Unemployment refers to adults who do not have a job, but are looking for one.
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
· Current Population Survey is a telephone survey of approximately 60,000 randomly selected adults that is used to calculate several commonly reported measures of labor market conditions.
· The labor force is the total number of workers in an economy, including both the employed and the unemployed.
· The labor force participation rate is the percentage of the adult population in the labor force.
· The unemployment rate is the percentage of the labor force that is unemployed.
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%.
· Underemployment refers to people with jobs who are not working as much as they want or need to work.
· Discouraged workers are individuals who would like to work but have given up looking for a job.
· In markets for labor, the price of labor is often referred to as the wage rate.
· The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded.
· The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate.
· A minimum wage law is a price floor that specifies the lowest price that employers can legally pay for labor.
· A price floor is a legal minimum price at which a product can be sold.
· Labor unions are worker associations that bargain with employers over wages and working conditions.
· Collective bargaining is the process by which unions and business firms agree on the terms of employment.
· A strike is the organized withdrawal of labor from a business firm by a union.
· Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.
· Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences.
· Job search is the process by which workers find appropriate jobs given their skills and preferences.
· Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings.
· Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs.
· Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate.
· The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates.
· The business cycle is the natural fluctuations in the economy.
· Cyclical unemployment is also called Keynesian unemployment.
· John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy.
· Classical economic theory suggests there is no role for government because the economy corrects itself.
· Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
· Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
· Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
· Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
Thursday, September 18, 2008
Wednesday, September 17, 2008
Summary of Strategies for Reducing Unemployment
Summary of the Strategies for Reducing Unemployment
Fiscal policy can be used to reduce all three types of unemployment. Monetary policy can be used to reduce cyclical (Keynesian) unemployment.
Objective to help achieve Low Unemployment
Fiscal Policy
to achieve this objective
Monetary Policy
To achieve this objective
Reduce frictional unemployment
· Government assistance in finding jobs
Reduce structural unemployment
· Government programs to retrain workers or provide additional education
· Tax incentives for people to go back to school or to obtain new skills
Reduce cyclical (Keynesian) unemployment
· Increases in government spending to increase aggregate demand
· Decreases in income taxes to leave workers with more disposable income to increase aggregate demand
· Increase the money supply to reduce interest rates to encourage more borrowing, increase consumption and investment spending, and thus increase aggregate demand.
Fiscal policy can be used to reduce all three types of unemployment. Monetary policy can be used to reduce cyclical (Keynesian) unemployment.
Objective to help achieve Low Unemployment
Fiscal Policy
to achieve this objective
Monetary Policy
To achieve this objective
Reduce frictional unemployment
· Government assistance in finding jobs
Reduce structural unemployment
· Government programs to retrain workers or provide additional education
· Tax incentives for people to go back to school or to obtain new skills
Reduce cyclical (Keynesian) unemployment
· Increases in government spending to increase aggregate demand
· Decreases in income taxes to leave workers with more disposable income to increase aggregate demand
· Increase the money supply to reduce interest rates to encourage more borrowing, increase consumption and investment spending, and thus increase aggregate demand.
Tuesday, September 16, 2008
Why the Macroeconomic Policy Goal is LOW Unemployment, Not NO Unemployment
Most economists consider it natural and good to have a certain amount of frictional unemployment. Having a pool of people looking for jobs makes it easier for businesses to hire new workers. If everyone who wanted a job had one, a business that needed to hire more workers would have to lure them from other companies or from the pool of adults who are not in the labor force. This would probably mean the business would have to offer to pay significantly more than the current market wage. Wages are typically based on productivity. Paying more to workers simply to hire them away from another company (and not because of increased productivity) contributes to inflation. Consequently, attempts to reduce unemployment generally focus on cyclical or structural unemployment.
Monday, September 15, 2008
Cyclical (Keynesian) Unemployment
Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate. The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates. Cyclical (Keynesian) unemployment is caused by downturns in the economy that are part of the business cycle. The business cycle is the natural fluctuations in the economy.
The graph below illustrates how the unemployment rate has fluctuated over the last half-century.
Source: Bureau of Labor Statistics
Cyclical unemployment is also called Keynesian unemployment. John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy. This is a departure from Classical economic theory, which suggests there is no role for government because the economy corrects itself. Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
The remedy for cyclical (Keynesian) unemployment is an increase in overall spending on newly produced goods and services, which economists refer to as aggregate demand. In the U.S. economy, increased demand for American products encourages U.S. businesses to produce more output. Businesses may hire additional workers to help produce the additional output needed to satisfy the increased demand. Thus, increased aggregate demand tends to reduce unemployment.
A closer look at the components of aggregate demand make it easier to develop appropriate macroeconomic strategies. Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
AD = C + I + G + X - M or AD = C + I + G + NE
where:
C = consumption spending (mostly by households)
I = investment spending (mostly by businesses)
G = government purchases of goods & services (It does not include transfer payments.)
X = exports of domestically produced goods & services to foreign purchasers
M = imports of foreign produced goods & services by domestic purchasers
NE = X - M = net exports
An increase in aggregate demand can be achieved using expansionary monetary or fiscal policy.
Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
The graph below illustrates how the unemployment rate has fluctuated over the last half-century.
Source: Bureau of Labor Statistics
Cyclical unemployment is also called Keynesian unemployment. John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy. This is a departure from Classical economic theory, which suggests there is no role for government because the economy corrects itself. Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
The remedy for cyclical (Keynesian) unemployment is an increase in overall spending on newly produced goods and services, which economists refer to as aggregate demand. In the U.S. economy, increased demand for American products encourages U.S. businesses to produce more output. Businesses may hire additional workers to help produce the additional output needed to satisfy the increased demand. Thus, increased aggregate demand tends to reduce unemployment.
A closer look at the components of aggregate demand make it easier to develop appropriate macroeconomic strategies. Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
AD = C + I + G + X - M or AD = C + I + G + NE
where:
C = consumption spending (mostly by households)
I = investment spending (mostly by businesses)
G = government purchases of goods & services (It does not include transfer payments.)
X = exports of domestically produced goods & services to foreign purchasers
M = imports of foreign produced goods & services by domestic purchasers
NE = X - M = net exports
An increase in aggregate demand can be achieved using expansionary monetary or fiscal policy.
Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
Sunday, September 14, 2008
Structural Unemployment
Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs. If a U.S. steel mill closes, for example, the steelworkers are likely to become structurally unemployed. There may not be enough jobs in the U.S. steel industry for all of the Americans who are trained to work in the production of steel. The remedy for structural unemployment is anything to improve the ability of these workers to acquire additional education and skills training, such as improved financial aid for attending college or vocational school.
Saturday, September 13, 2008
Frictional Unemployment
Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences. Frictional unemployment includes people who do not have jobs because they are new entrants into the labor force (and have not found a job yet) or people who are voluntarily between jobs. A full-time college student, who does not have a job and is not looking for one, is classified as not in the labor force. When the student nears graduation and begins to look for a job, however, the student becomes frictionally unemployed and is included in the unemployment statistics. Job search is the process by which workers find appropriate jobs given their skills and preferences.
One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings. Since jobs are the main source of income for most families, the unemployment insurance program is designed to provide enough income so the family’s basic needs can be met after the worker becomes unemployed. In the absence of the unemployment insurance program, many workers would have an urgent need to find another job to avoid significant hardships. When the government provides unemployed workers with income, however, the urgency of finding a new job is reduced for many of these workers. Some workers do not search for a new job in earnest until their unemployment benefits are close to being terminated. Thus, unemployment insurance increases frictional unemployment by increasing the amount of time workers take between losing a job and finding a new one.
The remedy for frictional unemployment is anything that reduces job search, such as providing better information about available jobs or reforming the unemployment insurance program.
Before the pervasiveness of the Internet, information about job openings was not readily accessible. Consequently the U.S. Department of Labor sponsored employment offices is most cities of at least moderate size. These offices maintained listings of available jobs. The Internet has made it much easier for people to learn about available jobs, across the country and around the world.
Several experiments have been tried with reforms of the unemployment insurance program. When the government has allowed unemployed workers to collect benefits for a maximum of 26 weeks, some people do not search for a new job in earnest until the 24th or 25th week. So one reform that has been tried is to offer a cash bonus if workers find a new job quickly. For example, recipients have been offered a cash bonus if they find a job during the first 13 weeks of receiving benefits. Taxpayers benefit from this reform because the bonus is less than the benefits that would be paid during the second 13 weeks of payouts.
One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings. Since jobs are the main source of income for most families, the unemployment insurance program is designed to provide enough income so the family’s basic needs can be met after the worker becomes unemployed. In the absence of the unemployment insurance program, many workers would have an urgent need to find another job to avoid significant hardships. When the government provides unemployed workers with income, however, the urgency of finding a new job is reduced for many of these workers. Some workers do not search for a new job in earnest until their unemployment benefits are close to being terminated. Thus, unemployment insurance increases frictional unemployment by increasing the amount of time workers take between losing a job and finding a new one.
The remedy for frictional unemployment is anything that reduces job search, such as providing better information about available jobs or reforming the unemployment insurance program.
Before the pervasiveness of the Internet, information about job openings was not readily accessible. Consequently the U.S. Department of Labor sponsored employment offices is most cities of at least moderate size. These offices maintained listings of available jobs. The Internet has made it much easier for people to learn about available jobs, across the country and around the world.
Several experiments have been tried with reforms of the unemployment insurance program. When the government has allowed unemployed workers to collect benefits for a maximum of 26 weeks, some people do not search for a new job in earnest until the 24th or 25th week. So one reform that has been tried is to offer a cash bonus if workers find a new job quickly. For example, recipients have been offered a cash bonus if they find a job during the first 13 weeks of receiving benefits. Taxpayers benefit from this reform because the bonus is less than the benefits that would be paid during the second 13 weeks of payouts.
Friday, September 12, 2008
Types of Unemployment and their Remedies
Types of Unemployment and their Remedies
There are three major types of unemployment: frictional, structural, and cyclical (Keynesian).
There are three major types of unemployment: frictional, structural, and cyclical (Keynesian).
Wednesday, September 10, 2008
Using Supply & Demand Analysis to Explain Unemployment
Using Supply & Demand Analysis to Explain Unemployment
In markets for labor, the price of labor is often referred to as the wage rate. Households typically supply labor to businesses. The supply of labor is upward sloping, which implies that as the wage rate increases, households are willing to supply a larger quantity of labor. Businesses typically demand labor from households. The demand for labor is downward sloping, which implies that as the wage rate increases, business demand a smaller quantity of labor. This means fewer jobs are available for workers.
The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded. The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate. If the market wage rate is above the equilibrium wage rate, the quantity of labor supplied is larger than the quantity of labor demanded. When this occurs, there is a surplus of labor. This is also called unemployment. Thus, unemployment occurs when the market wage rate is above the equilibrium wage rate.
Market for Labor
unemployment
(excess supply
of labor)
Supply of Labor
Quantity
of Labor
Equilibrium wage
rate
Demand for Labor
Market wage rate
Price of Labor (wage rate)
O
QS
QDwhere:
QS = the quantity of labor supplied at the market wage rate
(i.e., the number of workers who want a job at the market wage rate)
QD = the quantity of labor demanded at the market wage rate
(i.e., the number of jobs offered by businesses at the market wage rate)
Explanations for the Market Wage Rate Staying
above the Equilibrium Wage Rate
Economists suggest several reasons for the market wage rate staying above the equilibrium wage rate. Consequently, it is natural and normal to always have some unemployment.
1. A minimum wage law specifies the lowest price that employers can legally pay for labor. In the absence of the law, unskilled workers would probably be paid less than the minimum wage. Thus, minimum wage laws keep the market wage rate above the equilibrium wage rate. Workers are usually paid based on their productivity. Skilled workers are generally more productive than unskilled workers and thus receive higher wages. Consequently, minimum wage laws are usually only applicable to unskilled workers. A minimum wage is an example of a price floor. A price floor is a legal minimum price at which a product can be sold. If the minimum wage is above the equilibrium wage, then the minimum wage law creates unemployment in the market for unskilled workers.
2. Labor unions are worker associations that bargain with employers over wages and working conditions. Collective bargaining is the process by which unions and business firms agree on the terms of employment. Unions frequently negotiate market wages than are above the equilibrium wages that would be paid in the absence of collective bargaining. Union contracts keep the market wage rate of union workers above the equilibrium wage rate. In some cases, unions may strike to obtain concessions from employers. A strike is the organized withdrawal of labor from a business firm by a union.
3. Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. Firms may find it profitable to pay high wages to improve the health of workers, to reduce worker turnover, to increase worker effort, and to attract higher quality workers. In addition to great pay, SAS, a computer software company headquartered in North Carolina, provides its workers with on-site day-care for children, medical and dental care, and recreational facilities that rival the best health clubs. It is expensive for the company to provide these added wages and benefits. Company executives argue it makes financial sense, however, because the added pay and benefits allow SAS to attract and keep the best workers in the industry. The company saves on the costs of recruiting and training personnel because workers rarely leave for other jobs. The state-of-the-art recreational facilities help keep the workers healthy. Combining this with the readily accessible doctors, dentists, and child-care allows workers to spend less time away from their jobs. Thus it makes sense for some businesses to routinely pay wages that are above the market wage for the industry.
