LABOR MARKET

THE LABOR MARKET

▪The labor market refers to the interaction of the supply of labor and the
demand for labor.

▪In the labor market, workers supply their labor services for firms and the
firms demand these labor services.

▪When the supply of labor exceeds the demand for labor, the unemployment
problem begin to arise.
 LABOR MARKET
INDICATORS
1) Labor force
2) Employment Rate
3) Unemployment Rate
4) Working-Age Population
5) Labor force Participation
Rate
 Total Population

Working-Age population Non-Working Age

(productive part of the population that can work Population
and earn income: age 16-64)
(unproductive part: below 16, equal & above
64 retired people)

Not in Labor Force (Economically

Labor Force Inactive Participants)
(willing & able to work)
(not willing to work: discouraged worker & didn’t Potential LF, Not a potential
look for a job…may be lost hope to find a one &
not searching anymore), (students, disabled
young D.B Labor Force, old D.P
physically or mentally, sickness, armed force, (below 16) (retired people)
jailed, housewife looking after her family)

Employed
(full time or part time)

Unemployed
(Actively seeking a job: exerted
an effort & still exerting this
effort but not yet finding a job)
To be counted in the labor force, the individual must be:
a) In the working age (15-64).
b) Want and able to work.
c) Actively searching for job in the last 4 weeks.

While others who are not joining the labor force are those who
cannot meet the previous stated conditions. Examples of
people not in the labor force are: homemakers and full-time
students.

Discouraged Workers: People who are available for work (want

and able to work) but have not looked for a job during the last 4
weeks because they believe no jobs are available for them.
Discouraged workers are not included in the labor force.
People are considered as unemployed if they are:
a) Without work.
b) Currently available for work (i.e. want and able to work).
c) Actively searching for job in the last 4 weeks
 LABOR MARKET INDICATORS
▪Labor Force = Employed Persons (Part-time & Full Time) + Unemployed Persons

▪Working-Age Population = Labor Force + Economically-Inactive people

▪Young-age dependency ratio:

younger dependents population under the age16
= working−age population ×100 = population aged 16−64 ×100

▪Old-age dependency ratio:

old age dependents population above the age 64
= ×100 = ×100
working−age population population aged 16−64

▪Total Dependency Ratio:

older and younger dependents population younger than 16 & those older than 64
= working−age population ×100 = population aged 16−64
▪The Labor Force Participation Rate: The labor force participation rate reflects the willingness and the
Labor Force
ability of the working-age population to work
= ×100
Working−Age Population

▪The Economic Inactivity Rate:

the No. of Economically Inactive people

= ×100
Working−Age Population

▪ The Employment Rate:

the No. of people employed
= ×100
Labor Force

▪ The Unemployment Rate: The unemployment rate shows the extent to which the people who
the No. of people Unemployed are willing to have a job can’t find it.
= ×100
Labor Force

▪ The (Un)Employment to Population Ratio:

The employment to population ratio shows the ability of the
the No. of people (Un)employed economy to create jobs and the degree of match between the
= ×100
working age population people’s skills and the jobs requirements and the labor market
conditions
NOTES
• The labor force participation rate and the economic inactivity rate must necessarily sum to 100%.

• Since the labor force is a part of the working-age population, the unemployment rate is necessarily
greater than the unemployment-to-population ratio.
 EXAMPLES
Suppose that the following statistics are available about the labor market in a certain country.
Calculate the following:
1) Young-age dependency ratio
•Working-Age Population = population – (younger dependents – older dependents) Population 800,000

= 800,000 – 200,000 – 100,000 = 500,000

Young-age dependency ratio =(younger dependents / working-age population)×100 Younger Dependents 200,000
=(200,000/500,000)×100=40%
Older Dependents 100,000

2) Old-age dependency ratio Economic Inactivity 28%

=(older dependents /working-age population)×100=(100,000/500,000)×100=20% Rate
Unemployment 43,200

3) Total dependency ratio

=(older and younger dependents / working-age population)×100
=((200,000+100,000)/500,000)×100=60%

4) The No. of Economically-Inactive People

Economic Inactivity Rate=(the No. of Economically Inactive people /Working-Age Population)×100
28=(the No. of Economically Inactive people/500,000)×100
Economically Inactive people=(28×500,000)/100=140,000
 5) Labor Force Participation Rate
•Labor Force = Working-Age Population – (Economically-Inactive)
Labor Force =500,000-140,000=360,000
Labor Force Participation Rate=(Labor Force/ Working-Age Population)×100
=(360,000/500,000)×100=72%
OR: Population 800,000

Labor Force Participation Rate = 100% – Economic Inactivity Rate

Younger Dependents 200,000
= 100%-28%=72%
Older Dependents 100,000
6) Employment-to-population ratio
Economic Inactivity 28%
Employment = Labor Force – Unemployment = 360,000 – 43,200 = 316,800 Rate
The Employment-to-Population Ratio=(Employment /Working-Age Population)×100 Unemployment 43,200
=(316,800/500,000)×100=63.36%

7) Unemployment-to-population ratio
The Unemployment-to-Population Ratio=(Unemployment/Working-Age Population)×100
=(43,200/500,000)×100=36.64%

8) Unemployment Rate
=(the No. of people Unemployed/ Labor Force)×100=(43,200/360,000)×100=12%
Types of Unemployment
1- Frictional unemployment: Short-term unemployment that
arise from the process of matching workers with jobs.
Ex: a worker who leaves job to search for another job.

2- Structural unemployment: unemployment arising from the

mismatch between the skills of workers and the requirements
of jobs.
Ex: ICT jobs require highly skilled workers.
3- Cyclical unemployment: unemployment caused by a
business cycle recession.
Ex: The loss of jobs during the global financial crisis 2008
or COVID- 19 pandemic
Natural Rate of unemployment
• The unemployment that arises from the frictions and
structural changes in the economy is known as the natural
unemployment. Thus, the natural unemployment is “the sum
of the frictional unemployment and the structural
unemployment”, therefore:
• Cyclical Unemployment = Unemployment Rate - Natural Rate
of Unemployment
• When Unemployment Rate = Natural Rate of Unemployment,
cyclical unemployment will equal to zero and in this case the
economy will be at full employment.
Real GDP and Unemployment over the Cycle
• The quantity of real GDP at full employment is called the
potential GDP.

• Over the business cycle, real GDP fluctuates around potential

GDP. The gap between real GDP and potential GDP is called
the output gap. As the output gap fluctuates over the
business cycle, the unemployment rate fluctuates around the
natural unemployment rate.
 GDP
Actual
GDP Potential
GDP

Peak
Point

Positive output Negative

gap output gap

No output gap
Trough
Point

Time
▪ Cyclical unemployment increase during expansion and decreases during recession while it is zero when there
is no output gap.
▪ At the no output gap point, the unemployment rate is equals to the natural rate of unemployment (frictional
and structural)
• When the economy is at full employment, the unemployment rate
equals the natural unemployment rate and real GDP equals potential
GDP so the output gap is zero.

• When the unemployment rate is less than the natural unemployment

rate, real GDP is greater than potential GDP and the output gap is
positive.

• When the unemployment rate is greater than the natural

unemployment rate, real GDP is less than potential GDP and the
output gap is negative.
• In part (a): real GDP fluctuates around potential GDP.
• In part (b): the unemployment rate fluctuates around the
natural unemployment rate.
• In recessions, cyclical unemployment peaks and the output gap
becomes negative. In expansions (at business cycle peaks), the
unemployment rate falls below the natural rate and the output
gap becomes positive.