Notes appear on slides 7, 10, 20, 31, 32, and 35

21 Jobs and Unemployment CHAPTER

C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to Define the unemployment rate and other labor market indicators. 1 Describe the trends and fluctuations in the indicators of labor market performance in the United States. 2 Describe the sources and types of unemployment, define full employment, and explain the link between unemployment and real GDP. 3

21.1 LABOR MARKET INDICATORS Current Population Survey Every month, 1,600 interviewers working on a joint project of the Bureau of Labor Statistics (BLS) and the Bureau of the Census survey 60,000 households to establish the age and job market status of each member of the household. Working-age population Total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care or in the U.S. Armed Forces.

21.1 LABOR MARKET INDICATORS The working-age population is divided into those in the labor force and those not in the labor force. Labor force The number of people employed plus the number unemployed.

21.1 LABOR MARKET INDICATORS Population Survey Criteria The survey counts as employed all persons who, during the week before the survey: 1. Worked at least 1 hour in a paid job or 15 hours unpaid in family business. 2. Were not working but who had jobs from which they were temporarily absent.

21.1 LABOR MARKET INDICATORS The survey counts as unemployed all persons who, during the week before the survey: 1. Had no employment 2. Were available for work, and either: 1. Had made efforts to find employment during the previous four weeks, or 2. Were waiting to be recalled to a job from which they had been laid off. Perhaps the most difficult point in this chapter to get across to students is explaining the difference between the layperson’s definition of unemployment and unemployment as measured by the Bureau of Labor Statistics. The layperson typically considers anyone who is not working as unemployed. It is worth reemphasizing that a person is only considered officially unemployed if the person is not working but also is actively seeking employment. Here is a good opportunity to ask students a direct question to which they will happily provide several answers. Why might someone be not working and not looking for work? Students will no doubt point to some of the most obvious answers: full‐time student, homemaker, retired etc.

21.1 LABOR MARKET INDICATORS Figure 21.1 shows population labor force categories. The figure shows the data for May 2005.

21.1 LABOR MARKET INDICATORS Two Main Labor Market Indicators The unemployment rate The labor force participation rate Unemployment rate The percentage of people in the labor force who are unemployed. Unemployment is an emotionally charged subject and is a good one for reinforcing the important point that economics is positive in contrast to normative. Economists do not make normative judgments as to whether unemployment is good or bad; rather they explain why unemployment exists and what determines its rate. Some students mistakenly compute the unemployment rate as the number unemployed divided by the number employed. Make sure to explain that economists consider the labor force to include not only those who are employed but also those who are unemployed and looking for work. Unemployment rate = Number of people unemployed x 100 Labor force

21.1 LABOR MARKET INDICATORS Labor force participation rate The percentage of the working-age population who are members of the labor force. Labor force participation rate = Working-age population x 100 Labor force

21.1 LABOR MARKET INDICATORS Discouraged Workers Discouraged worker A person who does not have a job, is available to work, but has not made efforts to find a job within the previous four weeks.

21.1 LABOR MARKET INDICATORS Part-Time Workers Full-time workers People who usually work 35 hours or more a week. Part-time workers People who usually work less than 35 hours a week. Involuntary part-time workers People who work 1 to 34 hours per week but are looking for full-time work.

21.1 LABOR MARKET INDICATORS Aggregate Hours The total number of hours worked by all the people employed, both full time and part time, during a year. In May 2005, 141.6 million people worked an average of 33.9 hours per week. With 50 workweeks per year, aggregate hours were 141.6 million  33.9  50 = 240 billion.

21.2 LABOR TRENDS AND FLUCTUATIONS Unemployment Figure 21.2 shows the U.S. unemployment rate: 1965–2005 The average unemployment rate between 1965 and 2005 was 5.9 percent.

21.2 LABOR TRENDS AND FLUCTUATIONS The unemployment rate increases in recessions and decreases in expansions.

21.2 LABOR TRENDS AND FLUCTUATIONS The Participation Rate The participation rate increased from 59 percent during the 1960s to 67 percent the 2000. Since 2000, the participation rate has fallen slightly. Between 1965 and 1999, the participation rate for women increased from 39 percent to 60 percent. Between 1965 and 2005, the participation rate for men decreased from 81 percent to 73 percent.

