Chapter 7
Labor Market Indicators
Current Population Survey:
Every month, the U.S. Census Bureau and Bureau
of Labor Statistics (BLS) survey 60,000 households
regarding the age and labor market status of their
members. Based on this survey, the following
measures are obtained:
Working-age population
The total number of non-institutionalized people aged
16 years and older.
The working-age population is divided into those in
the labor force and those not in the labor force.
Labor force
The number of people employed plus the number
of people unemployed.
The survey counts as employed all members of the
labor force who, during the week before the survey,
were either working or were temporarily absent from
their jobs.
The survey counts as unemployed all members of
the labor force who, during the week before the
survey, were not working but either had made efforts
to find employment during the past 4 weeks or were
waiting to be recalled to a job from which they had
been laid off.
Members of the working-age population who are
neither employed nor unemployed are classified as
“not in the labor force,” e.g., full-time students,
homemakers, retired people.
“Not in the labor force” also includes discouraged
workers, who are individuals who are not working,
are available and willing to work, but have made no
attempt to seek employment during the past 4
weeks.
Working-age population
Labor force
Not in the labor force
(incl. discouraged workers)
Employed
Unemployed
Using the numbers from the Current
Population Survey, the BLS calculates the
following two main labor market indicators:
The unemployment rate
The labor force participation rate
Unemployment rate
The percentage of people in the labor force who are
unemployed
Unemployment rate =
Number of people unemployed
Labor force
X 100%
Labor force participation rate
The percentage of the working-age population who
are in the labor force
Labor force participation rate =
Labor force
Working-age population
X 100%
Categories of workers:
Full-time workers are those who normally work
35 hours a week or more.
Part-time workers are those who usually work
less than 35 hours per week.
Involuntary part-time workers are those who
work less than 35 hours per week but who are
looking for full-time work.
Aggregate hours:
To determine the total amount of labor employed in
the economy we measure labor in hours.
Aggregate hours is the total number of hours worked
by all people employed, both full- and part-time,
during a year.
Aggregate hours = no. of employed workers x average
hours x no. of workweeks in a year.
E.g., in May 2005, 141.6 million people worked an
average of 33.9 hours per week. With 50 workweeks
per year, aggregate hours were
141.6 million  33.9  50 = 240 billion hours.
Unemployment and the business cycle:
The business cycle refers to fluctuations in real GDP
over time. During business cycle recessions
unemployment generally rises and during
expansions unemployment generally falls.
However, sometimes the initial phase of a business
cycle expansion is accompanied by a temporary rise
in unemployment as discouraged workers and
others outside the labor force enter or re-enter the
labor force.
Notable trends in the U.S. labor market
The labor force participation rate:
The participation rate increased from 59% during the
1960s to 67% in 2000, and since 2000 has fallen
slightly.
Growing labor force participation has been due
entirely to an increase in female labor force
participation, which increased from 39% in 1965 to
60% in 1999.
By contrast, the male participation rate decreased
from 81% in 1965 to 73% in 2005.
Part-time workers
Part-time workers average about 16 to 17% of all
employed workers.
Involuntary part-time work increases during
business cycle recessions and decreases during
expansions.
Aggregate and average hours
Aggregate hours have increased, but not as rapidly
as the number of people employed. The reason is
that average hours have decreased.
The number of people employed doubled, i.e.,
increased by 100%, from 1965 to 2005, but
aggregate hours increased by only 75% over this
period. Average hours worked per week fell from
38.5 hours in 1965 to just under 34 hours in 2005.
Sources of unemployment
How do people move into and out of the labor
force and into and out of jobs? This process is
best described by the following chart:
Types of unemployment
1. Frictional
2. Structural
3. Seasonal
4. Cyclical
Frictional unemployment:
This is unemployment arising from normal labor
market turnover – people entering or re-entering the
labor force or moving between jobs.
Frictional unemployment is sometimes called “search
unemployment” because people entering the labor
force or between jobs are searching for a job.
Employers, too, are searching for the right worker.
Search by workers and employers is desirable
because it brings about optimal matching of workers
with jobs.
