MACROECONOMICS I
Unemployment
Lecture 5
March 11, 2022
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LOOK FOR THE ANSWERS TO THESE
QUESTIONS:
• How is unemployment measured?
• What is the “natural rate of unemployment”?
• Why are there always some people unemployed?
• How is unemployment affected by unions and
minimum wage laws?
• What is the theory of efficiency wages, and how
does it help explain unemployment?
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LABOR FORCE STATISTICS
Produced by Bureau of Labor Statistics (BLS), in
the U.S. Dept. of Labor
 Based on regular survey of 60,000
households
 Based on “adult population” (16 yrs or older)
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LABOR FORCE STATISTICS
BLS divides population into 3 groups:
 Employed: paid employees and self-employed
 Unemployed: people not working who have
looked for work during previous 4 weeks
 Not in the labor force: everyone else
Labor force = Employed + Unemployed
 The total # of workers
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LABOR FORCE STATISTICS
Unemployment rate (“u-rate”):
 % of the labor force that is unemployed
u−rate = 100 ×
# of unemployed
Labor force
Labor-force participation rate
 % of the adult population that is in the labor force
Labor−force participation rate
= 100 ×
Labor force
Adult population
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6
ACTIVE LEARNING 1 CALCULATE LABOR FORCE STATISTICS
Compute the labor force, u-rate, adult population,
and labor force participation rate using this data:
Adult population of the U.S.
by group, Feb 2021
# of employed 150.2 million
# of unemployed 9.9 million
not in labor force 100.7 million
7
ACTIVE LEARNING 1 ANSWERS
Labor force = employed + unemployed =
= 150.2 + 9.9 = 160.1 million
U-rate = 100 x (unemployed)/(labor force) =
= 100 x 9.9/160.1 = 6.2%
Population = labor force + not in labor force
= 160.1 + 100.7 = 260.8 million
LF partic. Rate = 100 x (labor force)/(population)
= 100 x 160.1/260.8 = 61.4%
LABOR FORCE STATISTICS FOR DIFFERENT GROUPS
The BLS publishes these statistics for
demographic groups within the population.
 These data reveal widely different labor
market experiences for different groups.
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LABOR FORCE STATISTICS FOR WHITES & BLACKS,
FEB 2021
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Adults (20 yrs & older)
u-rate LF part. rate
White, male 5.3% 69.7%
White, female 5.2 56.3
Black, male 10.2 66.0
Black, female 8.9 59.7
LABOR FORCE STATISTICS FOR WHITES & BLACKS,
FEB 2021
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Teens (16–19 yrs)
u-rate LF part. rate
White 13.1% 38.9%
Black 19.8 28.7
LABOR FORCE STATISTICS FOR OTHER GROUPS,
FEB 2021
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All ages
u-rate LF part. rate
Asian 5.2% 62.2%
Hispanic 8.5 65.4
LABOR FORCE STATISTICS BY EDUCATION LEVEL,
FEB 2021
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Adults (25 yrs & older)
u-rate LF part. rate
less than h.s. 10.1% 45.9%
h.s. diploma 7.2 54.7
some college or
assoc degree
5.9 62.7
bachelor’s
degree or more
3.8 71.8
LF PARTICIPATION RATES BY SEX, 1948–2016
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female
male
percent
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ACTIVE LEARNING 2 LIMITATIONS OF THE U-RATE
In each of the following, what happens to the u-rate?
Does the u-rate give an accurate impression of what’s
happening in the labor market?
A. Sue lost her job and begins looking for a new one.
B. Jon, a steelworker who has been out of work since his
mill closed last year, becomes discouraged and gives up
looking for work.
C. Sam, the sole earner in his family of 5, just lost his
$80,000 job as a research scientist. Immediately, he
takes a part-time job at McDonald’s until he can find
another job in his field.
15
ACTIVE LEARNING 2 ANSWERS
A. Sue lost her job and begins looking for a new one.
u-rate rises
A rising u-rate gives the impression that the labor
market is worsening, and it is.
16
ACTIVE LEARNING 2 ANSWERS
B. Jon has been out of work since last year,
becomes discouraged, stops looking for work.
Discouraged workers would like to work but have
given up looking for jobs
- classified as “not in the labor force” rather than
“unemployed”
U-rate falls because Jon is no longer counted as
unemployed.
