CHAPTER 6 - UNEMPLOYMENT

THE LABOR FORCE

The labor force includes all people aged 16 and over who are working for pay plus all people in this age range who are actively seeking employment.

Who is NOT included?

• children

• retired people

• full-time homemakers

• full-time students

• people in institutions such as prisons and mental hospitals

• anyone else who is NOT actively seeking a job

Why is an accurate measure of the labor force important?

• It demonstrates the quantity of our labor resource available for the production of national output.

• It also reflects social trends and attitudes:

• 1960s – ¼ of married mothers and ½ of single mothers worked outside the home.

• In the mid-1980s there were more married working mothers than single mothers.

• By the late-1990s, 2/3 of married mothers were in the workforce.

LABOR FORCE PARTICIPATION RATE
The Labor Force Participation Rate (LFPR) is the share of the population aged 16 and over that is in the labor force or the percentage of all adults who are actively interested in working.

LFPR =	Number of people in labor force
	Number of people aged 16 and over

 
GROWTH OF PRODUCTION POSSIBILITIES
Depends on:

1. Availability of factors of production

2. Technological know-how

If the labor force grows, our production possibilities curve shifts outward or we have an increase in our production possibilities.

Institutional Constraints limit the size of our labor force (and our available labor) and shrink our potential output.

• Child labor laws and limits on logging, etc.

OKUN’S LAW
Each additional one percent of unemployment translates into a loss of 3% in real GDP. With unemployment we are not producing to our full potential or (full employment GDP).

THE UNEMPLOYMENT RATE

How is the unemployment rate calculated?

The unemployment rate is defined as the percentage of the labor force that is unemployed.

Unemployment rate =	Number of unemployed people
	Number of people in the labor force

 
An unemployed person must be in the labor force.
Remember the following people are not included in the labor force:

• people under age 16

• people over age 16 who are not actively seeking employment (full-time homemakers, students, retired people, prisoners, mental hospitals, etc)

The labor force is not a measure of the total population.

NATIONAL UNEMPLOYMENT RATE

In 2000 the unemployment rate extremely low by historical standards (4.2%) because there had been a steady expansion of the economy since 1992.

UNEMPLOYMENT RATES FOR SELECTED GROUPS OF PEOPLE, May 2000

GROUP	UNEMPLOYMENT RATE
Nation	4.1%
Men	3.9
Women	4.3
Youth aged16-19	12.5
White	3.5
Black	8.0
Hispanic	5.8

 

1. Men/Women unemployment varies

2. High unemployment rate for teenagers – 3x the national average

• Teenagers have the highest unemployment rate of any group, year after year because of lack of education, skills and experience.

3. Usually unemployment for African-Americans is higher, Hispanics fall somewhere between blacks and whites. Minority groups have higher unemployment rates.

• Thus, the burden of unemployment is not shared equally by all groups.

4. Education reduces the chances of being unemployed. There is a premium placed on educated workers.

Discouraged workers are individuals who aren’t actively seeking employment but would look for or accept a job if one were available.

Underemployment includes people seeking full-time paid employment who work only part-time or are employed at jobs below their capability.

The Phantom Unemployed are people who report that they’re actively searching for a job even when they have little interest in finding employment.

PROBLEMS IN MEASURING UNEMPLOYMENT

The unemployment rate understates the true extent of economic hardship from unemployment in our country for 2 reasons:

1. Anyone working at least part-time for pay is considered to be employed.

2. Discouraged workers are not included. Some people who have actively sought employment have become so discouraged in their search that they have given up looking for jobs.

Ramifications:

1. Many macroeconomic policies based on unemployment rate, if understated, policymakers may not take the problem seriously enough.

2. Changes in our economy can have a misleading impact on official unemployment rates. Because discouraged workers are ignored in the statistics, the official unemployment rate may be decreasing as the economy is worsening.

THE EFFECTS OF UNEMPLOYMENT

PERSONAL EFFECTS

• Loss of income - most unemployed people do no receive unemployment compensation.

• Employment related health benefits.

• On the job experience – reducing unemployed person’s productivity and marketability.

• Social ills – domestic violence, divorce, alcoholism, child abuse, suicide.

• With underemployment our labor resources not being fully utilized.
  Underemployment leads to discontent on the part of the underemployed worker.

MACROECONOMIC EFFECTS

Production Possibilities Curve: when we are using society’s resources and technology to their fullest, the economy is represented somewhere along the PPC.

• If not, we’re producing somewhere inside the PPC.

• Unemployment results in a reduction in our nation’s output; we are not producing to our full potential.

TYPES OF UNEMPLOYMENT

FRICTIONAL
Frictional unemployment is the normal time delay before finding a job or when changing jobs or reentering the labor force after a period of absence.

• Imperfect information (on the part of job seekers and employers) causes frictional unemployment.

• Frictional unemployment is just temporary.

• Programs to improve job information can help reduce the period of time required to find a job: college career services office, state job service office, local employment agency, Internet, etc.

STRUCTURAL
Structural unemployment is caused by structural shifts within our economy.

EXAMPLE: If someone went to school to become school teacher, but now there are fewer children in school and employers demanding more specialized school teachers. The skills of the regular school teacher are no longer needed.

Structural unemployment also results from a shift in the production of goods from the manufacturing to services sector (healthcare and childcare). The number of autoworkers (manufacturing) needed has greatly diminished in the past 20 years while the need for nurses (service) has greatly increased.

**A job vacancy may exist for each unemployed worker but due to structural circumstances within the economy, the unemployed worker is not suited to a particular job. (MISMATCH OF SKILLS)

Also, structural factors may prevent people from taking available jobs: lack of child care facilities, discrimination, inner city, part of country where jobs are scarce.

Government Actions that can help reduce structural unemployment include:

• Job training and education programs.

• Provision of child care facilities

• Enforcement of anti-discrimination policies

• Relocation assistance

• Return to school assistance

CYCLICAL UNEMPLOYMENT

Unemployment that results from a drop in economic activity (recession). Cyclical unemployment results from a change in the macroeconomy, economy as a whole, not individual sectors (like structural unemployment).

When the economy is expanding, the number of jobs is expanding, etc.

Only with cyclical unemployment do we assume that the economy has an insufficient number of jobs.

Macroeconomic policy is necessary to expand the economy and create new employment opportunities.

FULL EMPLOYMENT

Full employment is defined as a situation in which there is no cyclical unemployment; jobs are available for all who want to work.

• Any unemployment that exists will be structural or frictional, not cyclical.

• An unemployment rate of 4-6% often considered to represent full employment

• Full employment is one of our basic economic goals but it doesn’t mean ZERO unemployment.

• There will always be some frictional/structural/seasonal unemployment.

INFLATION or rising prices is a sign that employment is nearing capacity. When most workers are employed, wages start rising.

CHANGES IN STRUCTURAL EMPLOYMENT have changed our full employment target:

• MORE YOUTH and WOMEN are in the workforce and this has resulted in increased frictional and structural unemployment.

• LIBERAL TRANSFER PAYMENTS like unemployment, welfare, etc., encourage people to be unemployed.

• STRUCTURAL CHANGES IN DEMAND (consumer demand, technology and trade have shrunk markets in steel, textiles, autos and other industries).

NATURAL RATE OF UNEMPLOYMENT

• Some claim it consists of only frictional and structural unemployment.

• The goal to maintain 4% unemployment and 3% inflation according to the Full Employment and Balanced Growth Act of 1978 or the Humphrey-Hawkins Act.