Even if there were a job vacancy for every job seeker,
there would still be search unemployment because it
takes time for workers to obtain information about job
availability, pay and other attributes, and it takes time
for employers to discover information about potential
workers’ productivity.
The amount of frictional unemployment depends on
the rate at which people enter or re-enter the labor
force and the rate at which jobs are created or
destroyed. It also depends on the generosity of
unemployment and welfare benefits, which subsidize
longer periods of search.
Structural unemployment:
This is the unemployment that arises when changes
in technology or international competition change the
skills needed to perform jobs or change the locations
of jobs.
When industries decline (e.g., steel making, auto
assembly), jobs are lost. At the same time, other
industries are expanding (e.g., information technology,
services). It takes time for workers laid off from
declining industries to retrain or relocate to obtain jobs
in the newly expanding industries.
Seasonal unemployment:
This is the unemployment that arises because of
seasonal weather patterns, e.g., construction workers
laid off during the winter, agricultural workers laid off
after the harvest.
Cyclical unemployment:
This is the fluctuating unemployment over the
business cycle that increases during a recession and
decreases during an expansion.
The average duration of unemployment varies
over the business cycle, rising during recessions and
falling during expansions. In general, the lower the
average unemployment rate, the shorter is the
average duration of unemployment.
Demographics of unemployment
Teenage unemployment is three to four times that of
workers aged 20 and over. This is because teenage
workers have less experience, are less likely to be in
a job that’s a good match for their skills, and are
often hired for short durations on a trial basis.
Full employment:
It is often said that one of the goals of
macroeconomic policy is to achieve “full
employment.” What does this mean? Clearly, it does
not mean zero unemployment. Zero unemployment
is impossible because, no matter how well the
economy is doing, there will always be some
frictional, structural and seasonal unemployment.
Full employment occurs when there is no cyclical
unemployment or, equivalently, when all of the
unemployment is frictional, structural and seasonal.
The unemployment rate when the economy is
operating at full employment is called the natural rate
of unemployment.
For many purposes the natural unemployment rate
can be treated as constant, but it does change
gradually over time, e.g., when changes in technology
bring increases in structural unemployment, or when
demographic changes bring changes in frictional
unemployment.
The natural unemployment rate also varies across
different economies. In some countries there are
more labor market frictions due to laws and
government regulations.
For example, the natural unemployment rate is higher
in Europe and Canada than in the U.S. due to more
generous unemployment and welfare benefits that
subsidize search, and due to labor market regulations
that raise the cost of hiring, e.g., high minimum
wages, lengthy mandated vacation, sick and parental
leaves, and restrictions on firing workers.
Unemployment and the business cycle:
The actual unemployment rate fluctuates around the
natural rate over the course of the business cycle.
At full employment there is no cyclical unemployment.
All unemployment is frictional, structural and
seasonal, i.e., the actual unemployment rate equals
the natural rate.
In a business cycle recession, there is cyclical
unemployment in addition to
frictional/structural/seasonal. Therefore the actual
unemployment rate is above the natural rate.
In a business cycle expansion, there is no cyclical
unemployment and frictional unemployment decreases
because more jobs are created and job seekers find
employment more quickly, lowering the duration of
search. Therefore the actual unemployment rate is
below the natural rate.
Potential GDP:
This is the level of real GDP that the economy would
produce if it were operating at full employment.
Because the unemployment rate fluctuates around
the natural rate, real GDP fluctuates around potential
GDP:
When the unemployment rate is equal to the natural
rate, i.e., when the economy is operating at full
employment, real GDP is equal to potential GDP.
When the unemployment rate is above the natural
rate (due to cyclical unemployment), real GDP is
below potential GDP.
When the unemployment rate is below the natural
rate (due to lower-than-usual frictional
unemployment), real GDP is above potential GDP.
How is it possible for the economy to produce a level
of real GDP that is temporarily above potential GDP?
Businesses and factories operate longer hours and
hire overtime labor.
The following figure shows the relationship between
unemployment and real GDP. As the unemployment
rate fluctuates around the natural rate of
unemployment (part a), real GDP fluctuates around
potential GDP (part b):