MODERN PRINCIPLES OF ECONOMICSThird EditionChapter 11

Unemployment and

Labor Force

Participation

Unemployment and

Labor Force

Participation

Outline

� Defining Unemployment

� Frictional Unemployment

� Structural Unemployment

� Cyclical Unemployment

� Labor Force Participation

2

Introduction

� Some unemployment is a necessary part of economic growth.

� Employment in fields such as farming has declined, while other jobs such as blacksmith and darkroom technician have disappeared.

� New jobs have been created in areas like software engineering and the biosciences.

� There are different types of unemployment with different causes.

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Introduction

Employment,

Unemployment, and

Labor Force Participation

in the U.S. Population

4

Definition

Unemployed workers:

Adults who do not have a job but who are looking for work.

5

Unemployment rate:

The percentage of the labor force without a job.

Unemployment

� Someone is unemployed only if he or she is willing and able to work but cannot find a job.

� To be counted as unemployed, a person must be:

� 16 years or older

� not institutionalized (e.g., not in prison)

� a civilian, and

� looking for work.

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Unemployment

� In April 2014, there were 9.8 million people unemployed in the U.S. and 145.7 employed.

� Together, the employed and the unemployed make up the labor force of 155.5 million.

� The unemployment rate was:

7

100forceLabor

Unemployed

Employed Unemployed

Unemployed(%) ratent Unemployme ×=

+

=

%3.61005.155

8.9

145.7mm 9.8

million 9.8 ratent Unemployme =×=

+

=

Self-Check

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Self-Check

9

If 2 million people are unemployed and 8 million are employed, the unemployment rate is:

a. 2%.

b. 20%.

c. 25%.

Answer: b – the unemployment rate is

[2 / (2 + 8)] x 100 = 20%.

Definition

Labor force participation rate:

The percentage of adults in the labor force.

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Unemployment

� Unemployment, especially if it is long-term, can be financially and psychologically devastating.

� Unemployment also means that the economy is underperforming.

� The unemployment rate is the single best indicator of how well the labor market is working, but it is incomplete.

� The unemployment rate does not include discouraged or underemployed workers.

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Definition

12

Discouraged workers:

Workers who have given up looking for work but who would still like a job.

Discouraged Workers

� Discouraged workers are difficult to measure because the concept is not well-defined.

� One definition is workers who want and are available for work, and who have looked for a job sometime in the last year but not in the last month because they believe that no jobs were available for them.

� Using this definition, the number of discouraged workers is small relative to the number of unemployed workers.

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Discouraged Workers

The Unemployment Rate With and Without Discouraged Workers

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Underemployment

� The unemployment rate also doesn’t measure the quality of the jobs or how well workers are matched to their jobs.

� A taxi driver with a PhD in chemistry is counted as fully employed; so is a part-time worker.

� Defining and measuring partial employment is difficult.

� As of March 2014, the underemployment rate in the U.S. was an unusually high 12.7.

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Definition

Underemployment rate:

A Bureau of Labor Statistics measure that includes part-time workers who would rather have a full-time position and people who would like to work but have given up looking for a job.

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Self-Check

17

If you have a Ph.D. in physics and are working as a retail clerk, you are:

a. Unemployed.

b. Partially employed.

c. Underemployed.

Answer: c – you are underemployed.

Definition

Frictional unemployment:

Short term unemployment caused by the ordinary difficulties of matching employee to employer.

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Frictional Unemployment

� Finding a job that you want at a wage that you will accept and the employer will pay takes time.

� This leads to frictional unemployment.

� Scarcity of information is one of the causes of frictional unemployment.

� One of the most worrying aspects of the 2007–2009 recession is the increase in long-term unemployment.

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Duration Of Unemployment

U.S. Unemployment Duration in 2005 and 2010 in the United States

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Frictional Unemployment

� Frictional unemployment is typically a large share of total unemployment because the U.S. economy is dynamic.

� “Creative destruction” describes this process.

� Innovation and competition drive progress, which creates new jobs and destroys old jobs.

� In February 2014, 4.59 million new jobs were created but there were also 4.38 million job separations, for a total of 210,000 new jobs.

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Definition

Structural unemployment:

Persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs.

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Structural Unemployment

� One cause of structural unemployment is large, economy-wide shocks such as oil shocks.

� Other causes include restructuring as a result of globalization, new information technologies, and the shift from manufacturing to services.

� Structural unemployment has significant costs:

• Loss of economic output.

• The unemployed suffer higher levels of stress, higher rates of suicide, and lower rates of measured happiness.

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Structural Unemployment

� In the U.S. unemployment tends to increase with a

shock and then decrease.

� In Europe, unemployment has increased with shocks

and then remained at high levels. 24

Structural Unemployment

� Structural unemployment has been a more serious problem in Europe than in the United States because of labor regulations.

� Unemployment benefits, minimum wages, unions, and employment protection laws benefit workers.

� All of these regulations are more generous and wide-ranging in Europe.

� These regulations can increase unemployment rates.

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Self-Check

26

One cause of structural unemployment is:

a. A recession.

b. A large, economy-wide shock.

c. The time it takes to find a suitable job.

Answer: b – one cause of structural

unemployment is a large, economy-wide shock.

Minimum Wage

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Wage

Quantity of Labor

Demand for labor

Supply of Labor

Minimum

wage

Market

wage

Market

employment

Employment

with minimum

wage

Unemployment

The minimum wage

raises the wage, thus

decreasing the quantity

of labor demanded.

The minimum wage

raises the wage, thus

decreasing the quantity

of labor demanded.

Labor supply

with minimum

wage

Definition

Median wage:

The wage such that one-half of all workers earn wages below the median and one-half of all workers earn wages above the median.

