Module 3

Unemployment
 Learning Objectives:

• Understand the meaning of

unemployment, unemployment rate, labour
force participation rate, and working age
population.
• Appreciate that the distribution of
unemployment between different groups may
vary considerably.
• Distinguish between the various types of
unemployment.
• Explain what causes structural unemployment.
 Learning Objectives:

• Identify the costs of unemployment.

• Understand the meaning of full
employment.
• Identify policies to tackle unemployment.
• Understand the relationship between
unemployment and inflation.
• Understand the meaning of stagflation.
 Labor Force Statistics

The population can be divided into 3 groups:

– Employed: paid employees, self-employed,
and unpaid workers in a family business
– Unemployed: people not working who have looked
for work during previous 4 weeks
– Not in the labor force: everyone else
The labor force is the total # of workers, including the employed
and unemployed.
 Labor Force Statistics

Unemployment rate (“u-rate”):

% of the labor force that is unemployed

# of unemployed
u-rate = 100 x
labor force

Labor force participation rate:

% of the adult population that is in the labor force

labor force labor force

= 100 x
participation rate adult population
 ACTIVE LEARNING 1
Calculate labor force statistics

Compute the labor force, u-rate, adult population, and labor force
participation rate using this data:

Adult population of the U.S.

by group, April 2011

# of employed 139.7 million

# of unemployed 13.7 million

not in labor force 85.7 million

 ACTIVE LEARNING 1
Answers

Labor force = employed + unemployed

= 139.7 + 13.7
= 153.4 million

U-rate = 100 x (unemployed)/(labor force)

= 100 x 13.7/153.4
= 8.9%
 ACTIVE LEARNING 1
Answers

Population = labor force + not in labor force

= 153.4 + 85.7
= 239.1

LF partic. rate = 100 x (labor force)/(population)

= 100 x 153.4/239.1
= 64.2%
 ACTIVE LEARNING 1
Calculate labor force statistics

Compute the labor force, u-rate, adult population, and labor force
participation rate using this data:

Adult population of the KSA

by group, April 2015

# of employed 11.229 million

# of unemployed 0.682 million

not in labor force 10.311 million

 Labor Force Statistics
for Different Groups

• The CDSI publishes these statistics for demographic groups

within the population.
• These data reveal widely different labor market experiences for
different groups.
 Labor Force Statistics for Whites & Blacks,
April 2011

Adults (20 yrs & older)

u-rate LF part. rate

White, male 7.9% 73.9%

White, female 7.0 59.8

Black, male 17.0 68.6

Black, female 13.4 62.0

Labor Force Statistics for Whites & Blacks,
April 2011

Teens (16–19 yrs)

u-rate LF part. rate

White 22.3% 36.2%

Black 41.6% 26.2%

Labor Force Statistics for Other Groups,
April 2011

All ages

u-rate LF part. rate

Asian 6.4% 64.1%

Hispanic 11.8 66.6

 Labor Force Statistics by Education Level,
April 2011

Adults (25 yrs & older)

u-rate LF part. rate

less than h.s. 14.6% 45.5%

h.s. diploma 9.7 60.4

some college or
7.5 69.7
assoc degree
bachelor’s
4.5 77.0
degree or more
 ACTIVE LEARNING 2
Limitations of the u-rate

In each of the following, what happens to the u-rate? What

happens to the LFPR? Does the u-rate give an accurate
impression of what’s happening in the labor market?
A. Hasan lost his job and begins looking for a new one.
B. Ahmad, a steelworker who has been out of work since
his mill closed last year, becomes discouraged and gives
up looking for work.
C. Musa, the sole earner in his family of 5, just lost his SR
20,000 job as a research scientist. Immediately, he takes
a part-time job at McDonald’s until he can find another
job in his field.
 ACTIVE LEARNING 2
Answers

A. Hasan lost his job and begins looking for a new one.
u-rate rises
A rising u-rate gives the impression that the labor market
is worsening, and it is.
 ACTIVE LEARNING 2
Answers

B. Ahmad has been out of work since last year,

becomes discouraged, stops looking for work.
Discouraged workers
 would like to work but have given up looking for jobs
 classified as “not in the labor force” rather than
“unemployed”
U-rate falls because Ahmad is no longer counted as
unemployed.
A falling u-rate gives the impression that the labor market is
improving, but it is not.
 ACTIVE LEARNING 2
Answers

C. Musa lost his SR 20,000 job, and takes a part-time job

at McDonald’s until he finds a better one.
U-rate unchanged because a person is “employed”
whether they work full or part time.
Things are worse, but the u-rate fails to show it.
 What Does the U-Rate Really
Measure?
• The u-rate is not a perfect indicator of
joblessness or the health of the labor market:
– It excludes discouraged workers.
– It does not distinguish between full-time and
part-time work, or people working part time because full-time jobs
not available.
– Some people misreport their work status in the CDSI survey.
– It does not indicate how long the unemployed has been without a
job.

