By the end of this chapter, you should understand:

 

Ø       the data used to measure the amount of unemployment.

 

Ø       how unemployment can result from minimum-wage laws.

 

Ø       how unemployment can arise from bargaining between firms and unions.

 

KEY POINTS:

 

1.       The unemployment rate is the percentage of those who would like to work but do not have jobs. The Bureau of Labor Statistics calculates this statistic monthly based on a survey of thousands of households.

 

2.       The unemployment rate is an imperfect measure of joblessness. Some people who call themselves unemployed may actually not want to work, and some people who would like to work have left the labor force after an unsuccessful search.

 

3.       In the U.S. economy, most people who become unemployed find work within a short period of time. Nonetheless, most unemployment observed at any given time is attributable to the few people who are unemployed for long periods of time.

 

4.       One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. Unemployment insurance is a government policy that, while protecting workers’ incomes, increases the amount of frictional unemployment.

 

5.       A second reason why our economy always has some unemployment is minimum-wage laws. By raising the wage of unskilled and inexperienced workers above the equilibrium level, minimum-wage laws raise the quantity of labor supplied and reduce the quantity demanded. The resulting surplus of labor represents unemployment.

 

6.       A third reason for unemployment is the market power of unions. When unions push the wages in unionized industries above the equilibrium level, they create a surplus of labor.

 

7.       A fourth reason for unemployment is suggested by the theory of efficiency wages. According to this theory, firms find it profitable to pay wages above the equilibrium level. High wages can improve worker health, lower worker turnover, raise worker quality, and increase worker effort.

 

CHAPTER OUTLINE:

 

I.          Unemployment can be divided into two categories.

 

A.         The economy’s natural rate of unemployment refers to the amount of unemployment that the economy normally experiences.

 

B.         Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate.

 

II.         Identifying Unemployment

 

A.         How Is Unemployment Measured?

 

1.         The Bureau of Labor Statistics (BLS) surveys 60,000 households every month.

 

2.         The BLS places each adult (age 16 or older) into one of three categories: employed, unemployed, or not in the labor force

 

3.         Definition of labor force: the total number of workers, including both the employed and the unemployed.

 

4.                   Definition of unemployment rate: the percentage of the labor force that is unemployed.

 

 

5.         Definition of labor-force participation rate: the percentage of the adult population that is in the labor force.

   

6.         Example: data from 2004. In that year, there were 139.3 million employed people and 8.1 million unemployed people.

 

a.         Labor Force = 139.3 + 8.1 = 147.4 million.

 

b.         Unemployment Rate = (8.1/147.4) × 100% = 5.5%.

 

c.          If the adult population was 223.4 million, the labor-force participation rate was:

 

Labor-Force Participation Rate = (147.4/223.4) × 100% = 66.0%.
 

7.         Table 1 shows unemployment and labor-force participation rates for various sub-groups of the U.S. population.

 

            a.         Women ages 20 and older have lower labor-force participation rates than men, but have similar rates of unemployment.

 

            b.         Blacks ages 20 and older have similar labor-force participation rates to whites, but have higher rates of unemployment.

 

            c.          Teenagers have lower labor-force participation rates than adults, but have higher unemployment rates.

 

 

8.         Figure 2 shows the unemployment rate in the United States since 1960.

 

B.         Definition of the natural rate of unemployment: the normal rate of unemployment around which the unemployment rate fluctuates.

 

C.      Definition of cyclical unemployment: the deviation of unemployment from its natural rate.

 

For 2004, economists at the Congressional Budget Office have estimated a natural rate of 5.2%.

 

D.         Case Study: Labor-Force Participation of Men and Women in the U.S. Economy

 

                        1.         There has been a dramatic rise in the labor-force participation rates of women over the past 50 years.

 

2.         Figure 3 shows this rise in the labor-force participation rate of women. The figure also shows that the labor-force participation rates for men have actually fallen by a small amount over the same time period.

 

E.         In the News: The Rise in Adult Male Joblessness

 

            1.         An increasing number of men are neither working nor looking for work.

 

            2.         This is an article by economist Alan Krueger that details this trend.

 

F.         Does the Unemployment Rate Measure What We Want It To?

 

1.         Measuring the unemployment rate is not as straightforward as it may seem.

 

2.         There is a tremendous amount of movement into and out of the labor force.

 

a.         Many of the unemployed are new entrants or reentrants looking for work.

 

b.         Many unemployment spells end with a person leaving the labor force as opposed to actually finding a job.

 

3.         There may be individuals who are calling themselves unemployed to qualify for government assistance, yet they are not trying hard to find work. These individuals are more likely not a part of the true labor force, but they will be counted as unemployed.

 

4.         Definition of discouraged workers: individuals who would like to work but have given up looking for a job.

 

a.         These individuals will not be counted as part of the labor force.

 

b.         Thus, while they are likely a part of the unemployed, they will not show up in the unemployment statistics.

 

                        5.         Table 2 presents other measures of labor underutilization calculated by the Bureau of Labor Statistics.

 

G.         How Long Are the Unemployed without Work?

 

1.         Another important variable that policymakers may be concerned with is the duration of unemployment.

 

 

2.         Most spells of unemployment are short, and most unemployment observed at any given time is long term.

 

H.         Why Are There Always Some People Unemployed?

 

1.         In an ideal labor market, wages would adjust so that the quantity of labor supplied and the quantity of labor demanded would be equal.

 

2.         However, there is always unemployment even when the economy is doing well. The unemployment rate is never zero; it fluctuates around the natural rate.

 

            a.         Definition of frictional unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills.

 

            b.         Definition of structural unemployment: unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.

 

            c.          Three possible reasons for structural unemployment are minimum-wage laws, unions, and efficiency wages.