1. Unemployment and Its Natural Rate Chapter 28 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Categories of Unemployment u The problem of unemployment is usually divided into two categories. u The long-run problem and the short-run problem: u The natural rate of unemployment u The cyclical rate of unemployment

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Describing Unemployment Three Basic Questions: Ê How does government measure the economy’s rate of unemployment? Ë What problems arise in interpreting the unemployment data? Ì How long are the unemployed typically without work?

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How is Unemployment Measured? u Unemployment is measured by the Bureau of Labor Statistics (BLS). u It surveys 60,000 randomly selected households every month. u The survey is called the Current Population Survey.

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How is Unemployment Measured? u Based on the answers to the survey questions, the BLS places each adult into one of three categories: u Employed u Unemployed u Not in the labor force

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How is Unemployment Measured? u The BLS considers a person an adult if he or she is over 16 years old. u A person is considered employed if he or she has spent most of the previous week working at a paid job. u A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. u A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force. u The BLS defines the labor force as the sum of the employed and the unemployed.

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Unemployed (6.2 million) The Breakdown of the Population in 1998 Not in labor force (67.5 million) Employed (131.5 million) Labor force (137.7 million) Adult population (205.2 million)

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How is Unemployment Measured? The unemployment rate is calculated as the percentage of the labor force that is unemployed.

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How is Unemployment Measured? The labor-force participation rate is the percentage of the adult population that is in the labor force.

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Labor-Force Experiences of Various Demographic Groups (1998) Demographic Group Unemployment Rate Labor-Force Participation Rate Adults (20+) White, male3.277.2 White, female3.459.7 Black, male7.472.5 Black, female7.964.8 Teenagers (16-19) White, male14.156.6 White, female10.955.4 Black, male30.140.7 Black, female25.342.5

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Unemployment Rate Since 1960 10 8 6 4 2 197019751980198519901995 Percent of Labor Force Natural rate of unemployment 19651960 2000 0 Unemployment rate

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 100 80 60 40 20 0 1950195519601965197019751980198519901995 ’98 Women Men Labor-force Participation Rate (in percent) Labor-force Participation Rates for Men and Women Since 1950

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. u It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force. u Discouraged workers u Other people may claim to be unemployed in order to receive financial assistance, even though they aren’t looking for work. Does the Unemployment Rate Measure What We Want It To??

14. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why Are There Always Some People Unemployed? u This question refers to the Natural Rate of Unemployment äFrictional Unemployment äStructural Unemployment

15. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Three Possible Reasons for an Above- Equilibrium Wage Resulting in Structural Unemployment u Minimum-wage laws u Job Becoming Obsolete u Unions u Efficiency wages

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Unemployment from a Wage Above the Equilibrium Level... WEWE Quantity of Labor LELE 0 Labor demand Wage Surplus of labor = Unemployment Minimum wage LDLD LSLS Labor supply

17. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Unions and Collective Bargaining u A union is a worker association that bargains with employers over wages and working conditions. u In the 1940s and 1950s, when unions were at their peak, about a third of the U.S. labor force was unionized. u A union is a type of cartel attempting to exert its market power.

18. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Theory of Efficiency Wages u A firm may prefer higher than equilibrium wages for the following reasons: u Worker Health: u Worker Turnover: u Worker Effort u Worker Quality