4. There is a cultural expectation that workers receive periodic raises, but pay cuts are generally unacceptable, regardless of economic conditions. Labor markets are not like other markets. Changing the prices of other resources or products does not change the resource or product. If you change the price of a bicycle, it is still the same bicycle. If you change the price of a worker, however, the worker may change. Workers may resent the wage cut and become hurt or angry. Workers may then be less productive, whether that reaction is intentional or not. Consequently, business firms are reluctant to cut the market wage rate, even when market wages are significantly above the equilibrium wage rate in an industry.
In markets for labor, the price of labor is often referred to as the wage rate. Households typically supply labor to businesses. The supply of labor is upward sloping, which implies that as the wage rate increases, households are willing to supply a larger quantity of labor. Businesses typically demand labor from households. The demand for labor is downward sloping, which implies that as the wage rate increases, business demand a smaller quantity of labor. This means fewer jobs are available for workers.
The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded. The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate. If the market wage rate is above the equilibrium wage rate, the quantity of labor supplied is larger than the quantity of labor demanded. When this occurs, there is a surplus of labor. This is also called unemployment. Thus, unemployment occurs when the market wage rate is above the equilibrium wage rate.
Market for Labor
unemployment
(excess supply
of labor)
Supply of Labor
Quantity
of Labor
Equilibrium wage
rate
Demand for Labor
Market wage rate
Price of Labor (wage rate)
O
QS
QDwhere:
QS = the quantity of labor supplied at the market wage rate
(i.e., the number of workers who want a job at the market wage rate)
QD = the quantity of labor demanded at the market wage rate
(i.e., the number of jobs offered by businesses at the market wage rate)
Explanations for the Market Wage Rate Staying
above the Equilibrium Wage Rate
Economists suggest several reasons for the market wage rate staying above the equilibrium wage rate. Consequently, it is natural and normal to always have some unemployment.
1. A minimum wage law specifies the lowest price that employers can legally pay for labor. In the absence of the law, unskilled workers would probably be paid less than the minimum wage. Thus, minimum wage laws keep the market wage rate above the equilibrium wage rate. Workers are usually paid based on their productivity. Skilled workers are generally more productive than unskilled workers and thus receive higher wages. Consequently, minimum wage laws are usually only applicable to unskilled workers. A minimum wage is an example of a price floor. A price floor is a legal minimum price at which a product can be sold. If the minimum wage is above the equilibrium wage, then the minimum wage law creates unemployment in the market for unskilled workers.
2. Labor unions are worker associations that bargain with employers over wages and working conditions. Collective bargaining is the process by which unions and business firms agree on the terms of employment. Unions frequently negotiate market wages than are above the equilibrium wages that would be paid in the absence of collective bargaining. Union contracts keep the market wage rate of union workers above the equilibrium wage rate. In some cases, unions may strike to obtain concessions from employers. A strike is the organized withdrawal of labor from a business firm by a union.
3. Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. Firms may find it profitable to pay high wages to improve the health of workers, to reduce worker turnover, to increase worker effort, and to attract higher quality workers. In addition to great pay, SAS, a computer software company headquartered in North Carolina, provides its workers with on-site day-care for children, medical and dental care, and recreational facilities that rival the best health clubs. It is expensive for the company to provide these added wages and benefits. Company executives argue it makes financial sense, however, because the added pay and benefits allow SAS to attract and keep the best workers in the industry. The company saves on the costs of recruiting and training personnel because workers rarely leave for other jobs. The state-of-the-art recreational facilities help keep the workers healthy. Combining this with the readily accessible doctors, dentists, and child-care allows workers to spend less time away from their jobs. Thus it makes sense for some businesses to routinely pay wages that are above the market wage for the industry.
4. There is a cultural expectation that workers receive periodic raises, but pay cuts are generally unacceptable, regardless of economic conditions. Labor markets are not like other markets. Changing the prices of other resources or products does not change the resource or product. If you change the price of a bicycle, it is still the same bicycle. If you change the price of a worker, however, the worker may change. Workers may resent the wage cut and become hurt or angry. Workers may then be less productive, whether that reaction is intentional or not. Consequently, business firms are reluctant to cut the market wage rate, even when market wages are significantly above the equilibrium wage rate in an industry.
Monday, September 8, 2008
Limitations of Unemployment Data
Limitations of Unemployment Data
Unemployment data, like all data, have limitations. The statistics reported by the Bureau of Labor Statistics are not perfect measures of labor market conditions in the United States. Two criticisms of the methodology used to measure unemployment suggest the reported data underestimate the true level of unemployment. Another criticism suggests the data may overestimate unemployment, however.
Some people counted as employed are underemployed. Underemployment refers to people with jobs who are not working as much as they want or need to work. Consider a single parent trying to support three children. The only job she is able to find is a part-time job, such as working 25 hours per week at McDonald's. Will this part-time job provide enough income to support her family? People with part-time jobs may be counted as employed even though they may not be working as much as they want or need to work. Because unemployment statistics may not represent the fact that some people are not working as much as they want or need to work, some critics argue the labor market data reported by the government may underestimate the actual amount of unemployment in the economy.
Discouraged workers are individuals who would like to work but have given up looking for a job. Some people may become discouraged by their inability to find a job and stop looking for work. Because they are no longer looking for a job, discouraged workers are included with those who are not in the labor force. If they had not become so discouraged and continued to look for a job, they would be classified as unemployed. Consequently, one could argue that workers becoming discouraged may reduce the reported unemployment rate and underestimate the true amount of unemployment in the economy.
Another criticism of the labor market data suggests the reported numbers may overestimate unemployment, however. Some respondents may give false or misleading answers to the telephone survey. Suppose a person does not have a job and collects unemployment compensation from the government. If someone from the government calls to ask "Do you have a job?" and "If you do not have a job, are you looking for one?" some people might say they are looking for work, which is a requirement for receiving benefits, even if they are not. If adults without jobs are not looking for work, technically they should not be classified as unemployed. Instead, they should be classified as not in the labor force. Consequently, some critics argue that the tendency for some people to misrepresent themselves in phone surveys causes the unemployment data reported by the government to overestimate the actual amount of unemployment in the economy.
When all three criticisms of labor market data are considered, the effects tend to offset each other. Even though unemployment data have these limitations, most economists believe they are reasonable measures of the true level of unemployment in the economy.
Unemployment data, like all data, have limitations. The statistics reported by the Bureau of Labor Statistics are not perfect measures of labor market conditions in the United States. Two criticisms of the methodology used to measure unemployment suggest the reported data underestimate the true level of unemployment. Another criticism suggests the data may overestimate unemployment, however.
Some people counted as employed are underemployed. Underemployment refers to people with jobs who are not working as much as they want or need to work. Consider a single parent trying to support three children. The only job she is able to find is a part-time job, such as working 25 hours per week at McDonald's. Will this part-time job provide enough income to support her family? People with part-time jobs may be counted as employed even though they may not be working as much as they want or need to work. Because unemployment statistics may not represent the fact that some people are not working as much as they want or need to work, some critics argue the labor market data reported by the government may underestimate the actual amount of unemployment in the economy.
Discouraged workers are individuals who would like to work but have given up looking for a job. Some people may become discouraged by their inability to find a job and stop looking for work. Because they are no longer looking for a job, discouraged workers are included with those who are not in the labor force. If they had not become so discouraged and continued to look for a job, they would be classified as unemployed. Consequently, one could argue that workers becoming discouraged may reduce the reported unemployment rate and underestimate the true amount of unemployment in the economy.
Another criticism of the labor market data suggests the reported numbers may overestimate unemployment, however. Some respondents may give false or misleading answers to the telephone survey. Suppose a person does not have a job and collects unemployment compensation from the government. If someone from the government calls to ask "Do you have a job?" and "If you do not have a job, are you looking for one?" some people might say they are looking for work, which is a requirement for receiving benefits, even if they are not. If adults without jobs are not looking for work, technically they should not be classified as unemployed. Instead, they should be classified as not in the labor force. Consequently, some critics argue that the tendency for some people to misrepresent themselves in phone surveys causes the unemployment data reported by the government to overestimate the actual amount of unemployment in the economy.
When all three criticisms of labor market data are considered, the effects tend to offset each other. Even though unemployment data have these limitations, most economists believe they are reasonable measures of the true level of unemployment in the economy.
Saturday, September 6, 2008
The Measurement of Unemployment
The Bureau of Labor Statistics (BLS) calculates the official U.S. unemployment statistics by conducting a monthly telephone survey of about 60,000 randomly selected adults (aged 16 or over) in the United States. This Current Population Survey is used to estimate the number of adults in the U.S. that belong in the following three categories:
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
The data collected in the Current Population Survey are used to calculate several commonly reported measures of labor market conditions. The labor force is the total number of workers in an economy, including both the employed and the unemployed. The labor force participation rate is the percentage of the adult population in the labor force. Approximately two-thirds of U.S. adults are in the labor force. The unemployment rate is the percentage of the labor force that is unemployed. It is calculated by dividing the number of unemployed adults by the size of the labor force and multiplying the result by 100 to obtain a percentage.
U.S. EMPLOYMENT DATA - MAY 2009 | |
|---|---|
| Employed | 140,570,000 |
| Unemployed | 14,511,000 |
| Labor Force = Employed + Unemployed | 155,081,000 |
| Not in the Labor Force | 80,371,000 |
| Adult Population = Labor Force + Not in the Labor Force | 235,452,000 |
(a -
b)
x
Examples of Labor Data (September 2004)
To illustrate the calculation of these statistics, consider the following employment data for the U.S. economy in September 2004.[3]
ADULT POPULATION (May 2009) 235,452,000 | ||
|---|---|---|
| EMPLOYED 140,570,000 (59.7% of the Population) | UNEMPLOYED 14,511,000 (9.4% of the Labor Force) | Not in the Labor Force 80,371,000 |
| ... | ... | ... |
| ... | ... | ... |
| ... | ... | ... |
Adult Population
223,941,000
Employed
139,480,000
Labor Force
147,483,000
Unemployed
8,003,000
Not in the Labor Force
76,458,000
Source: Bureau of Labor Statistics. ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt
Labor Force = Number of Employed + Number of Unemployed
Labor Force in September 2004 = 139,480,000 + 8,003,000 = 147,483,000
Labor Force Participation Rate = [Labor Force / Adult Population] 100
Labor Force Participation Rate in September 2004 =
[(147,483,000)/(223,941,000)] 100 = 65.9%
Unemployment Rate = [Number of Unemployed / Labor Force] 100
Unemployment Rate in September 2004 =
[(8,003,000) / (147,483,000)] 100 = 5.4%
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%. The graph and table below show how the unemployment rate changed over the last decade.
Because it is natural for there to be 5.5% unemployment in the U.S. economy, many economists consider the economy to be “fully employed” when the unemployment rate is at or below 5.5%.
Historical Unemployment Data
The U.S. unemployment rate between 1948 and 2009.
