Unemployment

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• Unemployment

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Learning Objectives

1. Define the unemployment rate and other labor
   market indicators
2. Describe sources of unemployment, define full
   employment, and explaining the potential link
   between unemployment and Real GDP

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Why do we care?

• Human capital depreciation
• Unemployment maybe the largest uninsurable shock
  in ones economic life
• Social and production externalities

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Labor Market

• Together with financial, and good markets, the
  labor market, as a third market, completes the
  economy
• Important distinction Supply and Demand

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Labor Market

• Contrary to the goods and financial markets,
  where the supply comes from firms or central bank
• In the labor market, the suppliers are the
  households, and the demand comes from the firms
  (or government)

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Labor Market Indicators

• According to the Bureau of Labor Statistics,
  Current Population Survey
• Working age population is the total number of
  people aged 16 years and over who are not in
  jail, hospital or some other form of
  institutional care or in the US Armed forces

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Labor Market Indicators

• Categories of the population
• Employed working at a paid job
• Unemployed not employed but looking for a job
• Labor force the amount of labor available for
  producing goods and services
• L Number of employed Number of unemployed

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Labor Market Indicators

•  

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Example

• U.S. adult population by group, June 2007
• Number employed 146.1 million
• Number unemployed 6.9 million
• Adult population 231.7 million
• E 146.1, U 6.9, POP 231.7
• Labor force E U 146.1 6.9 153.0

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Example

• NILF POP L 231.7 153 78.7
• Unemployment rate U/L x 100 (6.9/153) x 100
  4.5

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Labor Market Indicators

•  

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Labor Market Indicators

• LFP Measures the willingness of people to work
• UR measures how hard it is to find a job for
  those who are searching for a job

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Example

• Employed 135.2 million
• Unemployed 5.7
• Population (16 years and older) 209.7 million
• NIL 68.8 million

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Example

• Labor force E U 135.2 5.7
• Unemployment rate U/L (5.7/140.9)
• LFP L/POP (140.9/209.7)

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• Classify each of the following persons in one the
  following categories employed, unemployed or not
  in the labor force
• Asaf worked 40 hours last week in Marjane
• Ulrika is a homemaker. Last week she was occupied
  with her normal household chores. She neither
  held a job nor looked for a job
• Ahmeds father is unable to work
• Julie is an autoworker. Last week she was not
  working because her union is on strike against
  the local automaker

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Does the unemployment rate we want it to?

• 1. Measuring the unemployment rate is not as
  straightforward as it may seem
• 2. Individuals move in and out of the labor force
  quite often (e.g., college graduates, older
  individuals re-entering). This makes interpreting
  the unemployment rate quite difficult

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Bias in Measuring Unemployment

• Discouraged workers are those who have attempted
  for months to find a job and have given up.
• These individuals are left out of the labor force
  even though they want to work
• Thus, while they are likely a part of the
  unemployed, they will not show up in the
  unemployment statistics

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• There might be individuals who are calling
  themselves unemployed to qualify for government
  assistance
• But they are not trying hard to find a job
• These individuals are more likely not a part of
  the true labor force, but they will counted as
  unemployed

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CEPR
Discouraged, marginally attached,
and part time for
ecomomic reasons
FIGURE 1 Unemployment and U-6 Rates, by Race and
Gender, 2011
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Unemployed
25.5
7.5
21.9
21.1
7.6
9.2
19.8
20
8.5
13.6
18.1
Percent
14.3
6.1
12.8 12.4 12.3
5.0
5.6
5.0
11.9
11.3
10
7.8
7.5
7.3
6.8
0
Black Men
Black Latino Women Women
Latino Men
Asian Women
White Men
White Women
Asian Men
Source Authors analysis of Current Population
Survey.
For all of these same groups, U-6 rates were much
higher than the standard unemployment rate. More
than one fourth of black men (25.5 percent) were
unemployed or underemployed by this
2010). Even after release, this group faces
enormous challenges in the labor market (Schmitt
and Warner, 2011). In order to isolate any
retirement-related effects, we also exclude those
65 and older, except when we explicitly look at
differences across age groups. 14 The
unemployment rate in Figure 1 is expressed in the
conventional way as a share of the total labor
force the U-6 rate is expressed as a share of
the total labor force expanded to include the
marginally attached. For ease of presentation,
both measures are presented on the same axis in
Figure 3 (and below), even though the
denominators differ slightly.
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Alternative Ways

• Administrative records instead of using Household
  Surveys
• For instance, Spain INEM
• Advantages vs. Disadvantages

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Unemployment and Income

• People who would like to work but cannot find a
  job are not contributing to the economys
  production of goods and services.
• Typically, increasing unemployment rates occur
  during recessions and depressions (Okuns law)

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Unemployment and Income

• Negative correlation between unemployment and
  growth in Real GDP

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Types of Unemployment

• Natural rate of Unemployment
• The unemployment rate that prevails when the
  economy is not in recession (e.g. 5-6)
• The average unemployment rate around which the
  economy fluctuates

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Types of Unemployment

• In a recession, the actual unemployment rate
  rises above the natural rate, then the real GDP
  is less than potential GDP
• In a boom, the actual unemployment rate falls
  below the natural rate, then Real GDP is greater
  than potential GDP

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U.S Unemployment 1958-2002
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Types of Unemployment

• Frictional unemployment
• Caused by the time it takes for workers to search
  for a job
• Occurs even when wages are flexible and there are
  enough jobs to go around
• Frictional unemployment increases when more
  people enter the labor market or when
  unemployment benefits increase

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Types of Unemployment

• Occurs because
• Workers have different abilities, preferences
• Jobs require different skills
• Geographic mobility is not instantaneous

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Types of Unemployment

• Structural unemployment
• The unemployment resulting from real wage
  rigidity and job rationing
• It represents a mismatch between supply of labor
  and demand for workers

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Types of Unemployment

• Cyclical Unemployment
• Results from fluctuations in the business cycle
• Cyclical unemployment rises during recessions and
  falls during expansions

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Types of Unemployment

• Seasonal unemployment
• It is the unemployment that arises because of
  seasonal weather patterns
• Normally, increases during the winter months and
  decreases during the spring and summer

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Full Employment

• When there is no cyclical unemployment, or
  equivalently when all unemployment is frictional,
  structural or seasonal
• The unemployment rate at full employment is
  called the natural unemployment rate