C h a p t e r 6 : U n e m p l o y m e n t

Unemployment - Definition

Unemployment is an imposed period of inactivity

that characterizes the situation of capable,

available and willing people to work but who are

unable to find a job.

Why Does Unemployment Exist?

The main reasons for which Unemployment exist are:

1. The existence of a legal minimum wage.

2. The cost of industrial labor is too high largely because of the burden on

businesses.

3. A part of the population has no qualification or a qualification that does not

match the demand.

4. In some cases, it is almost better to receive unemployment pensions rather

than working in some low wages jobs.

5. Unemployment depends on the economic situation at both national and

international levels where some governments lack the power to intervene,

especially when their treasury are empty.

U n e m p l o y m e n t R a t e - D e fi n i ti o n The unemployment rate is the percentage of the total labor force that

is seeking a job but does not have one.

U n e m p l o ye d Wo r ke r s x 100% Employed + Unemployed Workers

• Unemployed workers are those who are jobless, seeking a job, and

ready to work if they find a job.

• Employed + Unemployed Workers = Total Labor Force.

• Note that the labor force does not include tfull-time students and

retirees.

Unemployment Rate (con) The official unemployment rate is NOT AN ACCURATE indicator of the

state of the labor market. The following are some reasons:

1. Discouraged workers

Those who have given up looking for work because they feel they do not

have a chance of getting one.

– The Bureau of Labor Statistics DOES NOT COUNT discouraged

workers as part of the labor force and thus as unemployed

These persons tend to UNDERSTATE the official level of

unemployment by making it lower than it otherwise would be.

Unemployment Rate (con) 2. Many are “working in the underground economy”

These people are employed off the books, do not report their income,

and are NOT COUNTED as employed by The Bureau of Labor

Statistics These persons tend to OVERSTATE the official level of

unemployment by making higher than it otherwise would be.

Unemployment Rate (con) 3. Collecting benefits but not job seeking:

While a state unemployment office may require a person to actively

seek a job in order to collect unemployment insurance benefits,

some benefit recipients do not really want a job and do not put

much effort into the job search. These persons are counted as

unemployed by The Bureau of Labor Statistics They tend to

OVERSTATE the official level of unemployment by making higher

than it otherwise would be.

Unemployment Rate (con)

4. Underemployed:

A person is counted as employed by The Bureau of Labor Statistics if he

or she is working part-time (e.g., 2 days ∕month); however, that

person nonetheless may be seeking full-time These persons tend

to UNDERSTATE the official level of unemployment by making it

lower than it otherwise would be.

Types of Unemployment

• Frictional unemployment (or natural unemployment)

• Structural unemployment

• Cyclical unemployment

Frictional UnemploymentA factor of overall unemployment that refers to the

unemployment which exists in any economy due to people being in the process of moving from one job to another. In fact, there is always a time interval between the beginning of the search for a job and finding one.

– At any given time, about 2 or 3 percent of the labor force is frictionally unemployed.

Structural Unemployment

A factor of overall unemployment that refers to the unemployment

caused by economic restructuring making some skills obsolete.

• A person who is out of work for a relatively long period of time,

say, a couple of years, is structurally unemployed.

Examples of Structural Unemployment– Steelworkers and coal miners who are out of work because local

steel plants and coal mines have closed.

– Clerical workers, typists, inventory control clerks who have been

made obsolete by a computer system.

– People who are functionally uneducated and who are virtually

shut out of the labor force

• One in five adult Americans is functionally uneducated

– About 2 to 3 percent of our labor force is always structurally

unemployed

C y c l i c a l U n e m p l o y m e n tA factor of overall unemployment that relates to the cyclical trends in

growth and production that occur within the business cycle.

• When business cycles are at their peak, cyclical unemployment will

fall because total economic output is being maximized. When

economic output falls, as measured by the gross domestic product

(GDP), the business cycle is low and cyclical unemployment will rise.

• Economists describe cyclical unemployment as the result of

businesses not having enough demand for labor to employ all those

who are looking for work. The lack of employer demand comes from

a lack of spending and consumption in the overall economy

Natural Rate of Unemployment

• The target rate of unemployment is the lowest sustainable rate of unemployment that policymakers believe is achievable under existing conditions.

• It is sometimes called the natural rate of unemployment.

Natural Unemployment Rate (con)

Most economists estimate the natural unemployment rate to be 5 or 6 percent. If we take a 5 percent unemployment rate as our working definition of full employment, anything above 5 percent would be cyclical unemployment

Frictional 2.5% (Natural)

Structural 2.5% (Natural)

5.0% (Full unemployment - NUR)

Cyclical 1.7% (Not natural) We can decrease it

Unemployment Rate 6.7%

+

+

• If it is increasingly difficult to find employees, employers

will bid up wage rates, pushing up the rate of inflation.

• Once the unemployment rate falls below its natural rate,

then inflationary wage pressure emerges:

I f U n e m p l o y m e n t R a t e < N atural U n e m p l o y m e n t R ate I n fl a ti o n ↑

I f U n e m p l o y m e n t R a t e > N atural U n e m p l o y m e n t R ate I n fl a ti o n ↓

U n e m p l o y m e n t R a t e & I n fl a ti o n

Unemployment as Government’s Problem

In the 1980s and 1990s, the target rate of

unemployment was been between 5 and 7

percent in the U.S.

Why the Target Rate of Unemployment Changed

• In the 1970s and early 1980s, a low inflation

rate seemed to be incompatible with a low

unemployment rate.

• Demographics have changed – different age

groups have different rates of unemployment.

Unemployment Rate Differs By Groups

Unemployment rate varies among demographic

groups.

Unemployment Rate

Unemployment by Subcategories, 2002

16-191.2 million(15.4%)

20-241.0 million

(9.2%)

Male – 4.5 million (6.0%)

Unemployment rate by age

25-54 – 4.8 million (4.7%)55 and over0.8 million

(3.8%)

Female – 3.7 million (5.6%)

Unemployment rate by sex

Total unemployment – 8.3 million (5.8%)

Total unemployment rate

The Effects of Recessions and Expansions on Unemployment

In general, the unemployment rate rises during recessions

and falls during expansions.

T h e U n e m p l o y m e n t R a t e a n d B u s i n e s s C y c l e

The unemployment rate normally rises during recessions and falls during expansions.

As shown here, there were large fluctuations in the U.S. unemployment rate during the period after World War II. Shaded areas show periods of recession; unshaded areas are periods of expansion. Over the entire period from 1948 to 2004, the unemployment rate averaged 5.6%.

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01948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

The Unemployment Rate, 1948-2000

Unemployment went up between 1969 and 1982 and went down after that