U.S. UNEMPLOYMENT RATE2010-2016 | ||||||||
|---|---|---|---|---|---|---|---|---|
| YEAR | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
| Jan | 9.7 | 9.0 | - | - | - | - | - | |
| Feb | 9.7 | 8.9 | - | - | - | - | - | |
| Mar | 9.7 | 8.8 | - | - | - | - | - | |
| Apr | 9.8 | 9.0 | - | - | - | - | - | |
| May | 9.6 | 9.1 | - | - | - | - | - | |
| Jun | 9.5 | 9.2 | - | - | - | - | - | |
| Jul | 9.5 | - | - | - | - | - | - | |
| Aug | 9.6 | - | - | - | - | - | - | |
| Sep | 9.6 | - | - | - | - | - | - | |
| Oct | 9.7 | - | - | - | - | - | - | |
| Nov | 9.8 | - | - | - | - | - | - | |
| Dec | 9.4 | - | - | - | - | - | - | |
| These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | ||||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | ||||||||
U.S. UNEMPLOYMENT RATE2003-2009 | ||||||||
|---|---|---|---|---|---|---|---|---|
| YEAR | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
| Jan | 5.8 | 5.7 | 5.3 | 4.7 | 4.6 | 5.0 | 7.7 | |
| Feb | 5.9 | 5.6 | 5.4 | 4.8 | 4.5 | 4.8 | 8.2 | |
| Mar | 5.9 | 5.8 | 5.2 | 4.7 | 4.4 | 5.1 | 8.6 | |
| Apr | 6.0 | 5.6 | 5.2 | 4.7 | 4.5 | 5.0 | 8.9 | |
| May | 6.1 | 5.6 | 5.1 | 4.6 | 4.4 | 5.4 | 9.4 | |
| Jun | 6.3 | 5.6 | 5.0 | 4.6 | 4.6 | 5.5 | 9.5 | |
| Jul | 6.2 | 5.5 | 5.0 | 4.7 | 4.6 | 5.8 | 9.4 | |
| Aug | 6.1 | 5.4 | 4.9 | 4.7 | 4.6 | 6.1 | 9.7 | |
| Sep | 6.1 | 5.4 | 5.0 | 4.5 | 4.7 | 6.2 | 9.8 | |
| Oct | 6.0 | 5.5 | 5.0 | 4.4 | 4.7 | 6.6 | 10.1 | |
| Nov | 5.8 | 5.4 | 5.0 | 4.5 | 4.7 | 6.9 | 10.0 | |
| Dec | 5.7 | 5.4 | 4.9 | 4.4 | 5.0 | 7.4 | 10.0 | |
| These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | ||||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | ||||||||
U.S. UNEMPLOYMENT RATE1997-2003 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 |
| Jan | 5.3 | 4.6 | 4.3 | 4.0 | 4.2 | 5.7 | 5.8 |
| Feb | 5.2 | 4.6 | 4.4 | 4.1 | 4.2 | 5.7 | 5.9 |
| Mar | 5.2 | 4.7 | 4.2 | 4.0 | 4.3 | 5.7 | 5.9 |
| Apr | 5.1 | 4.3 | 4.3 | 3.8 | 4.4 | 5.9 | 6.0 |
| May | 4.9 | 4.4 | 4.2 | 4.0 | 4.3 | 5.8 | 6.1 |
| Jun | 5.0 | 4.5 | 4.3 | 4.0 | 4.5 | 5.8 | 6.3 |
| Jul | 4.9 | 4.5 | 4.3 | 4.0 | 4.6 | 5.8 | 6.2 |
| Aug | 4.8 | 4.5 | 4.2 | 4.1 | 4.9 | 5.7 | 6.1 |
| Sep | 4.9 | 4.6 | 4.2 | 3.9 | 5.0 | 5.7 | 6.1 |
| Oct | 4.7 | 4.5 | 4.1 | 3.9 | 5.3 | 5.7 | 6.0 |
| Nov | 4.6 | 4.4 | 4.1 | 3.9 | 5.5 | 5.9 | 5.8 |
| Dec | 4.7 | 4.4 | 4.0 | 3.9 | 5.7 | 6.0 | 5.7 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1990-1996 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 |
| Jan | 5.4 | 6.4 | 7.3 | 7.3 | 6.6 | 5.6 | 5.6 |
| Feb | 5.3 | 6.6 | 7.4 | 7.1 | 6.6 | 5.4 | 5.5 |
| Mar | 5.2 | 6.8 | 7.4 | 7.0 | 6.5 | 5.4 | 5.5 |
| Apr | 5.4 | 6.7 | 7.4 | 7.1 | 6.4 | 5.8 | 5.6 |
| May | 5.4 | 6.9 | 7.6 | 7.1 | 6.1 | 5.6 | 5.6 |
| Jun | 5.2 | 6.9 | 7.8 | 7.0 | 6.1 | 5.6 | 5.3 |
| Jul | 5.5 | 6.8 | 7.7 | 6.9 | 6.1 | 5.7 | 5.5 |
| Aug | 5.7 | 6.9 | 7.6 | 6.8 | 6.0 | 5.7 | 5.1 |
| Sep | 5.9 | 6.9 | 7.6 | 6.7 | 5.9 | 5.6 | 5.2 |
| Oct | 5.9 | 7.0 | 7.3 | 6.8 | 5.8 | 5.5 | 5.2 |
| Nov | 6.2 | 7.0 | 7.4 | 6.6 | 5.6 | 5.6 | 5.4 |
| Dec | 6.3 | 7.3 | 7.4 | 6.5 | 5.5 | 5.6 | 5.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1983-1989 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 |
| Jan | 10.4 | 8.0 | 7.3 | 6.7 | 6.6 | 5.7 | 5.4 |
| Feb | 10.4 | 7.8 | 7.2 | 7.2 | 6.6 | 5.7 | 5.2 |
| Mar | 10.3 | 7.8 | 7.2 | 7.2 | 6.6 | 5.7 | 5.0 |
| Apr | 10.2 | 7.7 | 7.3 | 7.1 | 6.3 | 5.4 | 5.2 |
| May | 10.1 | 7.4 | 7.2 | 7.2 | 6.3 | 5.6 | 5.2 |
| Jun | 10.1 | 7.2 | 7.4 | 7.2 | 6.2 | 5.4 | 5.3 |
| Jul | 9.4 | 7.5 | 7.4 | 7.0 | 6.1 | 5.4 | 5.2 |
| Aug | 9.5 | 7.5 | 7.1 | 6.9 | 6.0 | 5.6 | 5.2 |
| Sep | 9.2 | 7.3 | 7.1 | 7.0 | 5.9 | 5.4 | 5.3 |
| Oct | 8.8 | 7.4 | 7.1 | 7.0 | 6.0 | 5.4 | 5.3 |
| Nov | 8.5 | 7.2 | 7.0 | 6.9 | 5.8 | 5.3 | 5.4 |
| Dec | 8.3 | 7.3 | 7.0 | 6.6 | 5.7 | 5.3 | 5.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1976-1982 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 |
| Jan | 7.9 | 7.5 | 6.4 | 5.9 | 6.3 | 7.5 | 8.6 |
| Feb | 7.7 | 7.6 | 6.3 | 5.9 | 6.3 | 7.4 | 8.9 |
| Mar | 7.6 | 7.4 | 6.3 | 5.8 | 6.3 | 7.4 | 9.0 |
| Apr | 7.7 | 7.2 | 6.1 | 5.8 | 6.9 | 7.2 | 9.3 |
| May | 7.4 | 7.0 | 6.0 | 5.6 | 7.5 | 7.5 | 9.4 |
| Jun | 7.6 | 7.2 | 5.9 | 5.7 | 7.6 | 7.5 | 9.6 |
| Jul | 7.8 | 6.9 | 6.2 | 5.7 | 7.8 | 7.2 | 9.8 |
| Aug | 7.8 | 7.0 | 5.9 | 6.0 | 7.7 | 7.4 | 9.8 |
| Sep | 7.6 | 6.8 | 6.0 | 5.9 | 7.5 | 7.6 | 10.1 |
| Oct | 7.7 | 6.8 | 5.8 | 6.0 | 7.5 | 7.9 | 10.4 |
| Nov | 7.8 | 6.8 | 5.9 | 5.9 | 7.5 | 8.3 | 10.8 |
| Dec | 7.8 | 6.4 | 6.0 | 6.0 | 7.2 | 8.5 | 10.8 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1969-1975 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1969 | 1970 | 1971 | 1972 | 1973 | 1974 | 1975 |
| Jan | 3.4 | 3.9 | 5.9 | 5.8 | 4.9 | 5.1 | 8.1 |
| Feb | 3.4 | 4.2 | 5.9 | 5.7 | 5.0 | 5.2 | 8.1 |
| Mar | 3.4 | 4.4 | 6.0 | 5.8 | 4.9 | 5.1 | 8.6 |
| Apr | 3.4 | 4.6 | 5.9 | 5.7 | 5.0 | 5.1 | 8.8 |
| May | 3.4 | 4.8 | 5.9 | 5.7 | 4.9 | 5.1 | 9.0 |
| Jun | 3.5 | 4.9 | 5.9 | 5.7 | 4.9 | 5.4 | 8.8 |
| Jul | 3.5 | 5.0 | 6.0 | 5.6 | 4.8 | 5.5 | 8.6 |
| Aug | 3.5 | 5.1 | 6.1 | 5.6 | 4.8 | 5.5 | 8.4 |
| Sep | 3.7 | 5.4 | 6.0 | 5.5 | 4.8 | 5.9 | 8.4 |
| Oct | 3.7 | 5.5 | 5.8 | 5.6 | 4.6 | 6.0 | 8.4 |
| Nov | 3.5 | 5.9 | 6.0 | 5.3 | 4.8 | 6.6 | 8.3 |
| Dec | 3.5 | 6.1 | 6.0 | 5.2 | 4.9 | 7.2 | 8.2 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1962-1968 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1962 | 1963 | 1964 | 1965 | 1966 | 1967 | 1968 |
| Jan | 5.8 | 5.7 | 5.6 | 4.9 | 4.0 | 3.9 | 3.7 |
| Feb | 5.5 | 5.9 | 5.4 | 5.1 | 3.8 | 3.8 | 3.8 |
| Mar | 5.6 | 5.7 | 5.4 | 4.7 | 3.8 | 3.8 | 3.7 |
| Apr | 5.6 | 5.7 | 5.3 | 4.8 | 3.8 | 3.8 | 3.5 |
| May | 5.5 | 5.9 | 5.1 | 4.6 | 3.9 | 3.8 | 3.5 |
| Jun | 5.5 | 5.6 | 5.2 | 4.6 | 3.8 | 3.9 | 3.7 |
| Jul | 5.4 | 5.6 | 4.9 | 4.4 | 3.8 | 3.8 | 3.7 |
| Aug | 5.7 | 5.4 | 5.0 | 4.4 | 3.8 | 3.8 | 3.5 |
| Sep | 5.6 | 5.5 | 5.1 | 4.3 | 3.7 | 3.8 | 3.4 |
| Oct | 5.4 | 5.5 | 5.1 | 4.2 | 3.7 | 4.0 | 3.4 |
| Nov | 5.7 | 5.7 | 4.8 | 4.1 | 3.6 | 3.9 | 3.4 |
| Dec | 5.5 | 5.5 | 5.0 | 4.0 | 3.8 | 3.8 | 3.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1955-1961 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1955 | 1956 | 1957 | 1958 | 1959 | 1960 | 1961 |
| Jan | 4.9 | 4.0 | 4.2 | 5.8 | 6.0 | 5.2 | 6.6 |
| Feb | 4.7 | 3.9 | 3.9 | 6.4 | 5.9 | 4.8 | 6.9 |
| Mar | 4.6 | 4.2 | 3.7 | 6.7 | 5.6 | 5.4 | 6.9 |
| Apr | 4.7 | 4.0 | 3.9 | 7.4 | 5.2 | 5.2 | 7.0 |
| May | 4.3 | 4.3 | 4.1 | 7.4 | 5.1 | 5.1 | 7.1 |
| Jun | 4.2 | 4.3 | 4.3 | 7.3 | 5.0 | 5.4 | 6.9 |
| Jul | 4.0 | 4.4 | 4.2 | 7.5 | 5.1 | 5.5 | 7.0 |
| Aug | 4.2 | 4.1 | 4.1 | 7.4 | 5.2 | 5.6 | 6.6 |
| Sep | 4.1 | 3.9 | 4.4 | 7.1 | 5.5 | 5.5 | 6.7 |
| Oct | 4.3 | 3.9 | 4.5 | 6.7 | 5.7 | 6.1 | 6.5 |
| Nov | 4.2 | 4.3 | 5.1 | 6.2 | 5.8 | 6.1 | 6.1 |
| Dec | 4.2 | 4.2 | 5.2 | 6.2 | 5.3 | 6.6 | 6.0 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1948-1954 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1948 | 1949 | 1950 | 1951 | 1952 | 1953 | 1954 |
| Jan | 3.4 | 4.3 | 6.5 | 3.7 | 3.2 | 2.9 | 4.9 |
| Feb | 3.8 | 4.7 | 6.4 | 3.4 | 3.1 | 2.6 | 5.2 |
| Mar | 4.0 | 5.0 | 6.3 | 3.4 | 2.9 | 2.6 | 5.7 |
| Apr | 3.9 | 5.3 | 5.8 | 3.1 | 2.9 | 2.7 | 5.9 |
| May | 3.5 | 6.1 | 5.5 | 3.0 | 3.0 | 2.5 | 5.9 |
| Jun | 3.6 | 6.2 | 5.4 | 3.2 | 3.0 | 2.5 | 5.6 |
| Jul | 3.6 | 6.7 | 5.0 | 3.1 | 3.2 | 2.6 | 5.8 |
| Aug | 3.9 | 6.8 | 4.5 | 3.1 | 3.4 | 2.7 | 6.0 |
| Sep | 3.8 | 6.6 | 4.4 | 3.3 | 3.1 | 2.9 | 6.1 |
| Oct | 3.7 | 7.9 | 4.2 | 3.5 | 3.0 | 3.1 | 5.7 |
| Nov | 3.8 | 6.4 | 4.2 | 3.5 | 2.8 | 3.5 | 5.3 |
| Dec | 4.0 | 6.6 | 4.3 | 3.1 | 2.7 | 4.5 | 5.0 |
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
Historical Unemployment Data
The U.S. unemployment rate between 1948 and 2012.
