Copyright©2004 South-Western Chapter28 Unemployment and its Natural Rate Yes, in all economies there is a natural level of unemployment! Mar Unemployment data

Copyright©2004 South-Western Learning Targets Be able to calculate… Labor Force Labor Force Participation Rate Unemployment Rate Why can the unemployment rate be misleading? Understand these concepts Cyclical Unemployment Natural Unemployment

Copyright©2004 South-Western Breakdown of US labor force in Some definitions… Not all adults are considered part of the labor force. Labor Force = # Employed + # Unemployed Many people are NOT in the labor force, such as… people who… Students Stay-at-home Stopped looking for work Labor Force Participation rate = Labor Force/Adult Population = 141.8/211.9 = 67% =% of adults interested in working How would you calculate the unemployment rate?

Copyright©2004 South-Western How Is Unemployment Measured? ●The unemployment rate is calculated as the percentage of the labor force that is unemployed. Adult Population = 200 million Employed = 135 million Unemployed = 7 million Labor Force = ? = 142 million Unemployment rate = ? 7 million/ 142 million (100) =.05 = 5%

Copyright©2004 South-Western Figure 3 Labor-Force Participation Rates for Men and Women since 1950 Labor Force Participation Rate = Labor Force Adult Population

Table 1 The Labor-Market Experiences of Various Demographic Groups Copyright©2004 South-Western Labor Force Participation Rate = Labor Force Adult Population % % % 39 33% 24

Copyright©2004 South-Western Let’s test your knowledge so far… Employment Stats for Country A Population100,000 Adult Population70,000 Number employed45,000 Unemployed5,000 Calculate the Labor Force = # employed + # unemployed = 45, ,000 = 50,000 Calculate the Labor Force Participation Rate = Labor Force / Adult Population *100 = 50,000/70,000 *100 = 71% Calculate the Unemployment Rate = # Unemployed / Labor Force * 100 = 5,000/50,000 * 100 = 10%

Copyright©2004 South-Western 2 Types of Unemployment Cyclical unemployment Natural Unemployment 1. Natural Unemployment 2. Cyclical Unemployment = due to economic downturns There is always some amount of unemployment! The “Natural” Unemployment

Copyright©2004 South-Western Unemployment due to economic fluctuations is called “CYCLICAL” Unemployment. Cyclical unemployment Any unemployment below the natural rate is considered “full employment” Why is some unemployment natural?

Copyright©2004 South-Western Learning Targets Know the difference between the following Natural Unemployment vs. Cyclical Unemployment Why is there a “natural rate of unemployment”? Frictional Unemployment Structural Unemployment What causes structural unemployment? Workers who need to be retrained Minimum Wage Unions Efficiency Wages

Copyright©2004 South-Western Causes of a Natural Rate of Unemployment? ■Frictional Unemployment ♦People switch jobs and it takes TIME to find another one. ♦Unemployment compensation ADDS to friction! ■People tend to find a job when their unemployment checks run out!! ●Structural Unemployment Longer-lasting unemployment, when … LABOR SUPPLIED > LABOR DEMANDED Some workers need to be retrained for a new employment environment! ■Frictional Unemployment ♦People switch jobs and it takes TIME to find another one. ♦Unemployment compensation ADDS to friction! ■People tend to find a job when their unemployment checks run out!! ●Structural Unemployment Longer-lasting unemployment, when … LABOR SUPPLIED > LABOR DEMANDED Some workers need to be retrained for a new employment environment! Why there will always be some unemployment

Copyright©2004 South-Western #1. Demand for SKILLS changes What might cause employers’ demand for workers to change? Economy changes and workers need to change with it Some workers need to get re-trained to continue in the job market. #1. Demand for SKILLS changes What might cause employers’ demand for workers to change? Economy changes and workers need to change with it Some workers need to get re-trained to continue in the job market. Causes of Structural Unemployment

Copyright©2004 South-Western #2. Minimum Wage Causes of structural unemployment- cont’d How does having a minimum wage cause unemployment? Minimum Wage can cause the wage to be above the equilibrium level Wages ABOVE equilibrium rate – creates a SURPLUS of laborers.

