Chapter 28
Unemployment and its Natural Rate
A Roadmap for Chapter 28
1.
2.
3.
4.
Background
Long Run vs. Short Run Unemployment
Unemployment - Generally Speaking
Determinants of Long-Run
Unemployment
Why Unemployment is Important?
• People who are unemployed not
contributing to economy’s production.
• A country that keeps its workers as fully
employed as possible achieve a higher level of
GDP than the one who leaves many of them idle
Why Unemployment is Important?
• Adult population (15-64 years) covers the
economically active age group in the population
• Long-run vs. Short-run problem.
Labour Force
• The total number of workers, including
both the employed and the unemployed
• Labour force = Number of employed + number of unemployed
Unemployment Rate
• The percentage of the labour force that is
unemployed
• Unemployment rate

Number of Unemploye
Labor Force
d
 100
Labour force participation
• The percentage of the adult population that
is in the labour force
The labour force participation
rate:
Labour Force

 100
Adult Population
Labour Force Participation Rate
labour-Force
Participation
Rate (in percent)
100
80
Men
60
40
Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Figure 1 US Population and Unemployment, 2009
Employed
(139.9million)
Adult
Population
(235.9 million)
Unemployed (14.3 million)
Not in labour force
(70.1 million)
labour Force
(154.2 million)
Unemployment in the
Long-Run
• Natural Rate of Unemployment: is the rate
of unemployment that the economy
experiences even during normal times, that
is, even when the economy is not in a
recession
• It is also called economy’s long-run rate of
unemployment
Unemployment in the Short-Run
• Cyclical Unemployment: year to year
fluctuations in unemployment around its
natural rate.
• Occurs during recessions.
Unemployment
Long Run vs Short Run?
The Natural Rate of Unemployment
– the long-run rate of unemployment
– the rate of unemployment when the economy is at
“full employment”
– According to your book, about 5.5% (see next slide)
Unemployment Rate since 1960
What is Unemployment?
 Compiled by a random monthly survey of
60,000 households
 To be counted as part of the labour force, you
must either:
– have a job
– not have a job, but is able to work and willing to work
(actively searching)
Who is Unemployed?
Demographic
Group
Unemployment
Rate
labour-Force
Participation Rate
White, male
3.7%
76.8%
White, female
3.6%
50.2%
Black, male
8.0%
72.1%
Black, female
7.0%
65.4%
White, male
13.8%
54.1%
White, female
11.4%
52.8%
Black, male
30.5%
38.0%
Black, female
27.5%
37.4%
Adults (20 or over)
Teenagers (15-19)
Problems With Our Measure of
Unemployment?
def: Discouraged workers
– people who would like to work but have given up
looking for jobs after an unsuccessful search, don’t
show up in unemployment statistics.
 Other people may claim to be unemployed in
order to receive financial assistance, even though
they aren’t looking for work.
 Some people work (homemakers) but aren’t paid
in a formal labour market, and so aren’t counted
as being part of the labour force
Is 0% Unemployment ever
possible?
Types of Unemployment
- Frictional Unemployment
- Structural Unemployment
- Disguised Unemployment
- Cyclical Unemployment
Frictional unemployment
Definition: unemployment that results because for
workers to search for the jobs that are best suit their
tastes and skills.
• Companies and sectors grow, shrink, go bankrupt every
day in every economy
• People migrate to other cities or regions for personal as
well as economic reasons
• People change jobs for many, even irrational reasons
• At any moment in time, there are many people
temporarily unemployed in the economy
Structural unemployment
Definition: is the unemployment that results because
the number of jobs available in some labour markets is
insufficient to provide a job for everyone who wants
one.
• The 15-64 years age group members (adults) who can
not find employment simply because there are not
enough factories, offices, fields,
• Macroeconomic policies have no impact on structural
unemployment in the short run: unemployment persists
even during rapid growth
Disguised unemployment (gizli işsizlik)
• Many people, especially in agriculture and
urban services seem to be working
• But they have very low productivity,
creating very little value added and
therefore earn low levels of income
• This is due to the lack of jobs with high
productivity in the economy, itself due to
the capital constraint
Cyclical unemployment
• Cyclical unemployment happens when economic
activity slows down as result of a recession or a
an economic crisis
• As demand for goods and services fall, people
who were producing them loose their jobs
• Many people became unemployed in Turkey
during 2001 and 2008 because of the economic
crisis
Why do above market wages
cause unemployment?
 If the wage is kept
above the equilibrium
(w*), then the quantity
of labour supplied (LS)
will exceed the quantity
of labour demanded
(LD) and some workers
will be unable to find
work
 This is structural
unemployment, and can
be caused by:
– Minimum wages
– Unions
– Efficiency wages
w
SL
Unemployment
Wmin
W*
DL
LD
L*
LS
L
What determines the natural rate
of unemployment?
1. Minimum wages


Minimum wages cause
some unemployment
As minimum wage rises
above equilibrium, the
natural rate rises
2. Labour Unions

As unions seek to raise
wages above equilibrium,
they’ll produce a similar
effect on the natural rate
as minimum wages
3. Efficiency Wages

When employers pay
above market wages to
reduce turnover and
increase worker
productivity, they increase
the natural rate
4. Job Search

In general, it’s not
possible to move from one
job to another without
some lost time – workers
are therefore temporarily
unemployed during the
interim
Conclusion
• Unemployment is a major economic as well as political
and social issue in all economies
• Labour force consists of the employed and the
unemployed
• The unemployment rate is the percentage of people who
would like to work but don’t have jobs
• There are four different kinds of unemployment:
structural, disguised, cyclical and frictional
• Most unemployment in Turkey is structural Wage and
salary earners constitute only 49 percent of the labour
force in Turkey