Unemployment
Full Employment?
 When we talked about producing on our PPC, we
said the only way to be on it was to not waste or
underutilize any factors of production.
 However, as we know, there are always some people
not working. It’s better to think of full employment
as the level of unemployment that exists when the
economy is producing it’s potential output, aka the
“natural rate of unemployment”
Unemployment defined…
 According to Tragakes, unemployment is “the
number of unemployed people, defined as all people
above a particular age (not children) who are not
working and who are actively looking for a job.
Underemployment
 Tragakes again…. “the number of underemployed
people, defined as all people above a certain age (not
children) who have part-time jobs when they would
prefer to have full-time jobs; or have jobs that do not
make full use of their skills and education
More on Underemployment
 How does the reality of an engineer working as a
dishwasher represent a waste of resources?
 When we have unemployment and/or
underemployment, what does that tell us about our
position in the PPC universe?
Unemployment Rate
 In order to talk about the unemployment rate, we
have to first establish the idea of the labour force.
 What do you remember about the labour force?
Labour Force
 The labour force is defined as the number of
employed people plus the number of unemployed
people.
 Lots of people are not included in the labour force,
such as…..
Not in the labour force
Measuring Unemployment
 We can refer to the unemployed as a number of
adults who are not working but are actively seeking
work……or more commonly…..
 As a percentage calculated as follows:
 Unemployment rate=# of unemployed/labour force
X 100
Difficulties Measuring Unemployment
What’s the trouble?
 Unemployment statistics may be underestimated for
several reasons including….
 People who have given up looking for work
(discouraged workers) are not part of the labour
force
 Underemployed people count as employed. Even if
you worked only one hour, you’re considered
employed
More trouble
 Unemployment rates may be overestimated because
if someone is working in the underground economy
but “looking for work” at the same time, he counts as
unemployed even though he is supporting himself.
Costs of Unemployment
 So what’s the big deal? People who aren’t working
are lucky right?
Costs of Unemployment
 One cost of unemployment is the loss of real GDP.
Less people working means less output which can
have a severe negative multiplier effect on the
economy.
 As we know, operating beneath our PPC is not a
happy situation
Costs of Unemployment
 Try living a satisfying life without a regular paycheck.
Even if you get unemployment benefits, they are
unlikely to provide you with a decent living.
 And when they run out, you’re in big trouble.
Costs of Unemployment
 Unemployed people represent loss of potential
revenue received by government. The government
would rather have you work and pay taxes than for it
to pay you unemployment benefits
Costs of Unemployment
 Social problems typically escalate with the
unemployment rate. Fighting these social problems
can be costly for government…
Costs of Unemployment
 Unemployment usually targets specific groups of
people. Minorities, uneducated people, the young,
people without job skills, and women have
inordinately high rates of unemployment. This can
lead to many disaffected people in society
Costs of Unemployment
 The longer you are unemployed, the more difficult it
becomes to re-enter the workforce. Employers
assume your skills have eroded, you are behind in
terms of new technology, or there must be something
wrong or someone else would have hired you.
Non-Economic Costs of Unemployment
 In addition to the economic costs of unemployment,
there are non-economic costs as well, including:
 Psychological stress which can lead to health
problems
 Social problems may escalate, such as criminal
activity and violence
Types of Unemployment
 There are several types of unemployment. Let’s
begin with those that occur even at “full
employment” or the “natural rate of unemployment”
 Do you remember which types of unemployment fall
in this category?
Structural Unemployment
 Structural Unemployment refers to unemployment
that occurs when there is a mismatch between labour
skills demanded and supplied.
 It may also result due to a mismatch of where
workers are and where jobs are located
 Structural Unemployment may occur when….
Causes of Structural Unemployment
 Technology changes may lead to structural
unemployment. When ATMs appeared, bank tellers
became expendable, while computer people became
more in demand.
 If those bank tellers don’t learn new skills, they may
become structurally unemployed for a long time
Causes of Structural Unemployment
 Changes in consumer demand patterns may lead to
structural unemployment. If consumers switch their
purchasing from one industry to another, workers
need to quickly learn new skills to work in the new
industry.
 If they don’t, a trip to the unemployment office is
needed…
Causes of Structural Unemployment
 If one area of a country, or a foreign country has a
booming economy while another is failing, people in
the failing region may become structurally
unemployed unless they choose to relocate with their
company.
 This happened in the U.S. “Rust Belt” as factories
were unable to compete with foreign companies.
Dangers of Structural Unemployment
 Tends to be long-term
 Inflicts costs on individuals and society
 Often targets older workers, forcing them into early
retirement
How to deal with Structural Unemployment
 Structural Unemployment will exist in a modern
economy but can be lowered…..Do you remember the
supply-side market and interventionist policies?
Market Oriented Measures
 The free market can fix anything! Let’s:
 Eliminate minimum wage
 Destroy labour unions
 Lower unemployment benefits
 Reduce job security for workers
 Lower peronal income taxes
 That’ll get people back to work! Maybe…
Interventionist Measures
 OK, we’ll let the government:
 Set up training programs
 Provide grants or low interest loans for education
 Provide on the job training and job info
 Provide grants to firms who train workers
 Offer wage subsidies to firms that hire the
unemployed
 Help workers relocate
 Help depressed economic areas
Frictional Unemployment
 This occurs when people are between jobs due to
being laid off, their company has gone out of
business, they are waiting to begin a new job or they
are looking for a better job
 It’s usually short-term and doesn’t signify a lack of
marketable skills, so it’s not so serious
Incomplete Information
 Frictional Unemployment often occurs due to
miscommunications between workers and firms.
 Because it can take time for workers and firms to
find each other, frictional unemployment always
exists to some extent.
How to deal with Frictional Unemployment
 More job centres, employment agencies and other
ways for workers and firms to find each other.
 The market oriented policies discussed before apply
here as well, under the assumption that people will
spend less time out of the work force if there is
money to be made….
Seasonal Unemployment
 Seasonal Unemployment occurs when the demand
for labour changes on a seasonal basis.
 There are many examples of jobs that are required in
certain times of the year, but not needed in others,
such as…
Seasonal Unemployment
Seasonal Unemployment
 Like Frictional and Structural Unemployment, this is
a fact of life and therefore part of the natural rate of
unemployment.

 Can it be lowered? Perhaps with improved
information during off season and the usual marketoriented ideas…..but it will never be eliminated
completely..
Last Words
 The natural rate of unemployment includes the three
we have just discussed.
 If we can lower the natural rate of unemployment,
we can increase potential GDP, shift LRAS or the
Keynesian AS to the right, and move closer to our
PPC. All of this makes for a happy economist……