Chapter Unemployment 15

Unemployment “Natural rate” of unemployment – amount of unemployment that the economy “normally” experiences Average or trend rate over a longer period (years) of time Correlated with long-term growth of GNP “Cyclical” unemployment – flucutuation of current level of unemployment around “natural” rate Short-run changes, e.g., business cycles 2

Identifying Unemployment How is unemployment measured? – Bureau of Labor Statistics Monthly survey 60,000 households Respondents are categorized into – Employed (even part-time) – Unemployed (available and looking) – Not in labor force Estimate of unemployment rate (survey) 3

Identifying Unemployment How is unemployment measured? Labor force – Total number of workers Employed Unemployed Labor force = Number of employed + Number of unemployed 4

Identifying Unemployment How is unemployment measured? Unemployment rate – Percentage of labor force that is unemployed Labor-force participation rate – Percentage of adult population that is in the labor force 5

Figure The breakdown of the population in The Bureau of Labor Statistics divides the adult population into three categories: employed, unemployed, and not in the labor force.

Table The labor-market experiences of various demographic groups 1 7 Demographic GroupUnemployment RateLabor-force Participation Rate Adults (ages 20 and older) White, male White, female Black, male Black, female Teenagers (ages 16–19) White, male White, female Black, male Black, female 3.7% % This table shows the unemployment rate and the labor-force participation rate of various groups in the U.S. population for 2007

Identifying Unemployment Labor-market experiences – Women ages 20 and older – Lower rates of labor-force participation than men – Once in the labor force – Men and women - similar rates of unemployment – Blacks ages 20 and older – Similar rates of labor-force participation as whites – Much higher rates of unemployment – Teenagers – Lower rates of labor-force participation – Much higher rates of unemployment than older workers 8

Figure Unemployment rate since This graph uses annual data on the U.S. unemployment rate to show the percentage of the labor force without a job. The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates

Identifying Unemployment Natural rate of unemployment – Normal rate of unemployment – Around which the unemployment rate fluctuates Cyclical unemployment – Deviation of unemployment from its natural rate 10

Women’s role in American society – Changed dramatically over the past century 1950: 33% women – 87% men 2009: 59% women – 72% men – New technologies Reduced the amount of time required to complete routine household tasks – Improved birth control Reduced the number of children born to the typical family – Changing political and social attitudes Labor-force participation of men and women in the U.S. economy 11

Fall in men’s labor-force participation – Young men - stay in school longer – Older men - retire earlier and live longer – With more women employed More fathers now stay at home to raise their children Counted as being out of the labor force – Full-time students – Retirees – Stay-at-home dads Labor-force participation of men and women in the U.S. economy 12

Figure Labor-force participation rates for men and women since This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

Identifying Unemployment Does the unemployment rate measure what we want it to? Official unemployment rate – Useful – Imperfect measure of joblessness Movements into and out of the labor force – Common – More than one-third of unemployed Recent entrants into the labor force 14

Identifying Unemployment Does the unemployment rate…? Some of those who are out of labor force – May want to work Discouraged workers – Individuals who would like to work – Have given up looking for a job 15

Table Alternative measures of labor underutilization 2 16 Measure and DescriptionRate U-1 U-2 U-3 U-4 U-5 U-6 Persons unemployed 15 weeks or longer, as a percentage of the civilian labor force (includes only very long-term unemployed) Job losers and persons who have completed temporary jobs, as a percentage of the civilian labor force (excludes job leavers) Total unemployed, as a percentage of the civilian labor force (official unemployment rate) Total unemployed, plus discouraged workers, as a percentage of the civilian labor force plus discouraged workers Total unemployed plus all marginally attached workers, as a percentage of the civilian labor force plus all marginally attached workers Total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian labor force plus all marginally attached workers 1.6% The table shows various measures of joblessness for the U.S. economy. The data are for February Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers are marginally attached workers who have given a job-market-related reason for not currently looking for a job. Persons employed part-time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Identifying Unemployment How long are the unemployed without work? – Most spells of unemployment are short – Most unemployment observed at any given time is long-term – Most people who become unemployed Will soon find jobs – Most of the economy’s unemployment problem Attributable to the relatively few workers who are jobless for long periods of time 17

Identifying Unemployment Why are there always some people unemployed? Frictional unemployment – Results because it takes time for workers to search for the jobs That best suit their tastes and skills 18

Identifying Unemployment Why are there always some people unemployed? Frictional unemployment – Takes time to find a job Structural unemployment – Changes in the structure of the economy Government benefits may discourage workers 19

Job Search (Frictional) Job search Process by which workers find appropriate jobs given their tastes and skills Frictional unemployment Results from the process of matching workers and jobs Why some frictional unemployment is inevitable Changes in demand for labor among different firms Changes in composition of demand among industries or regions (sectoral shifts) 20

Job Search Public policy and job search Reduce time for unemployed to find jobs – Reduce Natural rate of unemployment Government programs – Government-run employment agencies – Public training programs 21

Job Search Unemployment insurance – Government program – Partially protects workers’ incomes When they become unemployed – Increases frictional unemployment Without intending to do so 22

Minimum-Wage Laws Structural unemployment – Results when the number of jobs is insufficient for the number of workers Minimum-wage laws – Can cause unemployment – Forces the wage to remain above the equilibrium level Higher quantity of labor supplied Smaller quantity of labor demanded Surplus of labor – unemployment 23

Figure Unemployment from a wage above equilibrium level 4 24 In this labor market, the wage at which supply and demand balance is W E. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal L E. By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum-wage law, the quantity of labor supplied rises to L S, and the quantity of labor demanded falls to L D. The resulting surplus of labor, L S – L D, represents unemployment. Wage Quantity of Labor 0 Minimum wage LDLD LSLS Surplus of labor = Unemployment Labor demand Labor supply LELE WEWE

Minimum-Wage Laws Wages may be kept above equilibrium level – Minimum-wage laws – Unions – Efficiency wages If the wage - kept above the equilibrium level – Result: unemployment 25

The Theory of Efficiency Wages Worker quality – Firm – pays a high wage Attracts a better pool of workers Increases the quality of its workforce Worker effort – High wages – make workers more eager to keep their jobs Give workers an incentive to put forward their best effort 26

Henry Ford - founder of Ford Motor Company – Introduced modern techniques of production – Built cars on assembly lines Unskilled workers were taught to perform the same simple tasks over and over again – Output: Model T Ford 1914, Ford - the $5 workday – Twice the going wage – Long lines of job seekers Number of workers willing to work > number of workers Ford needed Henry Ford and the very generous $5-a-day wage 27

Ford’s high-wage policy – efficiency wage – Turnover fell – Absenteeism fell – Productivity rose – Workers – so much more efficient Ford’s production costs were lower despite higher wages – Profitable for the firm – Closely linked to Ford’s use of the assembly line Assembly line - highly interdependent workers Henry Ford and the very generous $5-a-day wage 28