U.S. UNEMPLOYMENT RATE2010-2016 | ||||||||
|---|---|---|---|---|---|---|---|---|
| YEAR | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
| Jan | 9.7 | 9.0 | 8.3 | - | - | - | - | |
| Feb | 9.7 | 8.9 | 8.3 | - | - | - | - | |
| Mar | 9.7 | 8.8 | 8.2 | - | - | - | - | |
| Apr | 9.8 | 9.0 | 8.1 | - | - | - | - | |
| May | 9.6 | 9.1 | 8.2 | - | - | - | - | |
| Jun | 9.5 | 9.2 | 8.2 | - | - | - | - | |
| Jul | 9.5 | 9.1 | 8.3 | - | - | - | - | |
| Aug | 9.6 | 9.1 | 8.1 | - | - | - | - | |
| Sep | 9.6 | 9.1 | - | - | - | - | - | |
| Oct | 9.7 | 9.0 | - | - | - | - | - | |
| Nov | 9.8 | 8.6 | - | - | - | - | - | |
| Dec | 9.4 | 8.5 | - | - | - | - | - | |
| These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | ||||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | ||||||||
U.S. UNEMPLOYMENT RATE2003-2009 | ||||||||
|---|---|---|---|---|---|---|---|---|
| YEAR | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
| Jan | 5.8 | 5.7 | 5.3 | 4.7 | 4.6 | 5.0 | 7.7 | |
| Feb | 5.9 | 5.6 | 5.4 | 4.8 | 4.5 | 4.8 | 8.2 | |
| Mar | 5.9 | 5.8 | 5.2 | 4.7 | 4.4 | 5.1 | 8.6 | |
| Apr | 6.0 | 5.6 | 5.2 | 4.7 | 4.5 | 5.0 | 8.9 | |
| May | 6.1 | 5.6 | 5.1 | 4.6 | 4.4 | 5.4 | 9.4 | |
| Jun | 6.3 | 5.6 | 5.0 | 4.6 | 4.6 | 5.5 | 9.5 | |
| Jul | 6.2 | 5.5 | 5.0 | 4.7 | 4.6 | 5.8 | 9.4 | |
| Aug | 6.1 | 5.4 | 4.9 | 4.7 | 4.6 | 6.1 | 9.7 | |
| Sep | 6.1 | 5.4 | 5.0 | 4.5 | 4.7 | 6.2 | 9.8 | |
| Oct | 6.0 | 5.5 | 5.0 | 4.4 | 4.7 | 6.6 | 10.1 | |
| Nov | 5.8 | 5.4 | 5.0 | 4.5 | 4.7 | 6.9 | 10.0 | |
| Dec | 5.7 | 5.4 | 4.9 | 4.4 | 5.0 | 7.4 | 10.0 | |
| These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | ||||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | ||||||||
U.S. UNEMPLOYMENT RATE1997-2003 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 |
| Jan | 5.3 | 4.6 | 4.3 | 4.0 | 4.2 | 5.7 | 5.8 |
| Feb | 5.2 | 4.6 | 4.4 | 4.1 | 4.2 | 5.7 | 5.9 |
| Mar | 5.2 | 4.7 | 4.2 | 4.0 | 4.3 | 5.7 | 5.9 |
| Apr | 5.1 | 4.3 | 4.3 | 3.8 | 4.4 | 5.9 | 6.0 |
| May | 4.9 | 4.4 | 4.2 | 4.0 | 4.3 | 5.8 | 6.1 |
| Jun | 5.0 | 4.5 | 4.3 | 4.0 | 4.5 | 5.8 | 6.3 |
| Jul | 4.9 | 4.5 | 4.3 | 4.0 | 4.6 | 5.8 | 6.2 |
| Aug | 4.8 | 4.5 | 4.2 | 4.1 | 4.9 | 5.7 | 6.1 |
| Sep | 4.9 | 4.6 | 4.2 | 3.9 | 5.0 | 5.7 | 6.1 |
| Oct | 4.7 | 4.5 | 4.1 | 3.9 | 5.3 | 5.7 | 6.0 |
| Nov | 4.6 | 4.4 | 4.1 | 3.9 | 5.5 | 5.9 | 5.8 |
| Dec | 4.7 | 4.4 | 4.0 | 3.9 | 5.7 | 6.0 | 5.7 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1990-1996 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 |
| Jan | 5.4 | 6.4 | 7.3 | 7.3 | 6.6 | 5.6 | 5.6 |
| Feb | 5.3 | 6.6 | 7.4 | 7.1 | 6.6 | 5.4 | 5.5 |
| Mar | 5.2 | 6.8 | 7.4 | 7.0 | 6.5 | 5.4 | 5.5 |
| Apr | 5.4 | 6.7 | 7.4 | 7.1 | 6.4 | 5.8 | 5.6 |
| May | 5.4 | 6.9 | 7.6 | 7.1 | 6.1 | 5.6 | 5.6 |
| Jun | 5.2 | 6.9 | 7.8 | 7.0 | 6.1 | 5.6 | 5.3 |
| Jul | 5.5 | 6.8 | 7.7 | 6.9 | 6.1 | 5.7 | 5.5 |
| Aug | 5.7 | 6.9 | 7.6 | 6.8 | 6.0 | 5.7 | 5.1 |
| Sep | 5.9 | 6.9 | 7.6 | 6.7 | 5.9 | 5.6 | 5.2 |
| Oct | 5.9 | 7.0 | 7.3 | 6.8 | 5.8 | 5.5 | 5.2 |
| Nov | 6.2 | 7.0 | 7.4 | 6.6 | 5.6 | 5.6 | 5.4 |
| Dec | 6.3 | 7.3 | 7.4 | 6.5 | 5.5 | 5.6 | 5.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1983-1989 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 |
| Jan | 10.4 | 8.0 | 7.3 | 6.7 | 6.6 | 5.7 | 5.4 |
| Feb | 10.4 | 7.8 | 7.2 | 7.2 | 6.6 | 5.7 | 5.2 |
| Mar | 10.3 | 7.8 | 7.2 | 7.2 | 6.6 | 5.7 | 5.0 |
| Apr | 10.2 | 7.7 | 7.3 | 7.1 | 6.3 | 5.4 | 5.2 |
| May | 10.1 | 7.4 | 7.2 | 7.2 | 6.3 | 5.6 | 5.2 |
| Jun | 10.1 | 7.2 | 7.4 | 7.2 | 6.2 | 5.4 | 5.3 |
| Jul | 9.4 | 7.5 | 7.4 | 7.0 | 6.1 | 5.4 | 5.2 |
| Aug | 9.5 | 7.5 | 7.1 | 6.9 | 6.0 | 5.6 | 5.2 |
| Sep | 9.2 | 7.3 | 7.1 | 7.0 | 5.9 | 5.4 | 5.3 |
| Oct | 8.8 | 7.4 | 7.1 | 7.0 | 6.0 | 5.4 | 5.3 |
| Nov | 8.5 | 7.2 | 7.0 | 6.9 | 5.8 | 5.3 | 5.4 |
| Dec | 8.3 | 7.3 | 7.0 | 6.6 | 5.7 | 5.3 | 5.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1976-1982 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | 1982 |
| Jan | 7.9 | 7.5 | 6.4 | 5.9 | 6.3 | 7.5 | 8.6 |
| Feb | 7.7 | 7.6 | 6.3 | 5.9 | 6.3 | 7.4 | 8.9 |
| Mar | 7.6 | 7.4 | 6.3 | 5.8 | 6.3 | 7.4 | 9.0 |
| Apr | 7.7 | 7.2 | 6.1 | 5.8 | 6.9 | 7.2 | 9.3 |
| May | 7.4 | 7.0 | 6.0 | 5.6 | 7.5 | 7.5 | 9.4 |
| Jun | 7.6 | 7.2 | 5.9 | 5.7 | 7.6 | 7.5 | 9.6 |
| Jul | 7.8 | 6.9 | 6.2 | 5.7 | 7.8 | 7.2 | 9.8 |
| Aug | 7.8 | 7.0 | 5.9 | 6.0 | 7.7 | 7.4 | 9.8 |
| Sep | 7.6 | 6.8 | 6.0 | 5.9 | 7.5 | 7.6 | 10.1 |
| Oct | 7.7 | 6.8 | 5.8 | 6.0 | 7.5 | 7.9 | 10.4 |
| Nov | 7.8 | 6.8 | 5.9 | 5.9 | 7.5 | 8.3 | 10.8 |
| Dec | 7.8 | 6.4 | 6.0 | 6.0 | 7.2 | 8.5 | 10.8 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1969-1975 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1969 | 1970 | 1971 | 1972 | 1973 | 1974 | 1975 |
| Jan | 3.4 | 3.9 | 5.9 | 5.8 | 4.9 | 5.1 | 8.1 |
| Feb | 3.4 | 4.2 | 5.9 | 5.7 | 5.0 | 5.2 | 8.1 |
| Mar | 3.4 | 4.4 | 6.0 | 5.8 | 4.9 | 5.1 | 8.6 |
| Apr | 3.4 | 4.6 | 5.9 | 5.7 | 5.0 | 5.1 | 8.8 |
| May | 3.4 | 4.8 | 5.9 | 5.7 | 4.9 | 5.1 | 9.0 |
| Jun | 3.5 | 4.9 | 5.9 | 5.7 | 4.9 | 5.4 | 8.8 |
| Jul | 3.5 | 5.0 | 6.0 | 5.6 | 4.8 | 5.5 | 8.6 |
| Aug | 3.5 | 5.1 | 6.1 | 5.6 | 4.8 | 5.5 | 8.4 |
| Sep | 3.7 | 5.4 | 6.0 | 5.5 | 4.8 | 5.9 | 8.4 |
| Oct | 3.7 | 5.5 | 5.8 | 5.6 | 4.6 | 6.0 | 8.4 |
| Nov | 3.5 | 5.9 | 6.0 | 5.3 | 4.8 | 6.6 | 8.3 |
| Dec | 3.5 | 6.1 | 6.0 | 5.2 | 4.9 | 7.2 | 8.2 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1962-1968 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1962 | 1963 | 1964 | 1965 | 1966 | 1967 | 1968 |
| Jan | 5.8 | 5.7 | 5.6 | 4.9 | 4.0 | 3.9 | 3.7 |
| Feb | 5.5 | 5.9 | 5.4 | 5.1 | 3.8 | 3.8 | 3.8 |
| Mar | 5.6 | 5.7 | 5.4 | 4.7 | 3.8 | 3.8 | 3.7 |
| Apr | 5.6 | 5.7 | 5.3 | 4.8 | 3.8 | 3.8 | 3.5 |
| May | 5.5 | 5.9 | 5.1 | 4.6 | 3.9 | 3.8 | 3.5 |
| Jun | 5.5 | 5.6 | 5.2 | 4.6 | 3.8 | 3.9 | 3.7 |
| Jul | 5.4 | 5.6 | 4.9 | 4.4 | 3.8 | 3.8 | 3.7 |
| Aug | 5.7 | 5.4 | 5.0 | 4.4 | 3.8 | 3.8 | 3.5 |
| Sep | 5.6 | 5.5 | 5.1 | 4.3 | 3.7 | 3.8 | 3.4 |
| Oct | 5.4 | 5.5 | 5.1 | 4.2 | 3.7 | 4.0 | 3.4 |
| Nov | 5.7 | 5.7 | 4.8 | 4.1 | 3.6 | 3.9 | 3.4 |
| Dec | 5.5 | 5.5 | 5.0 | 4.0 | 3.8 | 3.8 | 3.4 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1955-1961 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1955 | 1956 | 1957 | 1958 | 1959 | 1960 | 1961 |
| Jan | 4.9 | 4.0 | 4.2 | 5.8 | 6.0 | 5.2 | 6.6 |
| Feb | 4.7 | 3.9 | 3.9 | 6.4 | 5.9 | 4.8 | 6.9 |
| Mar | 4.6 | 4.2 | 3.7 | 6.7 | 5.6 | 5.4 | 6.9 |
| Apr | 4.7 | 4.0 | 3.9 | 7.4 | 5.2 | 5.2 | 7.0 |
| May | 4.3 | 4.3 | 4.1 | 7.4 | 5.1 | 5.1 | 7.1 |
| Jun | 4.2 | 4.3 | 4.3 | 7.3 | 5.0 | 5.4 | 6.9 |
| Jul | 4.0 | 4.4 | 4.2 | 7.5 | 5.1 | 5.5 | 7.0 |
| Aug | 4.2 | 4.1 | 4.1 | 7.4 | 5.2 | 5.6 | 6.6 |
| Sep | 4.1 | 3.9 | 4.4 | 7.1 | 5.5 | 5.5 | 6.7 |
| Oct | 4.3 | 3.9 | 4.5 | 6.7 | 5.7 | 6.1 | 6.5 |
| Nov | 4.2 | 4.3 | 5.1 | 6.2 | 5.8 | 6.1 | 6.1 |
| Dec | 4.2 | 4.2 | 5.2 | 6.2 | 5.3 | 6.6 | 6.0 |
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
U.S. UNEMPLOYMENT RATE1948-1954 | |||||||
|---|---|---|---|---|---|---|---|
| YEAR | 1948 | 1949 | 1950 | 1951 | 1952 | 1953 | 1954 |
| Jan | 3.4 | 4.3 | 6.5 | 3.7 | 3.2 | 2.9 | 4.9 |
| Feb | 3.8 | 4.7 | 6.4 | 3.4 | 3.1 | 2.6 | 5.2 |
| Mar | 4.0 | 5.0 | 6.3 | 3.4 | 2.9 | 2.6 | 5.7 |
| Apr | 3.9 | 5.3 | 5.8 | 3.1 | 2.9 | 2.7 | 5.9 |
| May | 3.5 | 6.1 | 5.5 | 3.0 | 3.0 | 2.5 | 5.9 |
| Jun | 3.6 | 6.2 | 5.4 | 3.2 | 3.0 | 2.5 | 5.6 |
| Jul | 3.6 | 6.7 | 5.0 | 3.1 | 3.2 | 2.6 | 5.8 |
| Aug | 3.9 | 6.8 | 4.5 | 3.1 | 3.4 | 2.7 | 6.0 |
| Sep | 3.8 | 6.6 | 4.4 | 3.3 | 3.1 | 2.9 | 6.1 |
| Oct | 3.7 | 7.9 | 4.2 | 3.5 | 3.0 | 3.1 | 5.7 |
| Nov | 3.8 | 6.4 | 4.2 | 3.5 | 2.8 | 3.5 | 5.3 |
| Dec | 4.0 | 6.6 | 4.3 | 3.1 | 2.7 | 4.5 | 5.0 |
| Source: Bureau of Labor Statistics, U.S. Department of Labor. | |||||||
These data are seasonally adjusted in order to account for cyclical hiring differences that do not reflect changes in the overall economy. | |||||||
...
Thursday, September 4, 2008
The Importance of Low Unemployment
There are several reasons why high unemployment is harmful.
1. If you are unemployed, it is difficult to earn enough income to buy the things you need and want. If you do not have a job (and you want one), then obviously you care about unemployment. Everyone in society should care whether you are unemployed, however. Government programs that provide financial assistance to people in need are funded by taxpayers. When unemployment increases, government expenditures on social programs also increase. This requires additional tax revenues, reductions in other government programs, or an increase in public debt. All of these options contain social costs. By keeping unemployment low, these social costs are reduced. This is also why it is important to begin saving for your retirement as soon as possible. If you save wisely and consistently from the start of your working career, then you may not need to work to have enough income to buy the things you need and want in your old age.
