Introduction to Macroeconomics
Chapter 6
Unemployment and the Labor Market
© Tancred Lidderdale
Tancred@Lidderdale.com

Chapter 6. Unemployment and the Labor Market
1. Employment - Unemployment
2. Labor Market Supply and Demand
3. Applying the Model
Introduction to Macroeconomics

1. Employment - Unemployment
• Measurement
• Definitions
• Criticisms of Unemployment Rate
• Types of Unemployment
• Natural Rate of Unemployment
• Government Policy and
Unemployment
Introduction to Macroeconomics

1. Employment - Unemployment
Measurement
Employed persons
+ Unemployed persons
= Total labor force
+ Not in labor force
= Civilian noninstitutional population (16 and over)
Introduction to Macroeconomics

1. Employment - Unemployment
Measurement
217,570,000
Civilian Noninstitutional
Population 16 years of age and older
2002 Labor
Force Statistics
Did you work at least 1 hour for pay last week?
Did you actively seek work in the last 4 weeks?
72,707,000 not in the labor force
Introduction to Macroeconomics
8,378,000 unemployed
136,485,000 employed
Source: Bureau of Labor Statistics www.bls.gov

1. Employment - Unemployment
Definitions
Unemployment Rate
(percent)
= Unemployed * 100
Total Labor Force
Participation Rate
(percent)
= Total Labor Force * 100
Civilian Population
Introduction to Macroeconomics

1. Employment - Unemployment
U.S. Unemployment Rate
25%
Great Depression
(1929 - 1933)
20%
World War II
(1941 - 1945)
15%
1973 - 1975 recession
1981 - 1982 recession
1990 - 1991 recession
10%
U.S.
5%
Fairfax Co., VA.
0%
1930 1940 1950 1960 1970 1980 1990 2000
Introduction to Macroeconomics
Source: Bureau of Labor Statistics www.bls.gov

1. Employment - Unemployment
U.S. Labor Force Participation Rate
100
Men
80
60
Women
40
20
0
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
Introduction to Macroeconomics
Source: Bureau of Labor Statistics www.bls.gov

1. Employment - Unemployment
Criticisms of Unemployment Rate
• Accuracy of Surveys
• Discouraged Workers
• Underemployed
Introduction to Macroeconomics

1. Employment - Unemployment
Types of Unemployment
• Frictional Unemployment - dynamic labor force in a stable economy with imperfect information.
• Structural Unemployment - stable labor force in a dynamic economy with mismatch between skills of labor and skills demanded.
• Seasonal Unemployment - unemployment that results from the normal seasonal change in aggregate economic activity.
• Cyclical Unemployment - stable labor force in an unstable economy. Unemployment that results from a decline in aggregate economic activity
Introduction to Macroeconomics

1. Employment - Unemployment
“Natural Rate” of Unemployment
• Natural Rate of Unemployment consistent with frictional, structural, and seasonal unemployment.
• Full Employment Output total output of economy when unemployment is at the natural rate. During the business cycle total output fluctuates around the full employment level leading to changes in the cyclical unemployment.
Introduction to Macroeconomics

1. Employment - Unemployment
Government Policy and Unemployment
• Job Training
• Unemployment Benefits
• Fiscal and Monetary Policy
Introduction to Macroeconomics

2. Labor Market Model
• Labor Market Supply and Demand
• Labor Market Puzzle
• Minimum Wage Laws
• Wage Contracts
• Efficiency Wage Theory
Introduction to Macroeconomics

2. Labor Market Model
Labor Market Supply and Demand
40
35
30
25
20
15
10
5
0
0
Labor
Supply
Equilibrium
Labor
Demand
Quantity of Labor (Hours Worked)
Introduction to Macroeconomics

2. Labor Market Model
Equilibrium Change with Demand Shift
40
35
30
25
20
15
10
5
0
0
Decline in labor demand (shift left):
- reduced employment
- lower real wage rate
Lower
Real
Wage
Employment
Declines
Quantity of Labor (Hours Worked)
Labor
Supply
Labor
Demand
Introduction to Macroeconomics

2. Labor Market Model
Labor Market Puzzle
Two problems with implications of the model with respect to recessions:
• Economy always at full-employment output in equilibrium. No cyclical unemployment.
• Real wage should decline.
Introduction to Macroeconomics

2. Labor Market Model
Labor Market Puzzle – Wage Floor
40
35
30
25
20
15
10
5
0
0
Cyclical
Unemployment
Decrease
In Labor
Demand
Labor
Supply
Real Wage Floor
Quantity of Labor (Hours Worked)
Introduction to Macroeconomics

2. Labor Market Model
Labor Market Puzzle - Explanations
Possible Explanations for Wage Floor with Cyclical Unemployment and
Rigid Real Wage
• Minimum Wage Laws
• Wage Contracts
• Efficiency Wages
Introduction to Macroeconomics

3. Applying the Model
• In-Class Discussion
Introduction to Macroeconomics