21.2 LABOR TRENDS AND FLUCTUATIONS Figure 21.3 shows the changing face of the labor market. The labor force participation rate of women has increased.

21.2 LABOR TRENDS AND FLUCTUATIONS The labor force participation rate of men has decreased. The average participation rate of both sexes has increased. Students are interested in the different behavior of the male labor force participation rate and the female labor force participation rate. Students will probably believe that the reason for the increasing female participation rate is social, not economic. They will identify changing social attitudes toward women as the major source and probably see the women’s liberation movement as the driving force for this change. While not to deny the importance of attitudes, this area is a good one in which to get students to explore the economic forces that lie behind social attitudes and change. Get them to think about the technological advances that have contributed to more women being in the labor force. Many goods that were previously produced in the household are now mass‐produced and available for purchase— most items of prepared food, for example. New appliances have increased productivity in the home enabling household production in less time—laundry, kitchen, and cleaning equipment for example. The market provides new goods and services that households want but can’t readily make at home—home entertainment equipment (TV, CD, DVD, etc) for example. These changes lead to many families deciding to have two income earners rather than the older tradition of one. It is interesting to let students discuss what they think will happen to the labor force participation rates in the future and whether or not they think they will ever be equal—or unequal in the opposite direction!

21.2 LABOR TRENDS AND FLUCTUATIONS Part-Time Workers Part-time work is attractive to workers because they Balance family with work Part-time work is attractive to employers because Benefits are not paid to part-time workers Less government regulation of part-time workers

21.2 LABOR TRENDS AND FLUCTUATIONS Figure 21.4 shows part-time workers from 1975 to 2005. Part-time workers are 16 to 17 percent of all workers and barely changes over the business cycle.

21.2 LABOR TRENDS AND FLUCTUATIONS The figure also shows involuntary part-time workers. Involuntary part-time work increases in recessions and decreases in expansions.

21.2 LABOR TRENDS AND FLUCTUATIONS Aggregate and Average Hours Between 1965 and 2005, the number of people employed doubled (up 100 percent) but aggregate hours increased by only 75 percent. The reason: average hours per worker decreased.

21.2 LABOR TRENDS AND FLUCTUATIONS Figure 21.5(a) shows aggregate hours: 1962–2002 Between 1965 and 2005, aggregate hours increased by 75 percent a year. Fluctuations in aggregate hours coincide with the business cycle.

21.2 LABOR TRENDS AND FLUCTUATIONS Figure 21.5(b) shows average weekly hours from 1965 to 2005. Average weekly hours decreased ... And fluctuate with the business cycle.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Sources of Unemployment People who become unemployed are: Job losers—people who are laid off from their jobs Job leavers—people who voluntarily quit their jobs Entrants and reentrants—people who have just left school or who are now looking for a job after a period out of the labor force. It comes as a shock to most students that unemployment has benefits as well as costs and that there is an efficient amount of unemployment that is greater than zero. (Note that this statement is positive!) You might like to spend a bit of class time on this topic. If you do, here are some ideas about what to do: A good way to introduce the idea that unemployment brings benefits is to think about the unemployment of things rather than people. Look around the campus and notice all the unemployed automobiles in the parking lots/stations. Notice the unemployed class rooms early in the morning and late at night. Notice the unemployed coffee shop seats at peak lecture times. Look around the city and notice all the unemployed automobiles in the car sales lots. Try to make a reservation at any of the hotels in the city and notice that you can almost always get a room—hence, lots of unemployed hotel rooms. Now ask: does all this unemployment bring benefits? The students quickly see that it would be very costly to organize rental markets in which cars don’t sit idle all day, and so on. [Continued on next slide]