2. High unemployment over an extended period of time will cause a country to have a lower standard of living than it would have with low unemployment. High unemployment is an inefficient use of economic resources. This means the economy is not producing as much output as is possible with the current level of resources and technology. Thus, the country’s gross domestic product (GDP) and related measures of output and income are lower than they could be if unemployment were lower. Unemployment can be illustrated on a production possibilities frontier. As unemployment increases, the production point for the economy moves further from the PPF.
To illustrate the potential effect of unemployment on a country’s standard of living, consider the following example. Imagine an economy where every worker is capable of producing $40,000 worth of output each year. Suppose there are 150 million workers in the labor force and 10% of them are unemployed.[1] This means there are 15 million workers who would like a job, but cannot find one. These unemployed workers are capable of producing $600 billion worth of goods & services. If the economy has a population of 225 million people, then adding $600 billion to the economy’s GDP would increase the standard of living by $2667 per person.
3. Unemployment is associated with other social problems. Drug and alcohol abuse and related crimes are much more prevalent in neighborhoods, cities, and countries with high rates of unemployment. This sentiment is echoed in the expression “Idle hands are the devil’s workshop.”[2] For example, the most likely time for teenagers to commit crimes is between the end of school and the time parents return home from work. The reduction of unemployment may help reduce other problems that plague society.
1. If you are unemployed, it is difficult to earn enough income to buy the things you need and want. If you do not have a job (and you want one), then obviously you care about unemployment. Everyone in society should care whether you are unemployed, however. Government programs that provide financial assistance to people in need are funded by taxpayers. When unemployment increases, government expenditures on social programs also increase. This requires additional tax revenues, reductions in other government programs, or an increase in public debt. All of these options contain social costs. By keeping unemployment low, these social costs are reduced. This is also why it is important to begin saving for your retirement as soon as possible. If you save wisely and consistently from the start of your working career, then you may not need to work to have enough income to buy the things you need and want in your old age.
2. High unemployment over an extended period of time will cause a country to have a lower standard of living than it would have with low unemployment. High unemployment is an inefficient use of economic resources. This means the economy is not producing as much output as is possible with the current level of resources and technology. Thus, the country’s gross domestic product (GDP) and related measures of output and income are lower than they could be if unemployment were lower. Unemployment can be illustrated on a production possibilities frontier. As unemployment increases, the production point for the economy moves further from the PPF.
To illustrate the potential effect of unemployment on a country’s standard of living, consider the following example. Imagine an economy where every worker is capable of producing $40,000 worth of output each year. Suppose there are 150 million workers in the labor force and 10% of them are unemployed.[1] This means there are 15 million workers who would like a job, but cannot find one. These unemployed workers are capable of producing $600 billion worth of goods & services. If the economy has a population of 225 million people, then adding $600 billion to the economy’s GDP would increase the standard of living by $2667 per person.
3. Unemployment is associated with other social problems. Drug and alcohol abuse and related crimes are much more prevalent in neighborhoods, cities, and countries with high rates of unemployment. This sentiment is echoed in the expression “Idle hands are the devil’s workshop.”[2] For example, the most likely time for teenagers to commit crimes is between the end of school and the time parents return home from work. The reduction of unemployment may help reduce other problems that plague society.
Tuesday, September 2, 2008
Low Unemployment - Learning Objectives
After studying the portion of this blog devoted to the macroeconomic policy goal of low unemployment, you should be able to:
· define unemployment.
· explain why low unemployment is an important macroeconomic goal. (Explain why high unemployment is bad.)
· illustrate full employment as a point on a production possibilities frontier.
· illustrate unemployment as a point inside a production possibilities frontier.
· explain how the Bureau of Labor Statistics (BLS) calculates the unemployment rate.
· list and explain the three categories into which the Bureau of Labor Statistics (BLS) divides the adult population.
· define the labor force and the labor force participation rate and explain what percentage of the U.S. adult population is in the labor force.
· define the unemployment rate.
· calculate the labor force participation rate and the unemployment rate from data on the total (adult) population, the labor force, unemployed workers, and employed workers.
· define the natural rate of unemployment, state its current estimate, and explain the conditions under which the economy is considered to be fully employed.
· list and explain the criticisms of using the unemployment rate (as calculated by the BLS) to measure unemployment.
· define discouraged workers and explain how they cause the unemployment rate to underestimate actual unemployment.
· define underemployment and explain how it causes the unemployment rate to underestimate actual employment.
· explain how the method of collecting unemployment data tends to overestimate the unemployment rate.
· illustrate unemployment with supply and demand curves in the labor market.
· explain the difference between the market wage rate and the equilibrium wage rate.
· provide explanations for the market wage staying above the equilibrium wage.
· define minimum wage laws, price floors, labor unions, collective bargaining, a strike, and efficiency wages.
· list the three basic types of unemployment.
· define frictional unemployment, explain its causes, and explain how frictional unemployment can be reduced.
· define job search.
· define unemployment insurance and explain how it unintentionally increases frictional unemployment.
· define structural unemployment, explain its causes, and explain how structural unemployment can be reduced.
· define cyclical (Keynesian) unemployment, explain its causes, and explain how cyclical unemployment can be reduced.
· define the business cycle and explain its relationship to cyclical (Keynesian) unemployment.
· provide a brief biography of John Maynard Keynes, explain his major contribution to economics, and state the title of his most famous book.
· define aggregate demand and state its components, based on the purchaser of the newly produced goods and services.
· define expansionary monetary and fiscal policies and explain how they can be used to increase aggregate demand.
· explain the difference between classical and Keynesian economics.
· explain why the macroeconomic policy goal is low unemployment rather than no unemployment.
· list and explain the appropriate macroeconomic policies for reducing unemployment.
...
· define unemployment.
· explain why low unemployment is an important macroeconomic goal. (Explain why high unemployment is bad.)
· illustrate full employment as a point on a production possibilities frontier.
· illustrate unemployment as a point inside a production possibilities frontier.
· explain how the Bureau of Labor Statistics (BLS) calculates the unemployment rate.
· list and explain the three categories into which the Bureau of Labor Statistics (BLS) divides the adult population.
· define the labor force and the labor force participation rate and explain what percentage of the U.S. adult population is in the labor force.
· define the unemployment rate.
· calculate the labor force participation rate and the unemployment rate from data on the total (adult) population, the labor force, unemployed workers, and employed workers.
· define the natural rate of unemployment, state its current estimate, and explain the conditions under which the economy is considered to be fully employed.
· list and explain the criticisms of using the unemployment rate (as calculated by the BLS) to measure unemployment.
· define discouraged workers and explain how they cause the unemployment rate to underestimate actual unemployment.
· define underemployment and explain how it causes the unemployment rate to underestimate actual employment.
· explain how the method of collecting unemployment data tends to overestimate the unemployment rate.
· illustrate unemployment with supply and demand curves in the labor market.
· explain the difference between the market wage rate and the equilibrium wage rate.
· provide explanations for the market wage staying above the equilibrium wage.
· define minimum wage laws, price floors, labor unions, collective bargaining, a strike, and efficiency wages.
· list the three basic types of unemployment.
· define frictional unemployment, explain its causes, and explain how frictional unemployment can be reduced.
· define job search.
· define unemployment insurance and explain how it unintentionally increases frictional unemployment.
· define structural unemployment, explain its causes, and explain how structural unemployment can be reduced.
· define cyclical (Keynesian) unemployment, explain its causes, and explain how cyclical unemployment can be reduced.
· define the business cycle and explain its relationship to cyclical (Keynesian) unemployment.
· provide a brief biography of John Maynard Keynes, explain his major contribution to economics, and state the title of his most famous book.
· define aggregate demand and state its components, based on the purchaser of the newly produced goods and services.
· define expansionary monetary and fiscal policies and explain how they can be used to increase aggregate demand.
· explain the difference between classical and Keynesian economics.
· explain why the macroeconomic policy goal is low unemployment rather than no unemployment.
· list and explain the appropriate macroeconomic policies for reducing unemployment.
...
Monday, September 1, 2008
Low Unemployment - Complete
Unemployment refers to non-institutionalized civilian adults who want a paid job, but do not have one. It is most commonly measured by the unemployment rate, which is the percentage of the labor force that is unemployed. Contrary to popular perceptions, the unemployment rate is NOT the percentage of the population without a paid job. Unemployment is measured by the Bureau of Labor Statistics (BLS) which conducts a monthly telephone survey of approximately 50,000 randomly selected adults. This Current Population Survey is used to estimated the number of Americans who are:
(1) employed - adults who spent the majority of the previous week working at a paid job.
(2) unemployed - adults who did not spend the majority of the previous week working at a paid job, but who looked one.
(3) not in the labor force - adults who did not spend the majority of the previous week working at a paid job and who did not look for one.
The labor force is comprised of the employed and the unemployed.
Objectives
After studying this chapter, you should be able to:
· define unemployment.
· explain why low unemployment is an important macroeconomic goal. (Explain why high unemployment is bad.)
· illustrate full employment as a point on a production possibilities frontier.
· illustrate unemployment as a point inside a production possibilities frontier.
· explain how the Bureau of Labor Statistics (BLS) calculates the unemployment rate.
· list and explain the three categories into which the Bureau of Labor Statistics (BLS) divides the adult population.
· define the labor force and the labor force participation rate and explain what percentage of the U.S. adult population is in the labor force.
· define the unemployment rate.
· calculate the labor force participation rate and the unemployment rate from data on the total (adult) population, the labor force, unemployed workers, and employed workers.
· define the natural rate of unemployment, state its current estimate, and explain the conditions under which the economy is considered to be fully employed.
· list and explain the criticisms of using the unemployment rate (as calculated by the BLS) to measure unemployment.
· define discouraged workers and explain how they cause the unemployment rate to underestimate actual unemployment.
· define underemployment and explain how it causes the unemployment rate to underestimate actual employment.
· explain how the method of collecting unemployment data tends to overestimate the unemployment rate.
· illustrate unemployment with supply and demand curves in the labor market.
· explain the difference between the market wage rate and the equilibrium wage rate.
· provide explanations for the market wage staying above the equilibrium wage.
· define minimum wage laws, price floors, labor unions, collective bargaining, a strike, and efficiency wages.
· list the three basic types of unemployment.
· define frictional unemployment, explain its causes, and explain how frictional unemployment can be reduced.
· define job search.
· define unemployment insurance and explain how it unintentionally increases frictional unemployment.
· define structural unemployment, explain its causes, and explain how structural unemployment can be reduced.
· define cyclical (Keynesian) unemployment, explain its causes, and explain how cyclical unemployment can be reduced.
· define the business cycle and explain its relationship to cyclical (Keynesian) unemployment.
· provide a brief biography of John Maynard Keynes, explain his major contribution to economics, and state the title of his most famous book.
· define aggregate demand and state its components, based on the purchaser of the newly produced goods and services.
· define expansionary monetary and fiscal policies and explain how they can be used to increase aggregate demand.
· explain the difference between classical and Keynesian economics.
· explain why the macroeconomic policy goal is low unemployment rather than no unemployment.
· list and explain the appropriate macroeconomic policies for reducing unemployment.
Macroeconomic Policy Goals
Unemployment refers to adults who do not have a job, but are looking for one. One of the primary macroeconomic policy goals is low unemployment. (The other primary macroeconomic policy goals are economic growth and low inflation.)
The Importance of Low Unemployment
There are several reasons why high unemployment is harmful.
1. If you are unemployed, it is difficult to earn enough income to buy the things you need and want. If you do not have a job (and you want one), then obviously you care about unemployment. Everyone in society should care whether you are unemployed, however. Government programs that provide financial assistance to people in need are funded by taxpayers. When unemployment increases, government expenditures on social programs also increase. This requires additional tax revenues, reductions in other government programs, or an increase in public debt. All of these options contain social costs. By keeping unemployment low, these social costs are reduced. This is also why it is important to begin saving for your retirement as soon as possible. If you save wisely and consistently from the start of your working career, then you may not need to work to have enough income to buy the things you need and want in your old age.
2. High unemployment over an extended period of time will cause a country to have a lower standard of living than it would have with low unemployment. High unemployment is an inefficient use of economic resources. This means the economy is not producing as much output as is possible with the current level of resources and technology. Thus, the country’s gross domestic product (GDP) and related measures of output and income are lower than they could be if unemployment were lower. Unemployment can be illustrated on a production possibilities frontier. As unemployment increases, the production point for the economy moves further from the PPF.
military
goods
Production points on the PPF
represent efficient use of
an economy’s resources.
Production points inside the
PPF represent unemployment
of resources
or inefficiency in their use.
PPF
civilian goods
To illustrate the potential effect of unemployment on a country’s standard of living, consider the following example. Imagine an economy where every worker is capable of producing $40,000 worth of output each year. Suppose there are 150 million workers in the labor force and 10% of them are unemployed.[1] This means there are 15 million workers who would like a job, but cannot find one. These unemployed workers are capable of producing $600 billion worth of goods & services. If the economy has a population of 225 million people, then adding $600 billion to the economy’s GDP would increase the standard of living by $2667 per person.
