Production, Income, and Employment Chapter 6 Part 2 (Employment) CHAPTER 1

Employment and Unemployment Unemployed – Not working and actively seeking a job Employed – Categories of unemployment – Frictional – Structural – Cyclical – Seasonal (not that important for policy) 2

Employment and Unemployment Frictional unemployment includes  people who are between jobs  people who are just entering or reentering the labor market It is short-term unemployment These people have skills and they will get jobs 3

Employment and Unemployment Structural unemployment Skill mismatch: between workers’ skills and employers’ requirements Geographic mismatch: between workers’ locations and employers’ locations Unemployment due to structural changes in the economy that eliminate some jobs and create other jobs for which the unemployed do not have required skills. This is a stubborn, long-term problem 4

Employment and Unemployment Cyclical unemployment Arising from changes in production over the business cycle –A problem for macroeconomic policy Seasonal unemployment –Related to changes in weather, tourist patterns, or other seasonal factors, ski instructors lose jobs in April –Short term and entirely predictable 5

Average Unemployment Rates in Several Countries, 1995–2005, 2007 and Unemployment rate higher in Europe - primarily structural. Higher benefits, for longer periods of time which reduce incentives to accept jobs or acquire skills. Legal obstacles laying off workers 10.8% 12.7% 7.2% 7.1% 5.2% 8.0% 6.7% 2013

Unemployment rates in the EU compared to Japan and the US 7 europa.eu/statistics_e xplained/index.php/Un employment_statisticshttp://epp.eurostat.ec. europa.eu/statistics_e xplained/index.php/Un employment_statistics

Employment and Unemployment Natural Rate of Unemployment –Sum of Frictional and Structural Full employment –Zero cyclical unemployment –Unemployment at full employment is equal to the natural rate of unemployment Potential output –Level of output the economy could produce if operating at full employment –Chapter 8, The Long-Run Classical Model, explains the determination of Potential GDP 8

The unemployment rate rises during recessions (shaded) and falls during expansions. Unemployment related to the business cycle is cyclical unemployment U.S. Quarterly Unemployment Rate, Natural rate of Unemployment

Actual and Potential Real GDP, 1990– Potential Actual GDP

Actual and Potential Real GDP, 1970–

The Costs of Unemployment When real GDP is above potential output – Unemployment is below the natural rate – Employment is higher than full- employment When real GDP is below potential output –Unemployment rises above the natural rate and employment falls below full- employment rate 12

The Costs of Unemployment Slump –A period during which real GDP is below potential and/or the employment rate is below normal Recession –End of 2007 through June 2009 Slump –The book states 2008 through the first half of We are still in a “slump” 13

14 Potential GDP Actual GDP Real GDP in 2009 Dollars

15 Potential GDP Actual GDP Real GDP in 2009 Dollars

The Costs of Unemployment Economic cost  opportunity cost of lost output, output produced is less than the economy’s potential output  which means less Income and less consumption 16

The Costs of Unemployment Broader costs – Psychological and physical effects – Setbacks in achieving important social goals – Burden of unemployment not shared equally among different groups in the population Most heavily: minorities, especially minority youth 17

Unemployment Rate for Various Groups 18

How Unemployment Is Measured Census Bureau’s Household Survey – Every month – Survey of 60,000 households across America In the labor force and unemployed: – Don’t have a job – Actively search for work during the previous four weeks 19

BLS interviewers ask a series of questions to determine whether an individual is employed, unemployed, or not in the labor force. How the BLS Measures Employment Status 20

How Unemployment Is Measured Labor force – Those people who have a job or are looking for one Unemployment rate – Fraction of the labor force that is without a job 21

Employment Status of the U.S. Population—August

How Unemployment is Measured Computing the unemployment rate for the month of July 2008: Labor force: million Employed: million Unemployed: 8.8 million July  Unemployment rate = 5.7%

How Unemployment is Measured unemployment rate The percentage of the labor force that is unemployed. Computing the unemployment rate for the months of July 2009, July 2011 and July 2012: Labor force: million million million Employed: million million million Unemployed: 14.5 million 13.9 million 12.8 million Unemployment rate 2009 = Unemployment rate 2011 = Unemployment rate 2012 =

Average Duration of Unemployment, 1970–2009 Weeks The Duration of Unemployment Table A-12

Problems in Measuring Unemployment Official measure of unemployment underestimates the extent of unemployment –Treatment of involuntary part-time workers –Treatment of discouraged workers 26

Problems in Measuring Unemployment Involuntary part-time workers – Individuals who would like a full-time job but who are working only part time Discouraged workers – Individuals who would like a job but have given up searching for one 27

Problems in Measuring Unemployment BLS defines discouraged worker 1. Not working 2. Searched for a job at some point in the last 12 months 3. Currently want a job 4. State that the only reason they are not currently searching for work is their belief that no job is available for them discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force. It lowers the unemployment rate! 28

Problems in Measuring Unemployment Marginally attached to the labor force – Meet the first three requirements of discouraged workers – But not necessarily the fourth: They can give any reason for not currently searching for work 29

Alternative Measures of Employment Conditions The Six “U”s –Six different unemployment rates Each labeled with a “U” followed by a number –“U-3”: the official unemployment rate The Establishment Survey –BLS surveys business establishments to track the number of jobs that have been added and lost 30

31 The Six “U”s Table A-15

Alternative Measures of Employment Conditions The employment-population ratio –Total employment (from the household survey) divided by the total population over age 16 –Tracks the fraction of the adult population that is working –not affected by job-searching behavior 32

The employment-population ratio often measures labor market conditions more accurately than the unemployment rate. The ratio falls during recessions, such as the deep recession of 2008 and The Employment Population Ratio: 1996–

34 The Employment Population Ratio: 1948–2014

35 The Employment Population Ratio: 1948–2014

36 Labor Force Participation Rate: 1948–2014

Its Not Just Demographics 37

Labor Force Participation Rate: Overall in Blue Along With age in Red