Lecture Notes on Unemployment

Introduction to Unemployment

• Unemployment is another way to gauge the economic health of an economy.
• Unemployment rate: Measures the number of people who want work but aren’t working.
• A higher unemployment rate suggests a smaller economic pie and a less healthy economy.

Types of Unemployment

• Natural Rate of Unemployment: Average rate of unemployment an economy experiences.
• Cyclical Unemployment: Fluctuations in unemployment due to economic cycles.
  • Cyclical unemployment causes the natural rate to fluctuate year to year.
  • Natural rate in the US is typically 4.5% to 5%.

Measuring Unemployment

• Calculated by the Bureau of Labor Statistics (BLS) using surveys of 60,000 households.
• Categories:
  • Employed: Worked at a paid job during the past week.
  • Unemployed: Temporarily laid off or looking for a job in the past four weeks.
  • Not in the labor force: Neither employed nor unemployed (e.g., homemakers, students).
• Labor Force = Employed + Unemployed.
• Unemployment Rate = (Unemployed / Labor Force) x 100.

Labor Force Participation Rate

• Calculation: (Labor Force / Adult Population) x 100.

Example: 2009 Data

• Employed: 139.9 million
• Unemployed: 14.3 million
• Adult population: 235.9 million
• Labor Force: 154.2 million
• Unemployment Rate: 9.3%
• Labor Force Participation Rate: 65.4%

Challenges with Unemployment Rate

• Discouraged Workers: Those who have stopped looking for work; not included in the unemployment rate.
  • Adjusted unemployment rate including discouraged workers in 2009 would be 16.3%.
• Short vs. Long-term Unemployment:
  • Most spells of unemployment are short.
  • Most observed unemployment is long-term.

Causes of Unemployment

• Frictional Unemployment: Movement of workers between jobs.
  • Job search due to constant economic change.
  • Voluntary quits for better job matches.
  • Unemployment insurance as a safety net.
• Structural Unemployment: Not enough jobs available.
  • Causes include minimum wage laws, unions, and efficiency wages.

Minimum Wage and Unemployment

• Can create unemployment in the unskilled labor market by setting a wage floor.
• Higher minimum wage increases unemployment.
• Argued to be a poorly targeted policy.

Unions and Collective Bargaining

• Unions negotiate wages, can lead to higher wages than equilibrium, causing unemployment.
• Can benefit union workers but may hurt non-union workers.

Efficiency Wages

• Firms voluntarily pay higher wages to increase productivity and reduce turnover.
• Creates unemployment as firms hire fewer workers at higher wages.

Conclusion

• Understanding unemployment requires careful interpretation of statistics.
• Importance of differentiating between frictional and structural unemployment.
• Need for intelligent consumption of economic information to avoid being misled by statistics.