Principles of Macroeconomics Chapter 15 Unemployment

Labor Force Statistics Labor force: % of the labor force that is unemployed LF # of unemployed + # of employed = Many of the following slides abbreviate “unemployment rate” as “u-rate” to reduce slide clutter and to reduce the note-taking burden on students. 2

Labor Force Statistics Unemployment rate (μ): % of the labor force that is unemployed μ # of unemployed labor force = 100 x Labor force participation rate (LFPR): % of the adult population that is in the labor force Many of the following slides abbreviate “unemployment rate” as “u-rate” to reduce slide clutter and to reduce the note-taking burden on students. LFPR labor force adult population = 100 x 3

Labor-Force Participation Rate Application 1 Based on the following information, can you complete the table? Country Adult Population Labor Force Employed People Unemployed People Unemployment Rate Labor-Force Participation Rate Country A 74,938 53,930 5,130 Country B 38,530 2,429 8.80% 71.60%

Labor-Force Participation Rate Country Adult Population Labor Force Employed People Unemployed People Unemployment Rate Labor-Force Participation Rate Country A 74,938 53,930 48,800 5,130 9.51% 72.00% Country B 38,530 27,600 25,171 2,429 8.80% 71.60%

Finding GDP Data Go to http://databank.worldbank.org/data/home.aspx Click on “World Development Indicators” Choose your main country from the list In series – Choose Unemployment, Labor Force Participation, Employment to Population Ratio In Time – Choose 2000 – 2015 (or recent 15 years) Download the data Download option  Excel Open Excel File Copy data  paste in new sheet (Transpose) Add Year column in Column A Create a line graph Can you analyze the data that you have downloaded? What other measures of unemployment are available to you?

Limitations of the Unemployment Rate It excludes discouraged workers. It does not distinguish between full-time and part-time work, or people working part time because full-time jobs not available. Some people misreport their work status in the BLS survey Cannot account for the difficulty in finding a job after a long break in employment

Cyclical Unemployment vs. the Natural Rate Natural rate of unemployment The normal rate of unemployment around which the actual unemployment rate fluctuates Cyclical unemployment The deviation of unemployment from its natural rate Associated with business cycles Unemployment is a serious and complicated problem with a variety of causes. To most effectively address such a problem, we need to break it down and look at each cause separately. We begin by noting that the causes of short-run fluctuations in unemployment are different than the causes of the long-run average unemployment rate, called the “natural rate of unemployment.” The next slide shows U.S. data on both since 1960. 8

U.S. Unemployment, 1960–2012 Unemployment rate percentage of labor force Natural rate of unemployment Cyclical unemployment is the gap between the two lines. In recessions, the actual unemployment rate is higher than the natural rate, and cyclical unemployment is positive. In booms, unemployment is below the natural rate and cyclical unemployment is negative. Sources: Unemployment rate from FRED, series UNRATE, quarterly (average of monthly rates) Natural rate of unemployment from CBO, http://www.cbo.gov/Spreadsheets.cfm, scroll down to Table 2-2.

Why a Natural Rate of Unemployment? Even when the economy is doing well, there is always some unemployment: Frictional factors Occurs when workers spend time searching for the jobs that best suit their skills and tastes Short-term for most workers Structural factors Occurs when there is a mismatch between skills of workers and skills required for jobs Industries expand or contract with new technology creating new employment opportunities that make some products and jobs obsolete Barriers exist in the labor market that create unemployment In later chapters, we will study short-run economic fluctuations and learn more about the causes and possible cures of cyclical unemployment. For the rest of this chapter, our job is understanding the various causes of the natural rate of unemployment. * * WARNING: If you are teaching with Mankiw for the first time, please note that his definition of structural unemployment may be different than the definition you’ve seen in other textbooks. Other books commonly define structural unemployment as arising from a mismatch between the skills or locations of workers and the skill requirements or locations of jobs. Such textbooks assert that such unemployment results from sectoral shifts. Mankiw’s position is as follows: If all wages were flexible, then they would adjust after structural changes so that all workers with any given skill set in any given location would be employed. The cause of “structural unemployment” therefore cannot be changes in the structure of demand and production; the cause must be wages that fail to adjust following these changes. 10

Structural vs. Frictional Unemployment Jeremy graduated from his MBA in December. He is looking for a job in Boston. Minimum wage laws increase in NYC to $15 per hour. McDonald’s replaces its service staff with electronic terminals where customers can place their order. Sarah was laid off from her position in a publishing house. She is applying to different positions to make a career change. The employment situation for US workers whose manufacturing firm has moved operations to Mexico.

Structural vs. Frictional Unemployment FRICTIONAL: Jeremy graduated from his MBA in December. He is looking for a job in Boston. STRUCTURAL: Minimum wage laws increase in NYC to $15 per hour. McDonald’s replaces its service staff with electronic terminals where customers can place their order. FRICTIONAL: Sarah was laid off from her position in a publishing house. She is applying to different positions to make a career change. STRUCTURAL: The employment situation for these workers.

Some Causes of Structural Unemployment Technological Advancements -- Automation of jobs eliminates the demand for labor to fill those positions Trade Agreements – Free trade agreements may move some jobs out of the country, creating joblessness within an industry

Some Causes of Structural Unemployment Unemployment Insurance – Government provides temporary payment transfers to alleviate the hardship of unemployment Minimum Wage Laws – Mandates on wages create a mismatch between workers that want jobs and jobs available at the minimum wages Unions – Collective bargaining and union representation makes it difficult for employers to adjust their demand for labor in response to market conditions

Some Causes of Structural Unemployment Efficiency Wages - Employers sometimes choose to pay workers more than the equilibrium wage Promotes worker effort Attracts higher quality applicants for the position Minimizes worker turnover

Key Takeaways Unemployment in the economy is inevitable – there is always someone in between jobs or looking for the next job The level of natural unemployment varies between countries because of structural unemployment or certain barriers that exist in the labor market The unemployment rate differs from the natural rate due to short term fluctuations in the economy (business cycles) which also reflect fluctuations in output