Important Definitions Related to the Macroeconomic Policy Goal of Low Unemployment

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).

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.

Types of Unemployment and their Remedies

Types of Unemployment and their Remedies

There are three major types of unemployment: frictional, structural, and cyclical (Keynesian).