PRINCIPLES OF MACROECONOMICSChapter 8 Unemployment

Modified by: Yun WangFall 2017, Florida International University

FIGURE 21.1

Borders was one of the many companies unable to recover from the economic recession of 2008-2009.

LABOR MARKET

UNEMPLOYMENT

MEASURING UNEMPLOYMENT

unemployment rate = unemployed

employed + unemployed

labor force = employed + unemployed

population = labor force + not in labor force

labor force participation rate = labor forcepopulation

EMPLOYMENT DATA

PATTERNS OF UNEMPLOYMENT

The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of 4% to 6%. Highest rate was about 10% in 1983-84 and 2007-09 recession.

PATTERNS OF UNEMPLOYMENT

TYPES OF UNEMPLOYMENT

Frictional unemployment: Unemployment due tosearching time for jobs and waiting time between jobs

e.g., Jennifer, just graduated from college, is looking for ajob that matches her qualifications

Structural unemployment: Unemployment due to changes in the structure of the economy that result in aloss of jobs in certain industries

e.g., Ken, a farm laborer, lost his job due to mechanization.He is getting trained to be a security officer.

TYPES OF UNEMPLOYMENT

Cyclical unemployment: Unemployment due tolabor lay-offs in a recession

e.g., Nancy, an engineer, is let go as her employerattempts to cut labor cost.

Seasonal unemployment: Unemployment due toseasonal changes

e.g., Tom, a ski instructor, loses his job when winterEnds.

TYPES OF UNEMPLOYMENT

Natural Rate of Unemployment: Unemploymentthat occurs as a normal functioning of the economy.

=Frictional Unemployment + Structural Unemployment

Usually 4 to 5 percent of the labor force is searching forjobs, waiting between jobs, or getting trained for new jobs.

Unemployment rate above the natural rate isconsidered to be cyclical, e.g., 7.5% – 5% = 2.5%

In a labor market with flexible wages, the equilibrium will occur at wage We and quantity Qe, where the demand for labor intersect the supply of labor.

Because the wage rate is stuck at W, above the equilibrium, the number of job seekers (Qs) is greater than the number of job openings (Qd). The result is unemployment = Qs – Qd.

a) In a labor market where wages could rise, an increase in the demand for labor leads to an increase in equilibrium wage and employment.

b) In a labor market where wages could not fall, a decline in the demand for labor leads to a loss of employment at the original wage. At the fixed wage of W0, unemployment = Q0 – Q2

ADJUSTMENT TO INCREASED DEMAND

o Productivity improves, increasing the demand for labor, wage, and employment.

o Then productivity stops increasing. Still, wages keep rising.

o But, the demand for labor has not increased, so at a market wage, unemployment exists.

q There is no improvement in productivity.q There is no wage increase. q Now, productivity improves, increasing the demand

for labor and creating more jobs.

ADJUSTMENT TO PRODUCTIVITY INCREASED