A falling u-rate gives the impression that the labor
market is improving, but it is not.
17
ACTIVE LEARNING 2 ANSWERS
C. Sam lost his $80,000 job, and takes a part-time
job at McDonald’s until he finds a better one.
U-rate unchanged because a person is
“employed” whether they work full or part time.
Things are worse, but the u-rate fails to show it.
WHAT DOES THE U-RATE REALLY MEASURE?
The u-rate:
 Not a perfect indicator of joblessness or the health
of the labor market
➢ It excludes discouraged workers.
➢ It does not distinguish between full-time and
part-time work, or people working part time
because full-time jobs not available.
➢ Some people misreport their work status
 Still a very useful barometer of the labor market &
economy. 18
THE DURATION OF UNEMPLOYMENT
Most spells of unemployment are short:
 Typically 1/3 of the unemployed have
been unemployed under 5 weeks, 2/3
have been unemployed under 14 weeks.
 Only 20% have been unemployed over 6
months.
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THE DURATION OF UNEMPLOYMENT
Yet, most observed unemployment is long term.
 The small group of long-term unemployed
persons has fairly little turnover, so it
accounts for most of the unemployment
observed over time.
Knowing these facts helps policymakers design
better policies to help the unemployed.
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CYCLICAL UNEMPLOYMENT
VS. THE NATURAL RATE
There’s always some unemployment, though the urate
fluctuates from year to year.
Natural rate of unemployment
 Normal rate of unemployment around which the
actual unemployment rate fluctuates
Cyclical unemployment
 Deviation of unemployment from its natural rate
 Associated with business cycles, which we’ll study
in later chapters
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U.S. UNEMPLOYMENT, 1960–2016
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EXPLAINING THE NATURAL RATE:
AN OVERVIEW
Even when the economy is doing well, there is always
some unemployment, including:
Frictional unemployment
 Occurs when workers spend time searching for the
jobs that best suit their skills and tastes
 Short-term for most workers
Structural unemployment
 Occurs when there are fewer jobs than workers
 Usually longer-term
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JOB SEARCH
Workers have different tastes & skills, and
jobs have different requirements.
Job search
 Process of matching workers with appropriate
jobs
Sectoral shifts
 Changes in the composition of demand across
industries or regions of the country.
 Displace some workers, who must search for new
jobs appropriate for their skills & tastes.
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PUBLIC POLICY AND JOB SEARCH
Government employment agencies
 Provide information about job vacancies to
speed up the matching of workers with jobs.
Public training programs
 Aim to equip workers displaced from
declining industries with the skills needed in
growing industries.
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UNEMPLOYMENT INSURANCE
Unemployment insurance (UI):
 A government program that partially protects
workers’ incomes when they become
unemployed
 Increases frictional unemployment.
➢ People respond to incentives.
➢ UI benefits end when a worker takes a job,
so workers have less incentive to search or
take jobs while eligible to receive benefits.
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UNEMPLOYMENT INSURANCE
Benefits of UI:
 Reduces uncertainty over incomes
 Gives the unemployed more time to search,
resulting in better job matches and thus higher
productivity
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EXPLAINING STRUCTURAL UNEMPLOYMENT
Structural unemployment
occurs when there are not
enough jobs to go around.
Occurs when wage
is kept above equilibrium.
There are three reasons
for this…
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W
L
D
S
WE
actual
wage
W1
unemp-
loyment
1. MINIMUM-WAGE LAWS
The minimum wage
 May exceed the equilibrium wage for the
least skilled or experienced workers, causing
structural unemployment.
 But this group is a small part of the labor
force, so the min. wage can’t explain most
unemployment.
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1. MINIMUM-WAGE LAWS
Current Population Survey – study by the BLS:
 267K earns min. wage ($5.85); 1.5 m earns
less
 Min wage earners are more likely to be
women (1% of men, 3% of women)
 Young: ~50% are under 25
 More likely to be part-time workers
 Leisure and hospit. has highest proportion
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2. UNIONS
Union:
 Worker association that bargains with
employers over wages, benefits, and
working conditions
 Exert their market power to negotiate higher
wages for workers.
 The typical union worker earns 20% higher
wages and gets more benefits than a
nonunion worker for the same type of work.
