Chapter
15
Unemployment
Identifying Unemployment
• How is unemployment measured?
– Usual BLS calculation considers only those
who are “active” in the current labor force
1. Currently Employed
2. Unemployed
– recently laid off (last 2 years)
– applying for or currently collecting benefits
– mean to capture those “actively looking”
• Not counted in the labor force
– Not employed and not actively looking
– Not unemployed
2
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.
3
Identifying Unemployment
• How is unemployment measured?
• Labor force (participation rate of adults)
– Total number of adult workers in the labor
force who are either:
• Employed
• Unemployed – but actively looking
• Labor force = Number of employed + Number
of unemployed
– Doesn’t count those not actively looking
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
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
6
Table
Labor Force Participation Rates – dropping recently
Year Jan
Feb Mar Apr
May Jun
Jul
Aug Sep Oct
Nov Dec
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
66.0
65.9
66.1
66.3
66.0
65.8
64.9
64.2
63.9
63.5
63.0
66.0
66.1
66.1
66.0
66.1
65.7
64.9
64.2
63.8
63.4
66.1
66.1
66.1
66.0
66.1
65.5
64.6
64.0
63.7
63.4
66.0
66.2
66.2
65.8
66.1
65.4
64.7
64.1
63.5
63.2
66.0
66.0
66.3
66.0
65.9
65.0
64.6
64.1
63.6
63.0
66.1
65.8
66.0
66.4
66.2
65.7
64.8
64.2
63.7
63.6
63.0
66.0
65.9
66.2
66.2
66.1
65.6
64.9
64.2
63.8
63.3
63.2
65.9
66.1
66.1
65.9
65.9
65.7
65.2
64.2
63.7
63.4
62.8
66.1
66.1
66.2
66.0
66.1
65.7
64.6
64.0
63.8
63.5
65.8
66.1
66.1
66.0
66.0
65.1
64.6
64.2
63.6
63.2
65.9
66.1
66.2
65.8
66.0
65.0
64.4
64.1
63.7
62.8
Ann
ual
65.9
66.0
66.4
66.0
65.8
64.6
64.3
64.0
63.6
62.8
7
Table
Labor Force Participation Rates - Graphically
Unemployment rate dropped early during recession
• But due to decrease in labor force participation rate
• Rather than an increase in employment
8
Year Jan
Feb
Mar Apr
May Jun
Jul
Aug Sep
Oct
Nov Dec
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
5.4
4.8
4.5
4.9
8.3
9.8
9.0
8.3
7.7
6.7
5.5
5.2
4.7
4.4
5.1
8.7
9.9
9.0
8.2
7.5
6.6
5.5
5.1
4.6
4.4
5.4
9.4
9.6
9.0
8.2
7.5
6.3
5.0
4.7
4.7
5.8
9.5
9.4
9.0
8.2
7.3
6.2
4.9
4.7
4.6
6.1
9.6
9.5
9.0
8.0
7.2
6.1
5.0
4.4
4.7
6.5
10.0
9.4
8.8
7.8
7.2
5.7
5.0
4.5
4.7
6.8
9.9
9.8
8.6
7.7
7.0
5.8
5.3
4.7
4.6
5.0
7.8
9.8
9.2
8.3
8.0
6.6
5.7
5.2
4.7
4.5
5.0
9.0
9.9
9.1
8.2
7.6
6.2
5.4
5.0
4.6
4.6
5.6
9.5
9.4
9.1
8.2
7.5
6.1
5.0
4.5
4.7
6.1
9.8
9.5
9.0
7.8
7.2
5.9
4.9
4.4
5.0
7.3
9.9
9.3
8.5
7.9
6.7
5.6
10
Figure 2
Actual Unemployment rates 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
11
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
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
• Particularly in longer recessions
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
• Unemployment rate
– Never falls to zero
– Fluctuates around the “natural” (long-term
trend) rate of unemployment
– ~5% historically
• Could shift with structural changes in the
economy (changes in what the economy
produces) and demographics (“ageing of the
population)
17
Identifying Unemployment
• Why are there always some people
unemployed?
• Frictional unemployment
• Results from the process of matching workers and
jobs
• Structural unemployment
– Results because of changes in the number of
jobs available in some labor markets
18
Job Search and Frictional Unemployment
• 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 – “job search” it takes time
• 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)
19
Structural Unemployment
• Structural unemployment
– Results because of changes in the number of jobs available in
some labor markets
• Reasons for structural unemployment
– Obsolescence of a single technology will make specific expertise useless.
– Increase of the efficiency in an economic sector reduces the number of
required workers. Unskilled laborers are the first to go unemployed, and
the most likely to stay so.
– Reduced relative competitiveness of an industry in a country can also
lead to structural unemployment. Basic manufacturing in the West has
been hit by this. Lower wages in less developed countries have attracted
manufacturing away from the West.
– Market inefficiencies can also cause structural unemployment.
• Long term – need to retrain workers
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
Unions and Collective Bargaining
• Union
– Worker association
– Bargains with employers over
• Wages, benefits, and working conditions
• The economics of unions
– Collective bargaining
• Process: unions and firms agree on the terms of
employment
– Strike
• Organized withdrawal of labor from a firm by a
union
26
Unions and Collective Bargaining
• The economics of unions
• Union - raises the wage above the
equilibrium level
– Higher quantity of labor supplied
– Smaller quantity of labor demanded
– Unemployment
– Better off: employed workers (insiders)
– Worse off: unemployed (outsiders)
• May stay unemployed
• Take jobs in firms that are not unionized
27
Unions and Collective Bargaining
• The economics of unions
• Union - raises the wage above equilibrium
– Supply of labor – increase in industries not
unionized
• Lower wage
• Workers in unions
– Reap the benefit of collective bargaining
• Workers not in unions
– Bear some of the cost
28
Unions and Collective Bargaining
• Are unions good or bad for the economy?
• Critics
– Unions - a type of cartel
– Allocation of labor
• Inefficient
– High union wages reduce employment in unionized
firms below the efficient level
• Inequitable
– Some workers benefit at the expense of other workers
29
Unions and Collective Bargaining
• Are unions good or bad for the economy?
• Advocates
– Unions - necessary antidote to the market
power of the firms that hire workers
• In the absence of a union
– Firm - pay lower wages and offer worse working
conditions
– Unions - help firms respond efficiently to
workers’ concerns
• Keep a happy and productive workforce
30
The Theory of Efficiency Wages
• Efficiency wages
– Above-equilibrium wages paid by firms to
increase worker productivity
• Worker health
– Better paid workers
• Eat a more nutritious diet
– Healthier and more productive
• Worker turnover
– Firm - can reduce turnover among its workers
• By paying them a high wage
31
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
32
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
33
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
34