• Despite these issues, the u-rate is still a very

useful barometer of the labor market &
economy.
 Explaining the Natural Rate:
An Overview

Even when the economy is doing well, there is always some

unemployment, including:
Frictional unemployment
– the time period between jobs when a worker is searching for, or transitioning
from one job to another
– occurs when workers spend time searching for the jobs that best suit their
skills and tastes
– short-term for most workers
Structural unemployment
– occurs when there are mismatches between workers and jobs
– usually longer-term
Seasonal unemployment
– occurs when demand fluctuates around seasons (e.g. jobs in the “winter
clothing” industry)
 Cyclical Unemployment
vs. the Natural Rate
There’s always some unemployment, though the u-rate fluctuates
from year to year.
Natural rate of unemployment
– the normal rate of unemployment around which the actual
unemployment rate fluctuates
– frictional + structural + seasonal = natural rate
Cyclical unemployment
– there is not enough aggregate demand in the economy to
provide jobs for everyone who wants to work
– the deviation of unemployment from its natural rate
– associated with business cycles
Full Employment
– the level of employment when there is no cyclical
unemployment.
– full employment is not when unemployment is 0%.
 U.S. Unemployment, 1960–2011
12

Unemployment rate
10
percentage of labor force

4
Natural rate of
2
unemployment

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
 Job Search

• Workers have different tastes & skills, and

jobs have different requirements.
• Job search is the process of matching workers
with appropriate jobs.
• Sectoral shifts are changes in the composition of
demand across industries or regions of the country.
• Such shifts displace some workers,
who must search for new jobs appropriate
for their skills & tastes.
• The economy is always changing,
so some frictional unemployment is inevitable.
 Public Policy and Job Search

• Govt employment agencies

provide information about job vacancies to speed up the
matching of workers with jobs.
• Public training programs
aim to equip workers displaced from declining industries with
the skills needed in growing industries.
 Unemployment Insurance

• Unemployment insurance (UI):

a govt program that partially protects workers’ incomes when
they become unemployed
• UI increases frictional unemployment.
Remember: People respond to incentives.
• UI benefits end when a worker takes a job,
so workers have less incentive to search or
take jobs while eligible to receive benefits.
 Unemployment Insurance

Benefits of UI:
• Reduces uncertainty over incomes
• Gives the unemployed more time to search, resulting in better
job matches and thus higher productivity
 Explaining the Natural Rate of Unemployment:
A Summary

The natural rate of unemployment consists of

• frictional unemployment
– It takes time to search for the right jobs
– Occurs even if there are enough jobs to go around
• seasonal unemployment
– demand fluctuates around seasons
– workers in such industries are laid off during off-season
• structural unemployment
– Changes over time in consumer demand and in technology
alter the “structure” of the total demand for labor, both
occupationally and geographically
 Inflation and unemployment

• In the long run, inflation & unemployment are unrelated:

– The inflation rate depends mainly on growth in the money supply.
– Unemployment (the “natural rate”) depends on the minimum
wage, the market power of unions, efficiency wages, and the
process of job search.
• In the short run, society faces a trade-off between inflation
and unemployment.
 The Phillips Curve
• Phillips curve: shows the short-run trade-off between inflation and
unemployment
• 1958: A.W. Phillips showed that
nominal wage growth was negatively
correlated with unemployment in the U.K.
• 1960: Paul Samuelson & Robert Solow found
a negative correlation between U.S. inflation
& unemployment, named it “the Phillips Curve.”
 Deriving the Phillips Curve
A. Low agg demand, low inflation, high u-rate
P inflation

SRAS
B B
5%
105
A
103 3% A
AD2
PC
AD1

Y1 Y2 Y 4% 6% u-rate

B. High agg demand, high inflation, low u-rate

 The Phillips Curve: A Policy Menu?

• Since fiscal and monetary policy affect

aggregate demand, the PC appeared to offer
policymakers a menu of choices:
– low unemployment with high inflation
– low inflation with high unemployment
– anything in between

• 1960s: U.S. data supported the Phillips curve.

Many believed the PC was stable and reliable.
 What is Stagflation?
• Stagflation is an economic situation in which the
inflation rate is high, the economic growth rate
slows down, and relatively high unemployment is
relatively high.
• Stagflation occurs when the economy isn't
growing but prices are, which is not a good
situation for a country to be in.
• This happened to a great extent during the
1970s, when world oil prices rose
dramatically, fueling sharp inflation in developed
countries. For these countries, including the
U.S., stagflation increased the inflationary
effects. 31