Chapter 6 Unemployment © OnlineTexts.com p. 1

Unemployment Unemployment in the U.S. follows a counter-cyclical pattern, rising when the economy's GDP is declining, and falling when the economy recovers. It is a lagging indicator, rising only after the recession has begun, and it peaks well after the recession is officially over. © OnlineTexts.com p. 2

U.S. Unemployment through Time © OnlineTexts.com p. 3

Measuring Unemployment Each month the Bureau of Labor Statistics polls over 50,000 households either in person or by phone. The respondents of the survey are classified into one of three categories: Unemployed Employed Not in the labor force The labor force = employed + unemployed © OnlineTexts.com p. 4

Measuring Unemployment The unemployment rate is the percentage of the labor force that is unemployed, or © OnlineTexts.com p. 5

The Employed To be counted as employed, a person must have worked at a job for pay or profit during the survey week (the week that contains the 12th of the month). worked without pay for more than 15 hours for a family business. © OnlineTexts.com p. 6

The Unemployed Persons are classified as unemployed if they do not have a job. have actively looked for work in the prior four weeks. are currently available for work. © OnlineTexts.com p. 7

Not in the Labor Force A person is classified as not in the labor force if he/she has no job. has not actively looked for work in the prior four weeks. is currently unavailable for work except for a temporary illness. © OnlineTexts.com p. 8

Example: Calculating Unemployment Rates Number “officially” unemployed is 50 – 22 = 28. Number in labor force = employed + unemployed = 420 + 28 = 448 Unemployment rate = 28/448 x 100 = 6.25%. TABLE 1 Labor Force Data Population 800 Full-time Students 150 Retired 180 Employed 420 Those wanting work* 50 *Note: Of those classified as “wanting work", 22 have not actively sought work in the prior four weeks. © OnlineTexts.com p. 9

Criticisms of the Unemployment Rate The survey does not count discouraged workers as unemployed. A discouraged worker is one who has given up looking for work because they could not find a job or thought that they could not find a job. This omission understates “true” unemployment rate because discouraged workers are classified as not in the labor force. © OnlineTexts.com p. 10

Criticisms of the Unemployment Rate The survey does not account for hidden unemployment. Hidden unemployment includes those who are working part-time but wish to have a full-time job and those who are grossly overqualified for their positions, the underemployed. This omission also understates the “true” unemployment rate. © OnlineTexts.com p. 11

Criticisms of the Unemployment Rate The surveyor does not check the accuracy of the response to an active job search. To be unemployed, a survey respondent must only "say" that he/she has actively sought work. This problem potentially overstates the “true” unemployment rate. © OnlineTexts.com p. 12

Types of Unemployment Frictional unemployment is unemployment that is due to the natural movements in and out of labor force. in a dynamic economy this frictional unemployment is healthy. tends to be short-term and voluntary. © OnlineTexts.com p. 13

Types of Unemployment Structural unemployment is unemployment that is typically due to changes in technology or international competitiveness. in a dynamic economy this frictional unemployment is healthy. result of some fundamental shift in the economy example: U.S. steelworkers laid off when the steel production moved to Asia. tends to be long term and involuntary. © OnlineTexts.com p. 14

Types of Unemployment Cyclical unemployment is unemployment that is due to a downturn in the business cycle. Changes in these unemployment rates are counter-cyclical. A primary goal of stabilization policy is to achieve zero cyclical unemployment. © OnlineTexts.com p. 15

The Natural Rate of Unemployment Frictional and structural unemployment are unavoidable in a dynamic economy. These two combined are called the natural rate of unemployment, or the full-employment rate of unemployment. There is nothing that macroeconomic policy can do to reduce or eliminate frictional and structural unemployment. Many economists estimate the U.S. natural rate of unemployment to be between 5 percent and 5.5 percent. © OnlineTexts.com p. 16

Costs of Unemployment The economics cost of unemployment is the lost output and, hence, lost consumption due to idle labor resource. Potential output is the level of GDP the economy would attain if all resources were fully employed. © OnlineTexts.com p. 17