted as being out of the labor force– Full-time students– Retirees– Stay-at-home dads

Labor-force participation of men and women in the U.S. economy

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Figure

Labor-force participation rates for men and women since 1950

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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.


• Does the unemployment rate measure what we want it to?

• Official unemployment rate– Useful– Imperfect measure of joblessness

• Movements into and out of the labor force– Common– More than one-third of unemployed

• Recent entrants into the labor force

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• Does the unemployment rate…?• Some of those who are out of labor force

– May want to work• Discouraged workers

• Discouraged workers– Individuals who would like to work– Have given up looking for a job

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Table

Alternative measures of labor underutilization

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Measure and Description Rate

U-1

U-2

U-3

U-4

U-5

U-6

Persons 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 workers

1.6%

2.5

4.8

5.1

5.8

8.9

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.


• How long are the unemployed without work?– Most spells of unemployment are short– Most unemployment observed at any given

time is long-term– Most people who become unemployed

• Will soon find jobs

– Most of the economy’s unemployment problem• Attributable to the relatively few workers who are

jobless for long periods of time17


• Why are there always some people unemployed?

• Frictional unemployment– Results because it takes time for workers to

search for the jobs• That best suit their tastes and skills

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• Why are there always some people unemployed?

• Frictional unemployment– Takes time to find a job

• Structural unemployment– Changes in the structure of the economy

• Government benefits may discourage workers

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Job Search (Frictional)

• Job search• Process by which workers find appropriate jobs given

their tastes and skills

• Frictional unemployment• Results from the process of matching workers and

jobs

• Why some frictional unemployment is inevitable• Changes in demand for labor among different firms• Changes in composition of demand among industries

or regions (sectoral shifts)

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Job Search

• Public policy and job search• Reduce time for unemployed to find jobs

– Reduce Natural rate of unemployment• Government programs

– Government-run employment agencies– Public training programs

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Job Search

• Unemployment insurance– Government program– Partially protects workers’ incomes

• When they become unemployed

– Increases frictional unemployment• Without intending to do so

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Minimum-Wage Laws

• Structural unemployment– Results when the number of jobs is

insufficient for the number of workers• Minimum-wage laws

– Can cause unemployment– Forces the wage to remain above the

equilibrium level• Higher quantity of labor supplied• Smaller quantity of labor demanded• Surplus of labor – unemployment

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Figure

Unemployment from a wage above equilibrium level

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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.

Wage

Quantity of Labor 0

Minimum wage

LD LS

Surplus of labor = Unemployment

Labordemand

Laborsupply

LE

WE

Minimum-Wage Laws

• Wages may be kept above equilibrium level– Minimum-wage laws– Unions– Efficiency wages

• If the wage - kept above the equilibrium level – Result: unemployment

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The Theory of Efficiency Wages

• Worker quality– Firm – pays a high wage

• Attracts a better pool of workers• Increases the quality of its workforce

• Worker effort– High wages – make workers more eager to

keep their jobs• Give workers an incentive to put forward their

best effort

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• Henry Ford - founder of Ford Motor Company– Introduced modern techniques of production– Built cars on assembly lines

• Unskilled workers were taught to perform the same simple tasks over and over again

– Output: Model T Ford

• 1914, Ford - the $5 workday– Twice the going wage– Long lines of job seekers

• Number of workers willing to work > number of workers Ford needed

Henry Ford and the very generous $5-a-day wage

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• Ford’s high-wage policy – efficiency wage– Turnover fell– Absenteeism fell– Productivity rose– Workers – so much more efficient

• Ford’s production costs were lower despite higher wages

– Profitable for the firm– Closely linked to Ford’s use of the assembly line

• Assembly line - highly interdependent workers

Henry Ford and the very generous $5-a-day wage

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

Documents

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