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LABOR UNIONS ACROSS THE WORLD
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33
UNEMPLOYMENT RATES ACROSS THE WORLD
0
5
10
15
20
25
30
0
2
4
6
8
10
12
14
00Q1 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 17Q1 18Q1 19Q1 20Q1
USA Japan UK Sweden Germany
France Austria CR Spain (R)
2. UNIONS
Unions raise the wage above equilibrium:
 Quantity of labor demanded falls and
unemployment results.
 “Insiders” – workers who remain employed, are
better off.
 “Outsiders” – workers who lose their jobs,
are worse off.
 Some outsiders go to non-unionized labor markets,
which increases labor supply and reduces wages in
those markets. 34
2. UNIONS
Are unions good or bad? Economists disagree.
Critics:
 Unions are cartels.
 They raise wages above equilibrium, which causes
unemployment and/or depresses wages in nonunion
labor markets.
Advocates:
 Unions counter the market power of large firms,
make firms more responsive to workers’ concerns.
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3. EFFICIENCY WAGES
The theory of efficiency wages:
 Firms voluntarily pay above-equilibrium
wages to boost worker productivity.
Different versions of efficiency wage theory
suggest different reasons why firms pay high
wages.
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FOUR REASONS WHY FIRMS MIGHT PAY
EFFICIENCY WAGES:
1. Worker health
 In less developed countries, poor
nutrition is a common problem.
 Paying higher wages allows workers to
eat better, makes them healthier, more
productive.
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FOUR REASONS WHY FIRMS MIGHT PAY
EFFICIENCY WAGES:
2. Worker turnover
 Hiring & training new workers is costly.
 Paying high wages gives workers more
incentive to stay, reduces turnover.
3. Worker quality
 Offering higher wages attracts better job
applicants, increases quality of the firm’s
workforce.
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FOUR REASONS WHY FIRMS MIGHT PAY
EFFICIENCY WAGES:
4. Worker effort
 Workers can work hard or shirk. Shirkers are
fired if caught.
 Is being fired a good deterrent?
 Depends on how hard it is to find another job.
 If market wage is above equilibrium wage,
there aren’t enough jobs to go around, so
workers have more incentive to work, not
shirk. 39
40
ACTIVE LEARNING 3 APPLYING THE CONCEPTS
Which of the following would be most likely to reduce
frictional unemployment?
A. The government eliminates the minimum wage.
B. The government increases unemployment insurance
benefits.
C. A new law bans labor unions.
D. More workers post their resumes at LinkedIn.com,
and more employers use LinkedIn.com to find suitable
workers to hire.
E. Sectoral shifts become more frequent.
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ACTIVE LEARNING 3 ANSWERS
A. The government eliminates the minimum wage.
C. A new law bans labor unions.
These are likely to reduce structural unemployment,
not frictional unemployment.
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ACTIVE LEARNING 3 ANSWERS
B. The government increases unemployment insurance
benefits.
E. Sectoral shifts become more frequent.
These are likely to increase frictional unemployment,
not reduce it.
43
ACTIVE LEARNING 3 ANSWERS
D. More workers post their resumes at LinkedIn.com,
and more employers use LinkedIn.com to find suitable
workers to hire.
Likely to speed up the process of matching workers &
jobs, which would reduce frictional unemployment.
EXPLAINING THE NATURAL RATE OF UNEMPLOYMENT:
A SUMMARY
The natural rate of unemployment consists of:
 Frictional unemployment: it takes time to search for the
right jobs
o Even if there are enough jobs to go around
 Structural unemployment: when wage is above
equilibrium, not enough jobs
o Min. wages, labor unions, efficiency wages
Later chapters discuss cyclical unemployment, the short-term
fluctuations in unemployment associated with business
cycles.
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SUMMARY
• The unemployment rate is the percentage of those
who would like to work, who do not have jobs.
• Unemployment and labor force participation vary
widely across demographic groups.
• The natural rate of unemployment is the normal rate
of unemployment around which the actual rate
fluctuates. Cyclical unemployment is the deviation of
unemployment from its natural rate and is connected
to short-term economic fluctuations.
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SUMMARY
• The natural rate includes frictional unemployment
and structural unemployment.
• Frictional unemployment occurs when workers take
time to search for the right jobs.
• Structural unemployment occurs when aboveequilibrium
wages result in a surplus of labor.
• Three reasons for above-equilibrium wages
include minimum wage laws, unions, and efficiency
wages. 46