Principles of Macroeconomics
Lecture 5
UNEMPLOYMENT
Unemployment

People who are looking for work but have no
jobs.
 ACTIVELY
LOOKING is critical to the definition.
Definitions for Unemployment



Labor Force = Employed + unemployed
Unemployment Rate = number of unemployed /
total labor force
Labor Force Participation Rate = labor force /
population 16 and over
Definitions of Unemployment

Discouraged Workers
 People
who left the labor force because
they could not find jobs.

Underemployed
 Workers
holding part-time work, but prefer
full-time work OR hold jobs that are far
below their capabilities.
The reasons for unemployment

Frictional Unemployment

Structural Unemployment

Seasonal Unemployment

Cyclical Unemployment
Cyclical Unemployment

When GDP fluctuates,
demand in the
economy is not
sufficient to provide
jobs for all those who
seek work.
– Recession
– Depression
Frictional Unemployment

People in between jobs.

Short period of time while changing jobs.

3% - 4% frictional employment is
considered normal.
Structural Unemployment

When changes in market supply or demand
conditions affect major industries or regions.
 The part of unemployment that results from the
mismatch of skills and jobs.
Causes of Structural Unemployment

Decline in demand for a product

Increased foreign competition

Automation of production

Increased raw material costs

Lack of labor mobility between occupations or regions.
Seasonal Unemployment

Most seasonal unemployment tends to
occur in certain industries.
–
–
–
–
Hotel and catering
Tourism
Fruit picking
Christmas
Unemployment Statistics

Natural Rate of Unemployment
 Level
of unemployment at which there is no
cyclical unemployment.

Full Employment
 Level
of employment that occurs when the
unemployment rate is at the “natural rate.”
The Natural Rate of Unemployment

Depending on whom you talk to …

4% to 5% is considered the natural rate.
 Consists
of only structural and frictional
unemployment.
Historic Unemployment Rates




1933 during the Great
Depression – 25%
1998 – Unemployment
fell to 3.9%
October 2009 – 10.2%
- highest in 26 years!
March 2010 – 9.7%
3.9% Unemployment

Why wouldn’t this be
good for the
economy?
Wage Inflation

How do employers attract or keep employees
if there is not enough workers?
 Higher
Wages
 More Benefits
 1999,
Amigos was paying $9 per hour and
McDonalds offered $500 signing bonuses.
Why would that be bad?



Costs go up (labour), so prices have to rise
to cover labour.
Higher prices make workers demand more
money.
Cost – Push Inflation
Current Data on Unemployment for
the US


According to the Bureau of Labour Statistics
(www.bls.gov)
Currently wages are stagnant to negative.
Unemployment Data



Previously: 303,000
new jobless claims were
filed in March 2009.
Currently: 448000 in
the week ending April
24, 2010
168000 people
reported getting jobs in
March 2010
Comparison of key countries December 09
BRIC Country Unemployment




Brazil – 9.7% (est.)
Russia – 6.4% (est.)
India – 6.8%
(DOWN)
China – 4.0%
BTW:

Top 3 of
unemployment:
 Nauru
 Liberia
 Zimbabwe
Countries with the lowest
unemployment 
Countries with the
lowest unemployment
 Andorra
 Monaco
 Qatar
Consequences of
Unemployment

Real Output Effects
– Each 1% of unemployment
results in a reduction of
$100-billion in output.
– Lower real investment
means less growth and
reduced future output.
– OKUN’S LAW!
Consequences of Unemployment

Income Effects
 Loss of income and
benefits (Health
insurance)
 Loss of income to
others because of
reduced purchasing
power
 Reduced tax income
and increased outlays
of government.
Consequences of
Unemployment

Social Effects
– Health Problems
– Increased suicides
– Break up of families
– Increased child abuse
– Increased crime
Review




How do economists measure the unemployed?
Previously unemployed individuals who have
stopped looking for work are called ____ workers.
What are the types of unemployment?
The natural rate of unemployment consists solely of
frictional and structural unemployment.