1. Instructor: Bob DiPaolo
ECON 151 – Macroeconomics
Instructor: Bob DiPaolo
Unemployment
Chapter 6
Materials include content from McGraw-Hill/Irwin which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

2. Introduction This chapter focuses on: When is a person “unemployed”?
What are the costs of unemployment?
What is an appropriate policy goal for “full employment”?

3. The Labor Force
The labor force includes all persons over age sixteen who are either working for pay or actively seeking paid employment.
People who are not employed or are not actively seeking work are not considered part of the labor force.
The labor-force participation rate is the percentage of the population working or seeking employment.

4. The Labor Force, 2000 Total population (275,372,000)
Out of the labor force (133,086,000)
In civilian labor force (142,286,000)
Under age 16 (62,541,000)
Civilians employed(135,208,000)
Homemakers (20,343,000)
Unemployed(5,655,000)
Armed forces (1,423,000)
In school (9,130,000)
Retired (29,813,000)
Sick and disabled (7,142,000) Institutionalized (3,628,000) Other (489,000)

5. A Growing Labor Force Population Labor force 1960 1970 1980 1990 2000
YEAR 50
1950
100
150
200
250
300
Participation Rates
(age 16 and older)
Men
Women
86.4
83.3
79.7
77.4
76.4
74.7
Year
1950
1960
1970
1980
1990
2000
33.9
37.7
43.3
51.5
57.5
60.0

6. Growth of Production Possibilities
Production possibilities are the alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.
Production is limited by two factors:
The availability of factors of production.
Technological know-how.

7. Institutional Constraints
Production possibilities in any year depend on available resources and technology and on how we choose to restrict their use.
The size of labor force is limited by participation rates and social regulation.

8. Institutional Constraints
Preventing small children, students, and others from working reduces the size of the labor force and potential output.
Constraints are also imposed on the use of material resources and technology.

9. Labor Force Growth
As the labor force grows, the production possibilities curve shifts outward.
This outward shift illustrates the increased capacity to produce goods and services given available technology and institutional constraints.

10. Labor Force Growth C
Labor-force growth increases production possibilities A H G F
Investment Goods (units per year) O B D
Consumption Goods (units per year)

11. Okun’s Law
Arthur Okun quantified the relationship between the shortfall in real output and unemployment.
Okun’s Law asserts that 1% more unemployment is estimated to equal 2 percent less output.
The 2 to 1 ratio puts a dollar value on the aggregate cost of unemployment.

12. Okun’s Law
High unemployment in 1992 left the U.S. $240 billion short of its production possibilities — a loss of $920 of goods and services for every American.

13. Measuring Unemployment
Unemployment is the inability of labor-force participants to find jobs.
U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed.
A person is considered unemployed if he or she is not employed and is actively seeking a job.

14. The Unemployment Rate
The unemployment rate is the proportion of the labor force that is unemployed.

15. Unemployment rates vary . . .
Who Are the Unemployed?
White
Black
Hispanic
National
average
High school
dropouts
graduates
College
Master's
degree
Doctoral
3.2
3.7
5.9
3.5
5.4
5.3
16.7
11.4
Adult Males
Adult Females
Teenagers
24.7
4.0
6.4
2.7
1.8
1.6
0.9 40 36 32 28 24 20 16 12 8 4
. . . by race, sex, age
Unemployment rates vary . . .
. . . by education

16. Duration of Unemployment: 2000
When the economy is growing, both unemployment rates and the average duration of unemployment decline.

17. Reasons for Unemployment
How long a person remains unemployed is affected by the nature of the joblessness.
Job leavers
Job losers
Reentrants
New entrants

18. Reasons for Unemployment
New
entrants 8%
Job
leavers
14%
Job losers
44%
Reentrants
34%

19. Discouraged Workers
When unemployment persists, job seekers become increasingly frustrated in their efforts to secure employment and give up looking.
A discouraged worker is an individual who is not actively seeking employment but would look for or accept a job if one were available.
Discouraged workers are not counted as part of the unemployment problem after they give up looking for a job.

20. Underemployment Some people are forced to take any job available.
These people are excluded from the count of unemployed, but not from the condition of underemployment.
Underemployment exists when people seeking full-time paid employment work only part time or are employed at jobs below their capability.
Underemployed workers represent labor resources that are not being fully utilized.

21. The Phantom Unemployed
Some of the people who are counted as unemployed probably should not be.
Many people report that they are actively seeking work when they have little interest in finding a job.
Public policy encourages this behavior by requiring most welfare and unemployment benefit receivers to provide evidence that they are looking for work.

22. Europe’s Unemployment Woes
Unemployment levels in Europe are much higher than those of the U.S.
Generous unemployment benefits cushion personal losses from joblessness, but also discourage European workers from accepting new jobs.
CIA World Fact Book

23. The Human Costs
The most visible impact of unemployment on individuals is loss of income
Over a long period, such losses can spell financial disaster.
The human cost of unemployment includes social, physical, and psychological costs as well.

