As long as we’re talking about stocks…
Why didn’t I buy
Apple Stock
instead of Apple
Products. ?
Copyright©2004 South-Western
Mar. 2014
Unemployment data
Unemployment and
its Natural Rate
Chapter28
Yes, in all economies there is a natural level
of unemployment!
Copyright©2004 South-Western
Learning Targets
Be able to calculate…
•Labor Force
•Labor Force Participation Rate
•Unemployment Rate
•Why can the unemployment rate be
misleading?
Understand these concepts
•Cyclical Unemployment
•Natural Unemployment
Copyright©2004 South-Western
Breakdown of US labor force in 2001. Some
definitions…
Not all adults
are considered
part of the
labor force.
Many people are
NOT in the labor
force, such as…
people who…
•Students
•Stay-at-home
•Stopped looking for
work
How would you calculate the
unemployment rate?
Labor Force =
# Employed +
# Unemployed
Labor Force
Participation rate =
Labor Force/Adult
Population
= 141.8/211.9
= 67%
=% of adults
interested in
working
Copyright©2004 South-Western
How Is Unemployment Measured?
● The unemployment rate is calculated as the
percentage of the labor force that is
unemployed.
Number unemployed
Unemployment rate =
 100
Labor force
Adult Population = 200 million
Employed = 135 million
Unemployed = 7 million
Labor Force = ?
7 + 135 = 142 million
Unemployment rate = ?
7 million/ 142 million (100) = .05 = 5%
Copyright©2004 South-Western
Figure 3 Labor-Force Participation Rates for
Men and Women since 1950
Labor Force Participation Rate =
Labor Force
Adult Population
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Table 1 The Labor-Market Experiences of Various
Demographic Groups
Labor Force Participation Rate = Labor Force
Adult Population
2004
2014
5.5%
5.1
12.9
9.9
2004
2014
73%
58
67
62
17.8%
33%
39
24
Copyright©2004 South-Western
Let’s test your knowledge so far…
Employment Stats for Country A
Population
100,000
Adult Population
70,000
Number employed
Unemployed
45,000
5,000
Calculate the Labor Force
= # employed + # unemployed
= 45,000 + 5,000 = 50,000
Calculate the Labor Force Participation Rate
= Labor Force / Adult Population *100
= 50,000/70,000 *100 = 71%
Calculate the Unemployment Rate
= # Unemployed / Labor Force * 100
= 5,000/50,000 * 100 = 10%
Copyright©2004 South-Western
2 Types of Unemployment
1. Natural Unemployment
2. Cyclical Unemployment= due to economic
downturns
Cyclical
unemployment
Natural
Unemployment
There is always some amount of unemployment!
The “Natural” Unemployment
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Unemployment due to economic fluctuations is
called “CYCLICAL” Unemployment.
Cyclical
unemployment
Any unemployment below the natural
rate is considered “full employment”
Why is some unemployment natural?
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A little practice- Worksheet answers
a. Labor Force 2001 = 105.2 + 7.4 = 112.6 million
Labor Force 2002 = 104.2 + 8.1 = 112.3 million
b. Labor Force Participation rate 2001 = 112.6/ 168.2 = 67%
LF Part. Rate 2002 = 112.3/169.5 = 66.2%
c. Unemployment rate 2001 = 7.4/112.6 = 6.6 %
Unemployment rate 2002 = 8.1/ 112.3 = 7.6%
d. What could cause the labor force participation rate to decrease?
People stopped looking for work (left the work force)
College grads who haven’t gotten first job haven’t entered
workforce.
e. 2001 cyclical unemployment = 0% = fully employed
2002 cyclical unemployment = (7.2% - 6.6%) = .6%, slight
economic downturn!!
Copyright©2004 South-Western
Learning Targets
Know the difference between the following
•Natural Unemployment vs. Cyclical Unemployment
Why is there a “natural rate of unemployment”?
Frictional Unemployment
Structural Unemployment
What causes structural unemployment?
•Workers who need to be retrained
•Minimum Wage
•Unions
•Efficiency Wages
Copyright©2004 South-Western
Causes of a Natural Rate of Unemployment?
Why there will always be some unemployment
■ Frictional Unemployment
♦ Somebody is always switching jobs!
♦ It takes time to find another job
♦ Unemployment compensation ADDS to friction!
■ People tend to find a job when their
unemployment checks run out!!
● Structural Unemployment
Surplus of Workers
Some workers need to be retrained for a new employment
environment!
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Minimum Wage
♦ Minimum Wage Laws cause structural
unemployment
♦ Keep wages ABOVE equilibrium rate – creates a
SURPLUS of labor supplied.
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Figure 4 Unemployment from a Wage above the
Equilibrium Level
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■ Efficiency Wages
● Many employers would rather keep wages ABOVE
equilibrium
● Why?
● Improve worker health (more relevant in developing
countries)
● Limit worker turnover
● Increase worker EFFORT and QUALITY
■ They make their jobs more attractive and only
hire the BEST, but the rest don’t get to work!!!
● Henry Ford paid $5/ hour in 1910 (twice the going
rate)
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More Causes of Structural Unemployment…
■ Unions – Yes, unions cause unemployment!
How?
♦ Keep wages higher for union workers so employers hire
less people for those jobs
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Right to Work States:
Some states do not allow unions to force workers to join a union in
order to work at a particular job. 24 states are right to work states.
Right to Work States
http://www.nrtw.org/en/print/1052
Screen clipping taken: 4/1/2014, 4:10 PM
Copyright©2004 South-Western
Journal Questions
How does natural unemployment differ from cyclical
unemployment?
•Natural unemployment is the level of unemployment that
exists when the economy is running at full
employment.
•Cyclical unemployment is the level of unemployment
caused by economic downturns.
What is Frictional Unemployment?
•The temporary unemployment caused when people look
for jobs.
What is Structural Unemployment?
•Long term unemployment caused when the supply of
labor is more than the demand.
Copyright©2004 South-Western
CPI and Non-farm Payrolls
Is an increasing CPI a good thing?
What does CPI indicate?
Price changes
A SLIGHT INCREASE IS OK.
IT SHOWS THE ECONOMY
IS GROWING.
Do we necessarily want
prices to increase?
NOT REALLY
Do we want prices to
decrease?
ABSOLUTELY NOT!
So what do we want?
WE WANT PRICES TO
REMAIN STABLE!
What About Non-Farm Payrolls?
Non-farm payrolls reports
the number of jobs gained
or lost in the economy in a
single month.
Negative non-farm payrolls
numbers report that jobs
are being LOST.
Yes, we have been losing
less jobs, BUT until
recently no jobs had been
created!