3. Unemployment is associated with other social problems. Drug and alcohol abuse and related crimes are much more prevalent in neighborhoods, cities, and countries with high rates of unemployment. This sentiment is echoed in the expression “Idle hands are the devil’s workshop.”[2] For example, the most likely time for teenagers to commit crimes is between the end of school and the time parents return home from work. The reduction of unemployment may help reduce other problems that plague society.
The Measurement of Unemployment
The Bureau of Labor Statistics (BLS) calculates the official U.S. unemployment statistics by conducting a monthly telephone survey of about 60,000 randomly selected adults (aged 16 or over) in the United States. This Current Population Survey is used to estimate the number of adults in the U.S. that belong in the following three categories:
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
The data collected in the Current Population Survey are used to calculate several commonly reported measures of labor market conditions. The labor force is the total number of workers in an economy, including both the employed and the unemployed. The labor force participation rate is the percentage of the adult population in the labor force. Approximately two-thirds of U.S. adults are in the labor force. The unemployment rate is the percentage of the labor force that is unemployed. It is calculated by dividing the number of unemployed adults by the size of the labor force and multiplying the result by 100 to obtain a percentage.
Examples of Labor Data (September 2004)
To illustrate the calculation of these statistics, consider the following employment data for the U.S. economy in September 2004.[3]
Adult Population
223,941,000
Employed
139,480,000
Labor Force
147,483,000
Unemployed
8,003,000
Not in the Labor Force
76,458,000
Source: Bureau of Labor Statistics. ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt
Labor Force = Number of Employed + Number of Unemployed
Labor Force in September 2004 = 139,480,000 + 8,003,000 = 147,483,000
Labor Force Participation Rate = [Labor Force / Adult Population] 100
Labor Force Participation Rate in September 2004 =
[(147,483,000)/(223,941,000)] 100 = 65.9%
Unemployment Rate = [Number of Unemployed / Labor Force] 100
Unemployment Rate in September 2004 =
[(8,003,000) / (147,483,000)] 100 = 5.4%
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%. The graph and table below show how the unemployment rate changed over the last decade.
Because it is natural for there to be 5.5% unemployment in the U.S. economy, many economists consider the economy to be “fully employed” when the unemployment rate is at or below 5.5%.
The unemployment rate between 1995 and 2005.
Series Id: LNS14000000Seasonal AdjustedSeries title: (Seas) Unemployment RateLabor force status: Unemployment rateType of data: PercentAge: 16 years and over
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
1993
7.3
7.1
7.0
7.1
7.1
7.0
6.9
6.8
6.7
6.8
6.6
6.5
1994
6.6
6.6
6.5
6.4
6.1
6.1
6.1
6.0
5.9
5.8
5.6
5.5
1995
5.6
5.4
5.4
5.8
5.6
5.6
5.7
5.7
5.6
5.5
5.6
5.6
1996
5.6
5.5
5.5
5.6
5.6
5.3
5.5
5.1
5.2
5.2
5.4
5.4
1997
5.3
5.2
5.2
5.1
4.9
5.0
4.9
4.8
4.9
4.7
4.6
4.7
1998
4.6
4.6
4.7
4.3
4.4
4.5
4.5
4.5
4.6
4.5
4.4
4.4
1999
4.3
4.4
4.2
4.3
4.2
4.3
4.3
4.2
4.2
4.1
4.1
4.0
2000
4.0
4.1
4.0
3.8
4.1
4.0
4.1
4.1
4.0
3.9
4.0
3.9
2001
4.1
4.2
4.2
4.4
4.4
4.6
4.6
4.9
5.0
5.4
5.6
5.8
2002
5.6
5.6
5.7
5.9
5.8
5.8
5.8
5.8
5.7
5.8
5.9
6.0
2003
5.7
5.8
5.8
6.0
6.1
6.4
6.2
6.1
6.1
6.0
5.9
5.7
2004
5.6
5.6
5.7
5.6
5.6
5.6
5.5
5.4
5.4
5.5
5.4
5.4
2005
5.2
5.4
5.2
5.2
Source: Bureau of Labor Statistics, U.S. Department of Labor, www.bls.gov.http://data.bls.gov/servlet/SurveyOutputServlet?series_id=LNS14000000&data_tool="EaG"
Limitations of Unemployment Data
Unemployment data, like all data, have limitations. The statistics reported by the Bureau of Labor Statistics are not perfect measures of labor market conditions in the United States. Two criticisms of the methodology used to measure unemployment suggest the reported data underestimate the true level of unemployment. Another criticism suggests the data may overestimate unemployment, however.
Some people counted as employed are underemployed. Underemployment refers to people with jobs who are not working as much as they want or need to work. Consider a single parent trying to support three children. The only job she is able to find is a part-time job, such as working 25 hours per week at McDonald's. Will this part-time job provide enough income to support her family? People with part-time jobs may be counted as employed even though they may not be working as much as they want or need to work. Because unemployment statistics may not represent the fact that some people are not working as much as they want or need to work, some critics argue the labor market data reported by the government may underestimate the actual amount of unemployment in the economy.
Discouraged workers are individuals who would like to work but have given up looking for a job. Some people may become discouraged by their inability to find a job and stop looking for work. Because they are no longer looking for a job, discouraged workers are included with those who are not in the labor force. If they had not become so discouraged and continued to look for a job, they would be classified as unemployed. Consequently, one could argue that workers becoming discouraged may reduce the reported unemployment rate and underestimate the true amount of unemployment in the economy.
Another criticism of the labor market data suggests the reported numbers may overestimate unemployment, however. Some respondents may give false or misleading answers to the telephone survey. Suppose a person does not have a job and collects unemployment compensation from the government. If someone from the government calls to ask "Do you have a job?" and "If you do not have a job, are you looking for one?" some people might say they are looking for work, which is a requirement for receiving benefits, even if they are not. If adults without jobs are not looking for work, technically they should not be classified as unemployed. Instead, they should be classified as not in the labor force. Consequently, some critics argue that the tendency for some people to misrepresent themselves in phone surveys causes the unemployment data reported by the government to overestimate the actual amount of unemployment in the economy.
When all three criticisms of labor market data are considered, the effects tend to offset each other. Even though unemployment data have these limitations, most economists believe they are reasonable measures of the true level of unemployment in the economy.
Using Supply & Demand Analysis to Explain Unemployment
In markets for labor, the price of labor is often referred to as the wage rate. Households typically supply labor to businesses. The supply of labor is upward sloping, which implies that as the wage rate increases, households are willing to supply a larger quantity of labor. Businesses typically demand labor from households. The demand for labor is downward sloping, which implies that as the wage rate increases, business demand a smaller quantity of labor. This means fewer jobs are available for workers.
The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded. The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate. If the market wage rate is above the equilibrium wage rate, the quantity of labor supplied is larger than the quantity of labor demanded. When this occurs, there is a surplus of labor. This is also called unemployment. Thus, unemployment occurs when the market wage rate is above the equilibrium wage rate.
Market for Labor
unemployment
(excess supply
of labor)
Supply of Labor
Quantity
of Labor
Equilibrium wage
rate
Demand for Labor
Market wage rate
Price of Labor (wage rate)
O
QS
QDwhere:
QS = the quantity of labor supplied at the market wage rate
(i.e., the number of workers who want a job at the market wage rate)
QD = the quantity of labor demanded at the market wage rate
(i.e., the number of jobs offered by businesses at the market wage rate)
Explanations for the Market Wage Rate Staying
above the Equilibrium Wage Rate
Economists suggest several reasons for the market wage rate staying above the equilibrium wage rate. Consequently, it is natural and normal to always have some unemployment.
1. A minimum wage law specifies the lowest price that employers can legally pay for labor. In the absence of the law, unskilled workers would probably be paid less than the minimum wage. Thus, minimum wage laws keep the market wage rate above the equilibrium wage rate. Workers are usually paid based on their productivity. Skilled workers are generally more productive than unskilled workers and thus receive higher wages. Consequently, minimum wage laws are usually only applicable to unskilled workers. A minimum wage is an example of a price floor. A price floor is a legal minimum price at which a product can be sold. If the minimum wage is above the equilibrium wage, then the minimum wage law creates unemployment in the market for unskilled workers.
2. Labor unions are worker associations that bargain with employers over wages and working conditions. Collective bargaining is the process by which unions and business firms agree on the terms of employment. Unions frequently negotiate market wages than are above the equilibrium wages that would be paid in the absence of collective bargaining. Union contracts keep the market wage rate of union workers above the equilibrium wage rate. In some cases, unions may strike to obtain concessions from employers. A strike is the organized withdrawal of labor from a business firm by a union.
3. Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. Firms may find it profitable to pay high wages to improve the health of workers, to reduce worker turnover, to increase worker effort, and to attract higher quality workers. In addition to great pay, SAS, a computer software company headquartered in North Carolina, provides its workers with on-site day-care for children, medical and dental care, and recreational facilities that rival the best health clubs. It is expensive for the company to provide these added wages and benefits. Company executives argue it makes financial sense, however, because the added pay and benefits allow SAS to attract and keep the best workers in the industry. The company saves on the costs of recruiting and training personnel because workers rarely leave for other jobs. The state-of-the-art recreational facilities help keep the workers healthy. Combining this with the readily accessible doctors, dentists, and child-care allows workers to spend less time away from their jobs. Thus it makes sense for some businesses to routinely pay wages that are above the market wage for the industry.
4. There is a cultural expectation that workers receive periodic raises, but pay cuts are generally unacceptable, regardless of economic conditions. Labor markets are not like other markets. Changing the prices of other resources or products does not change the resource or product. If you change the price of a bicycle, it is still the same bicycle. If you change the price of a worker, however, the worker may change. Workers may resent the wage cut and become hurt or angry. Workers may then be less productive, whether that reaction is intentional or not. Consequently, business firms are reluctant to cut the market wage rate, even when market wages are significantly above the equilibrium wage rate in an industry.
Types of Unemployment and their Remedies
There are three major types of unemployment: frictional, structural, and cyclical (Keynesian).
Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences. Frictional unemployment includes people who do not have jobs because they are new entrants into the labor force (and have not found a job yet) or people who are voluntarily between jobs. A full-time college student, who does not have a job and is not looking for one, is classified as not in the labor force. When the student nears graduation and begins to look for a job, however, the student becomes frictionally unemployed and is included in the unemployment statistics. Job search is the process by which workers find appropriate jobs given their skills and preferences.
One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings. Since jobs are the main source of income for most families, the unemployment insurance program is designed to provide enough income so the family’s basic needs can be met after the worker becomes unemployed. In the absence of the unemployment insurance program, many workers would have an urgent need to find another job to avoid significant hardships. When the government provides unemployed workers with income, however, the urgency of finding a new job is reduced for many of these workers. Some workers do not search for a new job in earnest until their unemployment benefits are close to being terminated. Thus, unemployment insurance increases frictional unemployment by increasing the amount of time workers take between losing a job and finding a new one.
The remedy for frictional unemployment is anything that reduces job search, such as providing better information about available jobs or reforming the unemployment insurance program.
Before the pervasiveness of the Internet, information about job openings was not readily accessible. Consequently the U.S. Department of Labor sponsored employment offices is most cities of at least moderate size. These offices maintained listings of available jobs. The Internet has made it much easier for people to learn about available jobs, across the country and around the world.
Several experiments have been tried with reforms of the unemployment insurance program. When the government has allowed unemployed workers to collect benefits for a maximum of 26 weeks, some people do not search for a new job in earnest until the 24th or 25th week. So one reform that has been tried is to offer a cash bonus if workers find a new job quickly. For example, recipients have been offered a cash bonus if they find a job during the first 13 weeks of receiving benefits. Taxpayers benefit from this reform because the bonus is less than the benefits that would be paid during the second 13 weeks of payouts.
Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs. If a U.S. steel mill closes, for example, the steelworkers are likely to become structurally unemployed. There may not be enough jobs in the U.S. steel industry for all of the Americans who are trained to work in the production of steel. The remedy for structural unemployment is anything to improve the ability of these workers to acquire additional education and skills training, such as improved financial aid for attending college or vocational school.
Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate. The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates. Cyclical (Keynesian) unemployment is caused by downturns in the economy that are part of the business cycle. The business cycle is the natural fluctuations in the economy.
The graph below illustrates how the unemployment rate has fluctuated over the last half-century.
Source: Bureau of Labor Statistics
Cyclical unemployment is also called Keynesian unemployment. John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy. This is a departure from Classical economic theory, which suggests there is no role for government because the economy corrects itself. Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
The remedy for cyclical (Keynesian) unemployment is an increase in overall spending on newly produced goods and services, which economists refer to as aggregate demand. In the U.S. economy, increased demand for American products encourages U.S. businesses to produce more output. Businesses may hire additional workers to help produce the additional output needed to satisfy the increased demand. Thus, increased aggregate demand tends to reduce unemployment.
A closer look at the components of aggregate demand make it easier to develop appropriate macroeconomic strategies. Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
AD = C + I + G + X - M or AD = C + I + G + NE
where:
C = consumption spending (mostly by households)
I = investment spending (mostly by businesses)
G = government purchases of goods & services (It does not include transfer payments.)
X = exports of domestically produced goods & services to foreign purchasers
M = imports of foreign produced goods & services by domestic purchasers
NE = X - M = net exports
An increase in aggregate demand can be achieved using expansionary monetary or fiscal policy.
Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
Why the Goal is LOW Unemployment
(not NO Unemployment).
