1. LIR 809 UNEMPLOYMENT & LABOR FORCE STATUS

2. LIR 809 LABOR FORCE STATUS

3. LIR 809 MEASURES OF LABOR FORCE STATUS  Unemployment Rate  U = #unemployed/LF  Labor Force  LF = employed + unemployed  Labor Force Participation Rate  LFPR = (# LF/# adult population)

4. LIR 809 EXAMPLES OF LABOR FORCE MEASUREMENTS

5. LIR 809 FOUR TYPES OF UNEMPLOYMENT o Frictional o Structural o Deficient Aggregate Demand o Seasonal

6. LIR 809 TYPE 1: FRICTIONAL ð Unemployment associated with movement between jobs ð “Search” unemployment ð Dynamic nature of the labor market ð Part of “NAIRU” - Natural Rate of Unemployment ðNon accelerating inflation rate of unemployment ð Policy: Lower search costs

7. LIR 809 TYPE 2: STRUCTURAL UNEMPLOYMENT o Arising from mismatch between characteristics of job vacancies and job seekers  Geographical  Skills mismatch o Failure of labor market assumptions o Policy: Training, relocation

8. LIR 809 TYPE 3: DEFICIENT AGGREGATE DEMAND o Associated with business cycle: Insufficient product demand  Can be regional or economy-wide (recession)  Based on downward sticky wages o Policy: Stimulate product demand

9. LIR 809 Unemployment - Inflation Trade-Off o Phillips Curve:  When unemployment decreases, prices increase o Mechanism:  Exogenous increase in spending => increased aggregate demand => increased employment/decreased unemployment => price increase (=> increase in wages)

10. LIR 809 The Phillips Curve Inflation Rate Unemployment Level

11. LIR 809 COSTS TO HIGH UNEMPLOYMENT 1.Pure Economic Loss Decline in product demand =>investment 2.Human Capital Loss Lower investment, depreciation, less mobility 3.Equity Loss 4.Psychological Costs

12. LIR 809 COSTS TO INFLATION o Cost depends on whether inflation proceeds at steady, predictable rate or is volatile. o All are buyers and sellers o Costs under steady inflation : Problem only when price of products one buys rise faster than what one sells o Costs under variable inflation: Creates windfall profits & deadweight losses

13. LIR 809 Stock v. Flows o Stock nMasks movement, implying more static condition of labor market than exits nLabor force status measured at one point in time o Flows nMovement between labor force statuses: nE->U nE->N nU->E nU->N nN->U nN->E nBetter picture of labor market dynamics

14. LIR 809 Unemployment Rate 1994-2004

15. LIR 809 Employment to Population Ratio, 1994 - 2004

16. LIR 809 Labor Force Participation Rates, 1994-2004

17. LIR 809 Unemployment + Discouraged Worker Rate, 1995-2005

18. LIR 809 Biggest Long-Term Change in LFPR