24. Seasonal Unemployment
Seasonal unemployment is the unemployment due to seasonal changes in employment or labor supply.
At the end of each season, thousands of workers must go searching for new jobs, experiencing seasonal unemployment in the process.
Statistical adjustments are made for seasonal unemployment.

25. Frictional Unemployment
Frictional unemployment is the brief periods of unemployment experienced by people moving between jobs or into the labor market.
Frictional unemployment differs from other unemployment in three ways:
There is an adequate demand for the labor of the frictionally unemployed.
The frictionally unemployed have the skills required for existing jobs.
The job-search period will be relatively short.

26. Structural Unemployment
Structural unemployment is the unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.
Periods between jobs will be lengthened when the unemployed lack the skills that employers require.

27. Cyclical Unemployment
Cyclical unemployment is the unemployment attributable to the lack of job vacancies – i.e., to an inadequate level of aggregate demand.
Cyclical unemployment occurs when there are simply not enough jobs to go around.
The Great Depression is the most striking example of cyclical unemployment.
The economy must grow at least as fast as the labor force to avoid cyclical unemployment.

28. The Unemployment Record
Rate of Unemployment
(Percent)
1910
1920
1930
1940
1950
1960
1970
1980 5 10 15 20 25
1990
2000

29. The Full-Employment Goal
In the Employment Act of 1946, Congress committed the federal government to pursue a goal of “maximum” employment.
Congress didn’t specify what the rate of unemployment should be.

30. The Full-Employment Goal
Full employment is not the same as zero unemployment.
A full employment goal presumably means avoiding as much cyclical and structural unemployment as possible, while keeping frictional unemployment reasonably low.

31. Inflationary Pressures
The first attempt to define full employment more precisely was undertaken in the early 1960s by the Council of Economic Advisors.
They concluded that rising prices are a signal that employment is nearing capacity.

32. Inflationary Pressures
The Council placed full employment at 4% — below that, prices begin rising.
4% unemployment was regarded as an acceptable compromise of employment and price goals.
Later, however, during the 1970s and early 1980s the 4% unemployment goal was considered too high.

33. Changes in Structural Unemployment
Unemployment stayed far above 4% even when the economy expanded, and inflation began to rise at higher levels of unemployment.
Critics suggested that structural barriers to full employment had gotten worse.
More youth and women.
Liberal transfer payments.
Structural changes in demand.

34. Redefining Full Unemployment
In view of these factors, the Council of Economic Advisers later raised the level of unemployment thought to be compatible with price stability.
In 1983, the Reagan administration concluded that the “inflation-threshold” unemployment rate was between six and seven percent.

35. Declining Structural Pressures
The structural barriers that intensified inflationary pressures in the 1970s and early 1980s receded in the 1990s, making it easier to lower unemployment rates without increasing inflation.
In 1991 full employment was equivalent to 5.5 percent.
In 1999, the Clinton administration suggested the full employment threshold might have dropped to 5.3 percent.

36. The “Natural” Rate of Unemployment
The ambiguity about what rate of unemployment triggers an upsurge in inflation has convinced some analysts to abandon the inflation-based concept of “full” employment.
The natural rate of unemployment is the long-term rate of unemployment determined by structural forces in labor and product markets.

37. The “Natural” Rate of Unemployment
The “natural” rate of unemployment consists of frictional and structural components only.
If the structural determinants of unemployment change, so does the level of “natural” unemployment.

38. Congressional Targets
The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act) states our national goal is a 4% unemployment rate with a required goal of 3% inflation.
The “escape clause” is that in the event that both goals could not be met, the President could set higher “provisional” definitions of employment.

39. The Historical Record
Although there is ambiguity about the specific definition of full employment, the historical record is clear on our failure to maintain it.
Our greatest failure occurred during the Great Depression, when as much as one-fourth of the labor force was unemployed.

40. The Historical Record
Unemployment rates fell dramatically during World War II — the civilian unemployment rate reached a rock bottom 1.2 percent.
Since 1950, unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the recession.
From 1982 to 1989, unemployment fell, but shot up again in the recession.

41. A Growing Skills Gap?
As the skills gap widens, structural unemployment increases.
The skills gap is the gap between skills required for emerging jobs and the skills of workers.
The rapid pace of structural change represent a major challenge for the U.S. economy in the future.

42. New Jobs
Our success in achieving full employment in the economy of tomorrow will depend on both structural and cyclical forces.
Ninety-eight percent of all new jobs created in the next decade will be service jobs.
The new jobs of tomorrow will require increasing levels of education and skill.
Workers without the right skills will find themselves out of step with a fast-changing market.

43. Projected Employment Changes: 1996-2006

44. ECON 151 – MACROECONOMICS
Unemployment
End of Chapter 6