McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Unemployment Chapter 6

2 The Labor Force The labor force includes all persons over age sixteen who are either working for pay or actively seeking paid employment. People who are not employed or are not actively seeking work are not considered part of the labor force. LO1

3 The Labor Force The labor-force participation rate is the percentage of the population working or seeking employment. People who are neither employed nor actively seeking work are called nonparticipants. LO1

4 The Labor Force, 2006 LO1

5 A Growing Labor Force

6 Growth of Production Possibilities Production is limited by two factors: The availability of factors of production. Technological know-how.

7 Production Possibilities A growing labor force creates long- run economic growth. Economic growth is an increase in output (real GDP); an expansion of production possibilities.

8 Institutional Constraints Production possibilities in any year depend on available resources and technology and on how we choose to restrict their use. The size of labor force is limited by participation rates and social regulation.

9 Labor Force Growth C H GF D Labor-force growth increases production possibilities Consumption Goods (units per year) B A Investment Goods (units per year) O

10 Unemployment To make full use of available production capacity, the labor force must be fully employed. Unemployment is the inability of labor-force participants to find jobs. LO1

11 Okun’s Law: Lost Output Okun’s Law asserts that 1% more unemployment results in 2 percent less output.

12 Measuring Unemployment U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed. A person is considered unemployed if he or she is not employed and is actively seeking a job. LO1

13 The Unemployment Rate The unemployment rate is the proportion of the labor force that is unemployed. LO1

14 Unemployment Isn’t Experienced Equally by Race or Sex

15 Unemployment Isn’t Experienced Equally by Education

16 Duration of Unemployment When the economy is growing, both unemployment rates and the average duration of unemployment decline.

17 Duration of Unemployment:

18 Reasons for Unemployment How long a person remains unemployed is affected by the nature of the joblessness. Job leavers Job losers Reentrants New entrants

19 Reasons for Unemployment Job losers 47% Reentrants 32% New entrants 9% Job leavers 12%

20 Discouraged Workers A discouraged worker is an individual who is not actively seeking employment but would look for or accept a job if one were available. Discouraged workers are not counted as unemployed because they gave up looking for a job. LO1

21 Underemployment Underemployment exists when people seeking full-time paid employment work only part time or are employed at jobs below their capability. Underemployed workers represent labor resources that are not being fully utilized. LO1

22 The Phantom Unemployed Some of the people who are counted as unemployed probably should not be. Public policy may encourage people to report that they are actively seeking work when they really don’t want a job. LO1

23 Europe’s Unemployment Woes Unemployment levels in Europe are much higher than those of the U.S. Analysts blame both sluggish economic growth and high unemployment benefits.

24 Europe’s Unemployment Woes

25 The Human Costs The most visible impact of unemployment on individuals is loss of income. There are social, physical, and psychological costs as well.

26 Defining Full Employment Full employment is not the same as zero unemployment. LO3

27 Seasonal Unemployment Seasonal unemployment is the unemployment due to seasonal changes in employment or labor supply. The Labor Department reports seasonally adjusted unemployment rates for every month. LO2

28 Frictional Unemployment Frictional unemployment is the brief periods of unemployment experienced by people moving between jobs or into the labor market. LO2

29 Frictional Unemployment Frictional unemployment differs from other unemployment in three ways: There is adequate demand for the labor of the frictionally unemployed. The frictionally unemployed have the skills required for existing jobs. The job-search period will be relatively short. LO2

30 Structural Unemployment Structural unemployment is the unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. LO2

31 Cyclical Unemployment Cyclical unemployment is the unemployment attributable to the lack of job vacancies – that is, to an inadequate level of aggregate demand. LO2

32 The Unemployment Record

33 Slow Growth To avoid cyclical unemployment, the economy must grow at least as fast as the labor force. LO2

34 The Full-Employment Goal In the Employment Act of 1946, Congress committed the federal government to pursue a maximum employment goal. Congress didn’t specify what the rate of unemployment should be. LO3

35 The Full-Employment Goal The full employment goal presumably means avoiding as much cyclical and structural unemployment as possible, while keeping frictional unemployment reasonably low. LO3

36 Inflationary Pressures Rising prices are a signal that employment is nearing capacity. During the 1960s, the Council of Economic Advisors placed full employment at 4%. LO3

37 Changes in Structural Unemployment During 1970s and early 1980s structural barriers to full employment had gotten worse. More youth and women. Liberal transfer payments. Structural changes in demand. LO3

38 Redefining Full Employment In 1983, the Reagan administration concluded that the inflation- threshold unemployment rate was between 6 and 7 percent. LO3

39 Declining Structural Pressures The structural barriers that intensified inflationary pressures in the 1970s and early 1980s receded in the 1990s. Made it easier to lower unemployment rates without increasing inflation. LO3

40 The “Natural” Rate of Unemployment The natural rate of unemployment is the long-term rate of unemployment determined by structural forces in labor and product markets. The “natural” rate of unemployment consists of frictional and structural components only. LO3

41 Congressional Targets The Full Employment and Balanced Growth Act of 1978 (Humphrey- Hawkins Act) set 4% unemployment rate and 3% inflation as a national goal. LO3

42 The Historical Record As many as one-fourth of the labor force was unemployed during the Great Depression. The civilian unemployment rate fell to 1.2 percent during World War II.

43 The Historical Record The unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the recession.

44 The Historical Record From 1982 to 1989, unemployment fell, but shot up again in the recession. Unemployment fell steadily during the last half of the 1990s. The unemployment rate rose sharply in late 2001 but fell again through 2005.

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