Most economists consider it natural and good to have a certain amount of frictional unemployment. Having a pool of people looking for jobs makes it easier for businesses to hire new workers. If everyone who wanted a job had one, a business that needed to hire more workers would have to lure them from other companies or from the pool of adults who are not in the labor force. This would probably mean the business would have to offer to pay significantly more than the current market wage. Wages are typically based on productivity. Paying more to workers simply to hire them away from another company (and not because of increased productivity) contributes to inflation. Consequently, attempts to reduce unemployment generally focus on cyclical or structural unemployment.
Summary of the Strategies for Reducing Unemployment
Fiscal policy can be used to reduce all three types of unemployment. Monetary policy can be used to reduce cyclical (Keynesian) unemployment.
Objective to help achieve Low Unemployment
Fiscal Policy
to achieve this objective
Monetary Policy
To achieve this objective
Reduce frictional unemployment
· Government assistance in finding jobs
Reduce structural unemployment
· Government programs to retrain workers or provide additional education
· Tax incentives for people to go back to school or to obtain new skills
Reduce cyclical (Keynesian) unemployment
· Increases in government spending to increase aggregate demand
· Decreases in income taxes to leave workers with more disposable income to increase aggregate demand
· Increase the money supply to reduce interest rates to encourage more borrowing, increase consumption and investment spending, and thus increase aggregate demand.
IMPORTANT DEFINITIONS FROM CHAPTER 7
Unemployment refers to adults who do not have a job, but are looking for one.
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
· Current Population Survey is a telephone survey of approximately 60,000 randomly selected adults that is used to calculate several commonly reported measures of labor market conditions.
· The labor force is the total number of workers in an economy, including both the employed and the unemployed.
· The labor force participation rate is the percentage of the adult population in the labor force.
· The unemployment rate is the percentage of the labor force that is unemployed.
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%.
· Underemployment refers to people with jobs who are not working as much as they want or need to work.
· Discouraged workers are individuals who would like to work but have given up looking for a job.
· In markets for labor, the price of labor is often referred to as the wage rate.
· The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded.
· The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate.
· A minimum wage law is a price floor that specifies the lowest price that employers can legally pay for labor.
· A price floor is a legal minimum price at which a product can be sold.
· Labor unions are worker associations that bargain with employers over wages and working conditions.
· Collective bargaining is the process by which unions and business firms agree on the terms of employment.
· A strike is the organized withdrawal of labor from a business firm by a union.
· Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.
· Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences.
· Job search is the process by which workers find appropriate jobs given their skills and preferences.
· Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings.
· Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs.
· Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate.
· The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates.
· The business cycle is the natural fluctuations in the economy.
· Cyclical unemployment is also called Keynesian unemployment.
· John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy.
· Classical economic theory suggests there is no role for government because the economy corrects itself.
· Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
· Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
· Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
· Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
QUESTIONS FOR FURTHER STUDY
1. Is a decrease in the unemployment rate always an indication of an increase in employment and an improvement in labor market conditions? Could the unemployment rate decrease when employment opportunities are declining? (Hint: Are discouraged workers considered to be unemployed?)
2. Can you think of a method for measuring labor market performance that might be better than the unemployment rate?
ENDNOTES
[1] In the 1980s, unemployment in the United States reached a high close to 10% per year. During the Great Depression (in the 1930s), the unemployment rate reached 25%.
[2] Issac Watts (1674-1748) was a British hymn-writer. The third stanza of Against Idleness and Mischief, in his Divine Songs for Children (1715), contains the lines “For Satan finds some mischief still For idle hands to do.” A collection of Scottish Proverbs, published in 1719 by John Ray, contains a variation of the thought. Similar expressions have been traced as far back as St. Jerome (c. 342-420). Source: The Columbia World of Quotations. Copyright © 1996 Columbia University Press.
[3] Data have been rounded to the nearest thousand. Discrepancies in the addition of numbers below are due to the rounding of data.
After studying this chapter, you should be able to:
· define unemployment.
· explain why low unemployment is an important macroeconomic goal. (Explain why high unemployment is bad.)
· illustrate full employment as a point on a production possibilities frontier.
· illustrate unemployment as a point inside a production possibilities frontier.
· explain how the Bureau of Labor Statistics (BLS) calculates the unemployment rate.
· list and explain the three categories into which the Bureau of Labor Statistics (BLS) divides the adult population.
· define the labor force and the labor force participation rate and explain what percentage of the U.S. adult population is in the labor force.
· define the unemployment rate.
· calculate the labor force participation rate and the unemployment rate from data on the total (adult) population, the labor force, unemployed workers, and employed workers.
· define the natural rate of unemployment, state its current estimate, and explain the conditions under which the economy is considered to be fully employed.
· list and explain the criticisms of using the unemployment rate (as calculated by the BLS) to measure unemployment.
· define discouraged workers and explain how they cause the unemployment rate to underestimate actual unemployment.
· define underemployment and explain how it causes the unemployment rate to underestimate actual employment.
· explain how the method of collecting unemployment data tends to overestimate the unemployment rate.
· illustrate unemployment with supply and demand curves in the labor market.
· explain the difference between the market wage rate and the equilibrium wage rate.
· provide explanations for the market wage staying above the equilibrium wage.
· define minimum wage laws, price floors, labor unions, collective bargaining, a strike, and efficiency wages.
· list the three basic types of unemployment.
· define frictional unemployment, explain its causes, and explain how frictional unemployment can be reduced.
· define job search.
· define unemployment insurance and explain how it unintentionally increases frictional unemployment.
· define structural unemployment, explain its causes, and explain how structural unemployment can be reduced.
· define cyclical (Keynesian) unemployment, explain its causes, and explain how cyclical unemployment can be reduced.
· define the business cycle and explain its relationship to cyclical (Keynesian) unemployment.
· provide a brief biography of John Maynard Keynes, explain his major contribution to economics, and state the title of his most famous book.
· define aggregate demand and state its components, based on the purchaser of the newly produced goods and services.
· define expansionary monetary and fiscal policies and explain how they can be used to increase aggregate demand.
· explain the difference between classical and Keynesian economics.
· explain why the macroeconomic policy goal is low unemployment rather than no unemployment.
· list and explain the appropriate macroeconomic policies for reducing unemployment.
Macroeconomic Policy Goals
Unemployment refers to adults who do not have a job, but are looking for one. One of the primary macroeconomic policy goals is low unemployment. (The other primary macroeconomic policy goals are economic growth and low inflation.)
The Importance of Low Unemployment
There are several reasons why high unemployment is harmful.
1. If you are unemployed, it is difficult to earn enough income to buy the things you need and want. If you do not have a job (and you want one), then obviously you care about unemployment. Everyone in society should care whether you are unemployed, however. Government programs that provide financial assistance to people in need are funded by taxpayers. When unemployment increases, government expenditures on social programs also increase. This requires additional tax revenues, reductions in other government programs, or an increase in public debt. All of these options contain social costs. By keeping unemployment low, these social costs are reduced. This is also why it is important to begin saving for your retirement as soon as possible. If you save wisely and consistently from the start of your working career, then you may not need to work to have enough income to buy the things you need and want in your old age.
2. High unemployment over an extended period of time will cause a country to have a lower standard of living than it would have with low unemployment. High unemployment is an inefficient use of economic resources. This means the economy is not producing as much output as is possible with the current level of resources and technology. Thus, the country’s gross domestic product (GDP) and related measures of output and income are lower than they could be if unemployment were lower. Unemployment can be illustrated on a production possibilities frontier. As unemployment increases, the production point for the economy moves further from the PPF.
military
goods
Production points on the PPF
represent efficient use of
an economy’s resources.
Production points inside the
PPF represent unemployment
of resources
or inefficiency in their use.
PPF
civilian goods
To illustrate the potential effect of unemployment on a country’s standard of living, consider the following example. Imagine an economy where every worker is capable of producing $40,000 worth of output each year. Suppose there are 150 million workers in the labor force and 10% of them are unemployed.[1] This means there are 15 million workers who would like a job, but cannot find one. These unemployed workers are capable of producing $600 billion worth of goods & services. If the economy has a population of 225 million people, then adding $600 billion to the economy’s GDP would increase the standard of living by $2667 per person.
3. Unemployment is associated with other social problems. Drug and alcohol abuse and related crimes are much more prevalent in neighborhoods, cities, and countries with high rates of unemployment. This sentiment is echoed in the expression “Idle hands are the devil’s workshop.”[2] For example, the most likely time for teenagers to commit crimes is between the end of school and the time parents return home from work. The reduction of unemployment may help reduce other problems that plague society.
The Measurement of Unemployment
The Bureau of Labor Statistics (BLS) calculates the official U.S. unemployment statistics by conducting a monthly telephone survey of about 60,000 randomly selected adults (aged 16 or over) in the United States. This Current Population Survey is used to estimate the number of adults in the U.S. that belong in the following three categories:
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
The data collected in the Current Population Survey are used to calculate several commonly reported measures of labor market conditions. The labor force is the total number of workers in an economy, including both the employed and the unemployed. The labor force participation rate is the percentage of the adult population in the labor force. Approximately two-thirds of U.S. adults are in the labor force. The unemployment rate is the percentage of the labor force that is unemployed. It is calculated by dividing the number of unemployed adults by the size of the labor force and multiplying the result by 100 to obtain a percentage.
Examples of Labor Data (September 2004)
To illustrate the calculation of these statistics, consider the following employment data for the U.S. economy in September 2004.[3]
Adult Population
223,941,000
Employed
139,480,000
Labor Force
147,483,000
Unemployed
8,003,000
Not in the Labor Force
76,458,000
Source: Bureau of Labor Statistics. ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt
Labor Force = Number of Employed + Number of Unemployed
Labor Force in September 2004 = 139,480,000 + 8,003,000 = 147,483,000
Labor Force Participation Rate = [Labor Force / Adult Population] 100
Labor Force Participation Rate in September 2004 =
[(147,483,000)/(223,941,000)] 100 = 65.9%
Unemployment Rate = [Number of Unemployed / Labor Force] 100
Unemployment Rate in September 2004 =
[(8,003,000) / (147,483,000)] 100 = 5.4%
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%. The graph and table below show how the unemployment rate changed over the last decade.
Because it is natural for there to be 5.5% unemployment in the U.S. economy, many economists consider the economy to be “fully employed” when the unemployment rate is at or below 5.5%.
The unemployment rate between 1995 and 2005.
Series Id: LNS14000000Seasonal AdjustedSeries title: (Seas) Unemployment RateLabor force status: Unemployment rateType of data: PercentAge: 16 years and over
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
1993
7.3
7.1
7.0
7.1
7.1
7.0
6.9
6.8
6.7
6.8
6.6
6.5
1994
6.6
6.6
6.5
6.4
6.1
6.1
6.1
6.0
5.9
5.8
5.6
5.5
1995
5.6
5.4
5.4
5.8
5.6
5.6
5.7
5.7
5.6
5.5
5.6
5.6
1996
5.6
5.5
5.5
5.6
5.6
5.3
5.5
5.1
5.2
5.2
5.4
5.4
1997
5.3
5.2
5.2
5.1
4.9
5.0
4.9
4.8
4.9
4.7
4.6
4.7
1998
4.6
4.6
4.7
4.3
4.4
4.5
4.5
4.5
4.6
4.5
4.4
4.4
1999
4.3
4.4
4.2
4.3
4.2
4.3
4.3
4.2
4.2
4.1
4.1
4.0
2000
4.0
4.1
4.0
3.8
4.1
4.0
4.1
4.1
4.0
3.9
4.0
3.9
2001
4.1
4.2
4.2
4.4
4.4
4.6
4.6
4.9
5.0
5.4
5.6
5.8
2002
5.6
5.6
5.7
5.9
5.8
5.8
5.8
5.8
5.7
5.8
5.9
6.0
2003
5.7
5.8
5.8
6.0
6.1
6.4
6.2
6.1
6.1
6.0
5.9
5.7
2004
5.6
5.6
5.7
5.6
5.6
5.6
5.5
5.4
5.4
5.5
5.4
5.4
2005
5.2
5.4
5.2
5.2
Source: Bureau of Labor Statistics, U.S. Department of Labor, www.bls.gov.http://data.bls.gov/servlet/SurveyOutputServlet?series_id=LNS14000000&data_tool="EaG"
Limitations of Unemployment Data
Unemployment data, like all data, have limitations. The statistics reported by the Bureau of Labor Statistics are not perfect measures of labor market conditions in the United States. Two criticisms of the methodology used to measure unemployment suggest the reported data underestimate the true level of unemployment. Another criticism suggests the data may overestimate unemployment, however.
Some people counted as employed are underemployed. Underemployment refers to people with jobs who are not working as much as they want or need to work. Consider a single parent trying to support three children. The only job she is able to find is a part-time job, such as working 25 hours per week at McDonald's. Will this part-time job provide enough income to support her family? People with part-time jobs may be counted as employed even though they may not be working as much as they want or need to work. Because unemployment statistics may not represent the fact that some people are not working as much as they want or need to work, some critics argue the labor market data reported by the government may underestimate the actual amount of unemployment in the economy.
Discouraged workers are individuals who would like to work but have given up looking for a job. Some people may become discouraged by their inability to find a job and stop looking for work. Because they are no longer looking for a job, discouraged workers are included with those who are not in the labor force. If they had not become so discouraged and continued to look for a job, they would be classified as unemployed. Consequently, one could argue that workers becoming discouraged may reduce the reported unemployment rate and underestimate the true amount of unemployment in the economy.