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Minimum Wage

� Both minimum wages and median wages have been higher in Western Europe than in the U.S.

� This means that the minimum wage will affect more workers and create more unemployment in Europe than in the U.S.

� The minimum wage is also more likely to create unemployment among young workers.

� In 2005 in France 21% of workers under the age of 25 were unemployed, while in the U.S. 11% of these workers were unemployed.

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Definition

Union:

An association of workers that bargains collectively with employers over wages, benefits, and working conditions.

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Unions

31

Wage

Quantity of Labor

Demand for labor

Supply of Labor

Union

wage

Market

wage

Market

employment

Employment

with union

wage

Unemployment

The increase in the

wage decreases the

quantity of labor

demanded.

Labor supply

with union

wage

Unions

� Unions can provide value for workers and employers alike.

� Excessively strong unions have an effect similar to minimum wages.

� Unions are more powerful in Europe than in the United States.

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Definition

Employment at-will doctrine:

says an employee may quit and an employer may fire an employee at any time and for any reason. There are many exceptions to the at-will doctrine, but it is the most basic U.S. employment law.

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Employment Protection Laws

� Employment protection laws have the following effects:

• Create valuable insurance for workers with full-time jobs.

• Make labor markets less flexible and dynamic.

• Increase the duration of unemployment.

• Increase unemployment rates among young, minority, or otherwise “riskier” workers.

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Employment Protection Laws

Hiring and Firing Costs Increase Long-Term Unemployment 35

Self-Check

36

The employment at-will doctrine says that employment can be terminated:

a. At any time for any reason.

b. With two weeks’ notice.

c. At any time by employees, but employers must give notice.

Answer: a – employment can be terminated by

either employer or employee, at any time and for

any reason.

Definition

Active labor market policies:

Policies like work tests, job search assistance and job retraining programs that focus on getting unemployed workers back to work.

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Structural Unemployment

Factors that can increase structural unemployment:

1. Large, long-lasting shocks that require the economy to restructure. Includes oil shocks, shifts from manufacturing to services, globalization, and technology shocks.

2. Labor regulations. Includes unemployment benefits, minimum wages, powerful unions, and employment protection laws.

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Structural Unemployment

Factors that can reduce structural unemployment:

1. Active labor market policies. Includes job retraining, job-search assistance,

work tests, and early employment bonuses.

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Structural Unemployment

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Milkman

Service Station Attendant

Elevator Operator

Bank Tellers

Store Cashiers

Store Greeters

Car Hops

Pony Express Riders

Town Cryer ("Two o'clock and all is well!")

Cooper (Not much demand for wooden barrels

nowadays.)

The Old Lamp Lighter (of long long ago)

http://www.npr.org/templates/story/story.php?storyId=12

4251060

• Polaroid camera film makers

• Typesetters

• Airbrush touch-up artists

• Telephone switchboard operator

• Typewriter manufacturer

• Soda jerk

• Manufacturers of floppy disks and ZIP

drives/disks

• Manufacturers of eight tracks and players

• Supervisor of Elections

• Hang Man

• Muleskinners

Definition

Cyclical unemployment:

Unemployment correlated with the business cycle.

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Cyclical Unemployment

� Cyclical unemployment is correlated with the ups and downs of the business cycle.

� Unemployment increases dramatically during a recession for two reasons:

1. When GDP is falling, firms often lay off workers, which increases unemployment.

2. When workers are idle, it’s likely that related capital is also idle and the economy cannot be maximizing growth.

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Cyclical Unemployment

U.S. Civilian Unemployment Rate, 1948–2013 43

Cyclical Unemployment

Faster Growth in Real GDP Decreases Unemployment 44

Self-Check

45

Cyclical unemployment is correlated with:

a. Innovation.

b. The business cycle.

c. Economic shocks.

Answer: b – cyclical unemployment is

correlated with the business cycle.

Definition

Natural unemployment rate:

The rate of structural plus frictional unemployment.

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Natural Unemployment Rate

� The underlying rates of frictional and structural unemployment change only slowly through time as major, long-lasting features of the economy change.

� Cyclical employment can increase or decrease dramatically over a matter of months.

� The natural rate changes only slowly through time and the actual rate of unemployment varies around the natural rate.

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Natural Unemployment Rate

The Natural Unemployment Rate: United States, 1948–201348

Labor Force Participation

� The labor force participation rate is the percentage of the adult, non-institutionalized, civilian population who are working or actively looking for work.

� In 2014, the labor force participation rate was:

Labor force = 155.4 million x 100 = 62.8% Adult population = 247.4 million

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100population Adult

force Labor

population Adult

EmployedUnemployedLFPR ×=

+=

Labor Force Participation

� Labor force participation is affected by life cycle effects and demographics.

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Labor Force Participation

Labor force participation is also affected by incentives. 51

Taxes discourage work,

while benefits encourage

non-work.

Taxes discourage work,

while benefits encourage

non-work.

Labor Force Participation

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Differences in Incentives

• Incentives and the rise in female labor force participation:

� 1948 -2008: number of women aged 25-54 in the

paid labor force increased from 35% to 75%.

� What caused this?

• Cultural factors

» Rise of feminism

» Growing acceptance of equality

• Move from a manufacturing to a service

economy.

Self-Check

53

Labor force participation is affected by:

a. The unemployment rate.

b. Life cycle effects and demographics.

c. The business cycle.

Answer: b – life cycle effects and demographics.

Takeaway

� You should know how unemployment, the unemployment rate, and the labor force

participation rate are defined and calculated.

� You should also be able to define frictional, structural, and cyclical unemployment.

� You should know about the factors that increase or decrease the labor force participation rate.

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