Copyright©2004 South-Western Figure 4 Unemployment from a Wage above the Equilibrium Level

Copyright©2004 South-Western #3 Efficiency Wages ●Many employers would rather keep wages ABOVE equilibrium ●Why? ●Improve worker health (more relevant in developing countries) ●Limit worker turnover ●Increase worker EFFORT and QUALITY ■They make their jobs more attractive and only hire the BEST, but the rest don’t get to work!!! ●Henry Ford paid $5/ hour in 1910 (twice the going rate) #3 Efficiency Wages ●Many employers would rather keep wages ABOVE equilibrium ●Why? ●Improve worker health (more relevant in developing countries) ●Limit worker turnover ●Increase worker EFFORT and QUALITY ■They make their jobs more attractive and only hire the BEST, but the rest don’t get to work!!! ●Henry Ford paid $5/ hour in 1910 (twice the going rate)

Copyright©2004 South-Western More Causes of Structural Unemployment… #4. Unions – Yes, unions cause unemployment! How? ♦Keep wages higher for union workers so employers hire less people for those jobs #4. Unions – Yes, unions cause unemployment! How? ♦Keep wages higher for union workers so employers hire less people for those jobs

Copyright©2004 South-Western Right to Work States: Some states do not allow unions to force workers to join a union in order to work at a particular job. 24 states are right to work states. Right to Work States Screen clipping taken: 4/1/2014, 4:10 PM

Copyright©2004 South-Western Journal Questions How does natural unemployment differ from cyclical unemployment? Natural unemployment is the level of unemployment that exists when the economy is running at full employment. Cyclical unemployment is the level of unemployment caused by economic downturns. What is Frictional Unemployment? The temporary unemployment caused when people look for jobs. What is Structural Unemployment? Long term unemployment caused when the supply of labor is more than the demand.

How would you evaluate the U.S. economy right now! In your own words, what would you look at to judge whether our Macroeconomy is strong or not.

Is our economy growing? Are we making and selling stuff, which creates income? What would you look at to evaluate this? GDP Real GDP or nominal GDP? Are we creating jobs? Are people working who want to work? UNEMPLOYMENT RATE LABOR FORCE PARTICIPATION RATE # of jobs “NON-FARM PAYROLLS” Are prices remaining stable or is there super high inflation? CPI

What About Non-Farm Payrolls? Non-farm payrolls reports the number of jobs gained or lost in the non-farm economy in a single month. Negative non-farm payrolls numbers report that jobs are being LOST. Yes, we have been losing less jobs, BUT until recently no jobs had been created!

Is an increasing CPI a good thing? What does CPI indicate? Price changes A SLIGHT INCREASE IS OK. IT SHOWS THE ECONOMY IS GROWING. Do we necessarily want prices to increase? NOT REALLY Do we want prices to decrease? ABSOLUTELY NOT! So what do we want? WE WANT PRICES TO REMAIN STABLE!

CPI and Non-farm Payrolls

Copyright©2004 South-Western Why didn’t I buy Apple Stock instead of Apple Products. ? As long as we’re talking about stocks…

Copyright©2004 South-Western A little practice- Worksheet answers a.Labor Force 2001 = = million Labor Force 2002 = = million b. Labor Force Participation rate 2001 = 112.6/ = 67% LF Part. Rate 2002 = 112.3/169.5 = 66.2% c. Unemployment rate 2001 = 7.4/112.6 = 6.6 % Unemployment rate 2002 = 8.1/ = 7.6% d. What could cause the labor force participation rate to decrease? People stopped looking for work (left the work force) College grads who haven’t gotten first job haven’t entered workforce. e cyclical unemployment = 0% = fully employed 2002 cyclical unemployment = (7.2% - 6.6%) =.6%, slight economic downturn!!