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Figure 21.6 shows unemployment by reasons. Job losers are the biggest group, and their number fluctuates most. Now ask: do the same ideas apply to unemployed people. (Be sure to be compassionate about the misery that unemployment can bring. You are not claiming that it is not costly. You’re trying to identify the benefits, if any.) You’ll quickly get your students to see that imagining an economy without any unemployment is nearly impossible. If consumers are free to change their decisions about what they want to buy, some goods and services must fall out of favor when others come into favor. The firms making the unfavored products fall on hard times and often their workers are fired or laid off. Sure, these laid off workers could start work right away, cleaning shoes, selling flowers at intersections. But they are better off (in their own opinion) being frictionally unemployed and searching for new jobs. To eliminate this source of unemployment we would need to forbid consumers from changing their buying plans or insist that no one remain idle and get on with doing any job even if it doesn’t earn a wage. Note that if this is how we ran our economy we’d still be using coal-fired stoves and the pony express, and we’d be wearing coonskin caps. There would be no McDonald’s, Federal Express, or Nike shoes.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT People who end a period of unemployed are Hires—people who have been unemployed and have started new jobs Recalls—people who have been temporarily laid off and has started work again Withdrawals—people who have been unemployed and have decided to stop looking for jobs.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Frictional unemployment The unemployment that arises from normal labor turnover—from people entering and leaving the labor force and from the ongoing creation and destruction of jobs. Structural unemployment The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. Ask your class if anyone they know has been laid off. Then discuss whether losing a job creates frictional, structural, or cyclical unemployment. Look at your local examples. If you live in a steel‐producing area, for example, you can talk about local structural unemployment arising from the closing of a steel manufacturer due to international competition. For cyclical unemployment, ask students how they think the business cycle and cyclical unemployment is related to full‐time enrolment at higher education institutions. Students often don’t think there is any relationship. But nationally during a recession the growth rate of full‐time enrolment increases. Ask students if they can explain this relationship. The answer is that during a recession and due to the increase in cyclical unemployment, the opportunity cost of school decreases. This is a great way to keep students thinking about marginal benefits and costs.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Seasonal unemployment The unemployment that arises because of seasonal weather patterns. Cyclical unemployment The fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Duration and Demographics of Unemployment On the average from 1995 to 2005, blacks experienced more than twice the unemployment rate of whites.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Duration and Demographics of Unemployment Teenagers experienced more than three times the unemployment of workers aged 20 and over. Women have lower unemployment rates than men.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Full Employment Full employment When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional, structural, or seasonal. Natural unemployment rate The unemployment rate when the economy is at full employment.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Unemployment and Real GDP Cyclical unemployment is the fluctuating unemployment over the business cycle—unemployment increases during recessions and decreases during expansions. At full employment, there is no cyclical unemployment. At the business cycle trough, cyclical unemployment is positive. At the business cycle peak, cyclical unemployment is negative.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Figure 21.8(a)shows the unemployment rate in the United States from 1975 to 2005. As the unemployment rate fluctuates around the natural rate unemployment, … Cyclical unemployment is negative (shaded red) and positive (shaded blue).

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Potential GDP is the level of real GDP that the economy would produce if it were at full employment. Because the unemployment rate fluctuates around the natural unemployment rate, real GDP fluctuates around potential GDP: When the unemployment rate is above the natural rate, real GDP is below potential GDP. When the unemployment rate is below the natural unemployment rate, real GDP is above potential GDP.

21.3 SOURCES AND TYPES OF UNEMPLOYMENT Figure 21.8 shows the relationship between unemployment and real GDP. As the unemployment rate fluctuates around the natural rate unemployment in part (a), real GDP fluctuates around potential GDP in part (b).

The Labor Market in YOUR Life Classify the labor market status of yourself and your friends. Are you in the labor force or not? Are you employed or unemployed? Are you a part-time or a full-time worker? Think about someone you know who is unemployed. Is this person experiencing frictional, structural, seasonal, or cyclical unemployment? How can you tell? Think about someone you know who has been unemployed but is now working. Did this person experience frictional, structural, seasonal, or cyclical unemployment? How long did it take this person to find a job?