Another criticism of the labor market data suggests the reported numbers may overestimate unemployment, however. Some respondents may give false or misleading answers to the telephone survey. Suppose a person does not have a job and collects unemployment compensation from the government. If someone from the government calls to ask "Do you have a job?" and "If you do not have a job, are you looking for one?" some people might say they are looking for work, which is a requirement for receiving benefits, even if they are not. If adults without jobs are not looking for work, technically they should not be classified as unemployed. Instead, they should be classified as not in the labor force. Consequently, some critics argue that the tendency for some people to misrepresent themselves in phone surveys causes the unemployment data reported by the government to overestimate the actual amount of unemployment in the economy.
When all three criticisms of labor market data are considered, the effects tend to offset each other. Even though unemployment data have these limitations, most economists believe they are reasonable measures of the true level of unemployment in the economy.
Using Supply & Demand Analysis to Explain Unemployment
In markets for labor, the price of labor is often referred to as the wage rate. Households typically supply labor to businesses. The supply of labor is upward sloping, which implies that as the wage rate increases, households are willing to supply a larger quantity of labor. Businesses typically demand labor from households. The demand for labor is downward sloping, which implies that as the wage rate increases, business demand a smaller quantity of labor. This means fewer jobs are available for workers.
The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded. The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate. If the market wage rate is above the equilibrium wage rate, the quantity of labor supplied is larger than the quantity of labor demanded. When this occurs, there is a surplus of labor. This is also called unemployment. Thus, unemployment occurs when the market wage rate is above the equilibrium wage rate.
Market for Labor
unemployment
(excess supply
of labor)
Supply of Labor
Quantity
of Labor
Equilibrium wage
rate
Demand for Labor
Market wage rate
Price of Labor (wage rate)
O
QS
QDwhere:
QS = the quantity of labor supplied at the market wage rate
(i.e., the number of workers who want a job at the market wage rate)
QD = the quantity of labor demanded at the market wage rate
(i.e., the number of jobs offered by businesses at the market wage rate)
Explanations for the Market Wage Rate Staying
above the Equilibrium Wage Rate
Economists suggest several reasons for the market wage rate staying above the equilibrium wage rate. Consequently, it is natural and normal to always have some unemployment.
1. A minimum wage law specifies the lowest price that employers can legally pay for labor. In the absence of the law, unskilled workers would probably be paid less than the minimum wage. Thus, minimum wage laws keep the market wage rate above the equilibrium wage rate. Workers are usually paid based on their productivity. Skilled workers are generally more productive than unskilled workers and thus receive higher wages. Consequently, minimum wage laws are usually only applicable to unskilled workers. A minimum wage is an example of a price floor. A price floor is a legal minimum price at which a product can be sold. If the minimum wage is above the equilibrium wage, then the minimum wage law creates unemployment in the market for unskilled workers.
2. Labor unions are worker associations that bargain with employers over wages and working conditions. Collective bargaining is the process by which unions and business firms agree on the terms of employment. Unions frequently negotiate market wages than are above the equilibrium wages that would be paid in the absence of collective bargaining. Union contracts keep the market wage rate of union workers above the equilibrium wage rate. In some cases, unions may strike to obtain concessions from employers. A strike is the organized withdrawal of labor from a business firm by a union.
3. Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity. Firms may find it profitable to pay high wages to improve the health of workers, to reduce worker turnover, to increase worker effort, and to attract higher quality workers. In addition to great pay, SAS, a computer software company headquartered in North Carolina, provides its workers with on-site day-care for children, medical and dental care, and recreational facilities that rival the best health clubs. It is expensive for the company to provide these added wages and benefits. Company executives argue it makes financial sense, however, because the added pay and benefits allow SAS to attract and keep the best workers in the industry. The company saves on the costs of recruiting and training personnel because workers rarely leave for other jobs. The state-of-the-art recreational facilities help keep the workers healthy. Combining this with the readily accessible doctors, dentists, and child-care allows workers to spend less time away from their jobs. Thus it makes sense for some businesses to routinely pay wages that are above the market wage for the industry.
4. There is a cultural expectation that workers receive periodic raises, but pay cuts are generally unacceptable, regardless of economic conditions. Labor markets are not like other markets. Changing the prices of other resources or products does not change the resource or product. If you change the price of a bicycle, it is still the same bicycle. If you change the price of a worker, however, the worker may change. Workers may resent the wage cut and become hurt or angry. Workers may then be less productive, whether that reaction is intentional or not. Consequently, business firms are reluctant to cut the market wage rate, even when market wages are significantly above the equilibrium wage rate in an industry.
Types of Unemployment and their Remedies
There are three major types of unemployment: frictional, structural, and cyclical (Keynesian).
Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences. Frictional unemployment includes people who do not have jobs because they are new entrants into the labor force (and have not found a job yet) or people who are voluntarily between jobs. A full-time college student, who does not have a job and is not looking for one, is classified as not in the labor force. When the student nears graduation and begins to look for a job, however, the student becomes frictionally unemployed and is included in the unemployment statistics. Job search is the process by which workers find appropriate jobs given their skills and preferences.
One government program that increases the amount of frictional unemployment, without intending to do so, is unemployment insurance. Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings. Since jobs are the main source of income for most families, the unemployment insurance program is designed to provide enough income so the family’s basic needs can be met after the worker becomes unemployed. In the absence of the unemployment insurance program, many workers would have an urgent need to find another job to avoid significant hardships. When the government provides unemployed workers with income, however, the urgency of finding a new job is reduced for many of these workers. Some workers do not search for a new job in earnest until their unemployment benefits are close to being terminated. Thus, unemployment insurance increases frictional unemployment by increasing the amount of time workers take between losing a job and finding a new one.
The remedy for frictional unemployment is anything that reduces job search, such as providing better information about available jobs or reforming the unemployment insurance program.
Before the pervasiveness of the Internet, information about job openings was not readily accessible. Consequently the U.S. Department of Labor sponsored employment offices is most cities of at least moderate size. These offices maintained listings of available jobs. The Internet has made it much easier for people to learn about available jobs, across the country and around the world.
Several experiments have been tried with reforms of the unemployment insurance program. When the government has allowed unemployed workers to collect benefits for a maximum of 26 weeks, some people do not search for a new job in earnest until the 24th or 25th week. So one reform that has been tried is to offer a cash bonus if workers find a new job quickly. For example, recipients have been offered a cash bonus if they find a job during the first 13 weeks of receiving benefits. Taxpayers benefit from this reform because the bonus is less than the benefits that would be paid during the second 13 weeks of payouts.
Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs. If a U.S. steel mill closes, for example, the steelworkers are likely to become structurally unemployed. There may not be enough jobs in the U.S. steel industry for all of the Americans who are trained to work in the production of steel. The remedy for structural unemployment is anything to improve the ability of these workers to acquire additional education and skills training, such as improved financial aid for attending college or vocational school.
Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate. The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates. Cyclical (Keynesian) unemployment is caused by downturns in the economy that are part of the business cycle. The business cycle is the natural fluctuations in the economy.
The graph below illustrates how the unemployment rate has fluctuated over the last half-century.
Source: Bureau of Labor Statistics
Cyclical unemployment is also called Keynesian unemployment. John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy. This is a departure from Classical economic theory, which suggests there is no role for government because the economy corrects itself. Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
The remedy for cyclical (Keynesian) unemployment is an increase in overall spending on newly produced goods and services, which economists refer to as aggregate demand. In the U.S. economy, increased demand for American products encourages U.S. businesses to produce more output. Businesses may hire additional workers to help produce the additional output needed to satisfy the increased demand. Thus, increased aggregate demand tends to reduce unemployment.
A closer look at the components of aggregate demand make it easier to develop appropriate macroeconomic strategies. Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
AD = C + I + G + X - M or AD = C + I + G + NE
where:
C = consumption spending (mostly by households)
I = investment spending (mostly by businesses)
G = government purchases of goods & services (It does not include transfer payments.)
X = exports of domestically produced goods & services to foreign purchasers
M = imports of foreign produced goods & services by domestic purchasers
NE = X - M = net exports
An increase in aggregate demand can be achieved using expansionary monetary or fiscal policy.
Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
Why the Goal is LOW Unemployment
(not NO Unemployment).
Most economists consider it natural and good to have a certain amount of frictional unemployment. Having a pool of people looking for jobs makes it easier for businesses to hire new workers. If everyone who wanted a job had one, a business that needed to hire more workers would have to lure them from other companies or from the pool of adults who are not in the labor force. This would probably mean the business would have to offer to pay significantly more than the current market wage. Wages are typically based on productivity. Paying more to workers simply to hire them away from another company (and not because of increased productivity) contributes to inflation. Consequently, attempts to reduce unemployment generally focus on cyclical or structural unemployment.
Summary of the Strategies for Reducing Unemployment
Fiscal policy can be used to reduce all three types of unemployment. Monetary policy can be used to reduce cyclical (Keynesian) unemployment.
Objective to help achieve Low Unemployment
Fiscal Policy
to achieve this objective
Monetary Policy
To achieve this objective
Reduce frictional unemployment
· Government assistance in finding jobs
Reduce structural unemployment
· Government programs to retrain workers or provide additional education
· Tax incentives for people to go back to school or to obtain new skills
Reduce cyclical (Keynesian) unemployment
· Increases in government spending to increase aggregate demand
· Decreases in income taxes to leave workers with more disposable income to increase aggregate demand
· Increase the money supply to reduce interest rates to encourage more borrowing, increase consumption and investment spending, and thus increase aggregate demand.
IMPORTANT DEFINITIONS FROM CHAPTER 7
Unemployment refers to adults who do not have a job, but are looking for one.
· employed – people who spent most of the previous week working at a paid job.
· unemployed – people who do not have a paid job, but are looking for one. This category includes workers who are temporarily laid off and people who have found a job and are waiting for it to begin.
· not in the labor force – people who do not have a paid job and are not looking for one, such as retirees, homemakers, and full-time students.
· Current Population Survey is a telephone survey of approximately 60,000 randomly selected adults that is used to calculate several commonly reported measures of labor market conditions.
· The labor force is the total number of workers in an economy, including both the employed and the unemployed.
· The labor force participation rate is the percentage of the adult population in the labor force.
· The unemployment rate is the percentage of the labor force that is unemployed.
The natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates. The natural rate of unemployment is currently estimated to be 5.5%.
· Underemployment refers to people with jobs who are not working as much as they want or need to work.
· Discouraged workers are individuals who would like to work but have given up looking for a job.
· In markets for labor, the price of labor is often referred to as the wage rate.
· The equilibrium wage rate is the price of labor at which the quantity of labor supplied equals the quantity of labor demanded.
· The market wage rate is the price of labor paid in a labor market. It may or may not be the same as the equilibrium wage rate.
· A minimum wage law is a price floor that specifies the lowest price that employers can legally pay for labor.
· A price floor is a legal minimum price at which a product can be sold.
· Labor unions are worker associations that bargain with employers over wages and working conditions.
· Collective bargaining is the process by which unions and business firms agree on the terms of employment.
· A strike is the organized withdrawal of labor from a business firm by a union.
· Efficiency wages are above-equilibrium wages paid by firms in order to increase worker productivity.
· Frictional unemployment occurs because it takes time for workers to search for the jobs that best suit their skills and preferences.
· Job search is the process by which workers find appropriate jobs given their skills and preferences.
· Unemployment insurance is a government program that temporarily provides unemployed workers with a fraction of their previous earnings.
· Structural unemployment occurs when workers have job skills that do not match the skills required by available jobs.
· Cyclical (Keynesian) unemployment is the deviation of unemployment from its natural rate.
· The natural rate of unemployment (5.5%) is the normal rate of unemployment around which the unemployment rate fluctuates.
· The business cycle is the natural fluctuations in the economy.
· Cyclical unemployment is also called Keynesian unemployment.
· John Maynard Keynes (1883-1946) was a British economist who popularized the idea that the government should play an active role in managing the economy.
· Classical economic theory suggests there is no role for government because the economy corrects itself.
· Keynes agreed that the economy might correct itself in the long run. However, he thought a natural correction might take an extremely long time. The Great Depression motivated Keynes to say “in the long run we are all dead.” Keynes’ most famous book, published in 1936, is entitled The General Theory of Employment, Interest, and Money.
· Aggregate demand (AD) refers to total spending in the economy on newly produced goods and services.
· Expansionary monetary policy refers to an increase in the money supply. This reduces interest rates and encourages more consumption (C) and investment (I) spending.
· Expansionary fiscal policy can be achieved by either (1) reducing taxes to encourage more spending by households and businesses (C + I); or (2) increasing government purchases (G).
QUESTIONS FOR FURTHER STUDY
1. Is a decrease in the unemployment rate always an indication of an increase in employment and an improvement in labor market conditions? Could the unemployment rate decrease when employment opportunities are declining? (Hint: Are discouraged workers considered to be unemployed?)
2. Can you think of a method for measuring labor market performance that might be better than the unemployment rate?
ENDNOTES
[1] In the 1980s, unemployment in the United States reached a high close to 10% per year. During the Great Depression (in the 1930s), the unemployment rate reached 25%.
[2] Issac Watts (1674-1748) was a British hymn-writer. The third stanza of Against Idleness and Mischief, in his Divine Songs for Children (1715), contains the lines “For Satan finds some mischief still For idle hands to do.” A collection of Scottish Proverbs, published in 1719 by John Ray, contains a variation of the thought. Similar expressions have been traced as far back as St. Jerome (c. 342-420). Source: The Columbia World of Quotations. Copyright © 1996 Columbia University Press.
[3] Data have been rounded to the nearest thousand. Discrepancies in the addition of numbers below are due to the rounding of data.