Unemployment

Chapter 6

The Labor Force

• The labor-force participation rate is the percentage of the population working or seeking employment.

The Labor Force

• The labor force includes all persons over age sixteen who are either working for pay or actively seeking paid employment.

• People who are not employed or are not actively seeking work are not considered part of the labor force.

The Labor Force

• The labor-force participation rate is the percentage of the population working or seeking employment.

The Labor Force, 2003

Total population (291 million)

Sick and disabled (7,142,000) Institutionalized (4.1 million)

Other (489,000)

Homemakers (20,343,000)

In school (9,130,000)Retired (29,813,000)

Unemployed(8.8 million)

Civilians employed(137.8 million)

Armed forces (1.5 million)

Out of the labor force (144 million) In civilian labor force (147 million)

Under age 16 (68.7 million)

A Growing Labor Force

Participation Rates(age 16 and older)

Men Women86.483.379.777.476.474.7

Year195019601970198019902000

33.937.743.351.557.560.0

73.52004 59.5

Growth of Production Possibilities

• Production is limited by two factors:– The availability of factors of production.– Technological know-how.

Production Possibilities

• A growing labor force creates long-run economic growth.– Economic growth is an increase in output

(real GDP); an expansion of production possibilities.

Institutional Constraints

• Production possibilities in any year depend on available resources and technology and on how we choose to restrict their use.

• The size of labor force is limited by participation rates and social regulation.

Labor Force Growth

C

H

GF

D

Labor-force growth increases production possibilities

Consumption Goods (units per year)B

A

Inve

stm

ent G

ood

s (u

nits

pe

r ye

ar)

O

Unemployment

• To make full use of available production capacity, the labor force must be fully employed.

• Unemployment is the inability of labor-force participants to find jobs.

• See “In the News” How Unemployment Affects the Family, pg. 114.

Okun’s Law

• Okun’s Law asserts that 1% more unemployment is estimated to equal 2 percent less output.

Okun’s Law

• If the U.S. has 300 million people.• 66% are in the labor force. • 40 million are unemployed. • Unemployment is set at 4%. • Based on the information above, by what percentage has real output failed to reach its potential according to the revised Okun's Law?

Okun’s Law

• If the U.S. has 300 million people.• 66% are in the labor force. (200)• 40 million are unemployed. (20%)• Unemployment is set at 4%. (4%)• Based on the information above, by what percentage has real output failed to reach its potential according to the revised Okun's Law? 20% - 4% = 16% X 2 = 32

Measuring Unemployment

• U.S. Census Bureau surveys about 60,000 households a month to determine how many people are actually unemployed.

• A person is considered unemployed if he or she is not employed and is actively seeking a job.

The Unemployment Rate

• The unemployment rate is the proportion of the labor force that is unemployed.

Unemployment Isn’t Experienced Equally by Race or Sex

Updated Data on pg. 110

Unemployment Isn’t Experienced Equally by Education

Duration of Unemployment

• When the economy is growing, both unemployment rates and the average duration of unemployment decline.

Duration of Unemployment:

Reasons for Unemployment

• How long a person remains unemployed is affected by the nature of the joblessness.– Job leavers– Job losers– Reentrants– New entrants

Reasons for Unemployment

Job losers 55%Reentrants 28%

New entrants 8%

Job leavers 9%

Discouraged Workers

• A discouraged worker is an individual who is not actively seeking employment but would look for or accept a job if one were available.

• Discouraged workers are not counted as part of the unemployment problem after they give up looking for a job.

Underemployment

• Underemployed workers represent labor resources that are not being fully utilized.

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

The Phantom Unemployed

• Some of the people who are counted as unemployed probably should not be.

• Many people report that they are actively seeking work when they have little interest in finding a job.

The Phantom Unemployed

• Public policy encourages this behavior by requiring most welfare and unemployment benefit receivers to provide evidence that they are looking for work.

Europe’s Unemployment Woes

• Unemployment levels in Europe are much higher than those of the U.S.

• Analysts blame both sluggish economic growth and high unemployment benefits.

Europe’s Unemployment Woes

United

King

dom

Japa

n

United

Sta

tes

Austra

lia

Canad

a

Belgium Ita

ly

Germ

any

Franc

e

Spain

5.0% 5.3%

6.9%

9.3%8.1% 8.8%

9.3%

11.3%

6.0%6.1%

Updated Data on page 113

The Human Costs

• The most visible impact of unemployment on individuals is loss of income

• The human cost of unemployment includes social, physical, and psychological costs as well.

Defining Full Employment

• Full employment is not the same as zero unemployment.

Seasonal Unemployment

• Seasonal unemployment is the unemployment due to seasonal changes in employment or labor supply.

• At the end of each season, thousands of workers must go searching for new jobs, experiencing seasonal unemployment in the process.

Frictional Unemployment

• Frictional unemployment is the brief periods of unemployment experienced by people moving between jobs or into the labor market.

Frictional Unemployment

• Frictional unemployment differs from other unemployment in three ways:

– There is an adequate demand for the labor of the frictionally unemployed.

– The frictionally unemployed have the skills required for existing jobs.

– The job-search period will be relatively short.

Structural Unemployment

• Structural unemployment is the unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.

Cyclical Unemployment

• Cyclical unemployment is the unemployment attributable to the lack of job vacancies – i.e., to an inadequate level of aggregate demand.

The Unemployment Record

The Full-Employment Goal

• In the Employment Act of 1946, Congress committed the federal government to pursue a goal of “maximum” employment.

• Congress didn’t specify what the rate of unemployment should be.

The Full-Employment Goal

• A full employment goal presumably means avoiding as much cyclical and structural unemployment as possible, while keeping frictional unemployment reasonably low.

Inflationary Pressures

• In the early 1960s, the council of economic advisors concluded that rising prices are a signal that employment is nearing capacity.

• The Council placed full employment at 4% — below that, prices begin rising.

Changes in Structural Unemployment

• During 1970s and early 1980s the 4% unemployment goal was considered too high.

Redefining Full Employment

• Critics suggested that structural barriers to full employment had gotten worse.– More youth and women.– Liberal transfer payments.– Structural changes in demand.

Redefining Full Employment

• In 1983, the Reagan administration concluded that the “inflation-threshold” unemployment rate was between six and seven percent.

The “Natural” Rate of Unemployment

• The natural rate of unemployment is the long-term rate of unemployment determined by structural forces in labor and product markets.

• The “natural” rate of unemployment consists of frictional and structural components only.

Congressional Targets

• The Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins Act) set 4% unemployment rate and 3% inflation as a national goal.

The Historical Record

• During the Great Depression as many as one-fourth of the labor force was unemployed.

• Unemployment rates fell dramatically during World War II — the civilian unemployment rate reached 1.2 percent.

The Historical Record

• Since 1950, unemployment rate has fluctuated from a low of 2.8 percent during the Korean War (1953) to a high of 10.8 percent during the 1981-82 recession. It is over 15 percent in our state and over 9 percent nationally.

The Historical Record

• From 1982 to 1989, unemployment fell, but shot up again in the 1990-91 recession.

• Unemployment fell steadily during the last half of the 1990s.

• The unemployment rate rose sharply in late 2001.

Unemployment

End of Chapter 6