Chapter
15
Unemployment
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
2
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)
3
Identifying Unemployment
• How is unemployment measured?
• Labor force
– Total number of workers
• Employed
• Unemployed
• Labor force = Number of employed + Number
of unemployed
4
Identifying Unemployment
• How is unemployment measured?
• Unemployment rate
– Percentage of labor force that is unemployed
Number of unemployed
Unemployment rate 
 100
Labor force
• Labor-force participation rate
– Percentage of adult population that is in the
labor force
Labor force
Labor - force participation rate 
 100
Adult population
5
Figure 1
The breakdown of the population in 2007
The Bureau of
Labor Statistics
divides the adult
population into
three categories:
employed,
unemployed, and
not in the labor
force.
6
Table
1
The labor-market experiences of various demographic
groups
Demographic Group
Adults (ages 20 and older)
White, male
White, female
Black, male
Black, female
Teenagers (ages 16–19)
White, male
White, female
Black, male
Black, female
Unemployment Rate
Labor-force Participation Rate
3.7%
3.6
7.9
6.7
76.3%
60.1
71.2
64.0
15.7
12.1
33.8
25.3
44.3
44.6
29.4
31.2
This table shows the unemployment rate and the labor-force participation rate of
various groups in the U.S. population for 2007
7
Identifying Unemployment
• 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
8
Figure 2
Unemployment rate since 1960
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
9
Identifying Unemployment
• Natural rate of unemployment
– Normal rate of unemployment
– Around which the unemployment rate
fluctuates
• Cyclical unemployment
– Deviation of unemployment from its natural
rate
10
Labor-force participation of men and
women in the U.S. economy
• 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
11
Labor-force participation of men and
women in the U.S. economy
• 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
12
Figure 3
Labor-force participation rates for men and women
since 1950
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
13
have left it.
Identifying Unemployment
• 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
14
Identifying Unemployment
• 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
15
Table
2
Alternative measures of labor underutilization
Measure and Description
Rate
U-1
1.6%
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 workers
Total unemployed plus all marginally attached workers, as a percentage of the civilian
labor force plus all marginally attached workers
Total 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
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.
16
Identifying Unemployment
• 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 time
17
Identifying Unemployment
• 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
18
Identifying Unemployment
• 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
19
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)
20
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
21
Job Search
• Unemployment insurance
– Government program
– Partially protects workers’ incomes
• When they become unemployed
– Increases frictional unemployment
• Without intending to do so
22
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
23
Figure 4
Unemployment from a wage above equilibrium level
Wage
Surplus of labor =
Unemployment
Labor
supply
Minimum wage
WE
Labor
demand
0
LD
LE
LS
Quantity of Labor
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
24
falls to LD. The resulting surplus of labor, LS – LD, represents unemployment.
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
25
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
26
Henry Ford and the very generous
$5-a-day wage
• 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
27
Henry Ford and the very generous
$5-a-day wage
• 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
28