Chapter 18: Employment and Unemployment (and its statistics)

1. Chapter 18: Employment and Unemployment (and its statistics)

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2. Employed Persons

Employed persons includes those 16
years of age and older who are either:
employed by a private firm or a
government unit
self-employed
had jobs but were not working because
of illness, bad weather,
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3. Employment-Population Ratio

employed persons
Employment* 100
Population Ratio = noninstitutional population
16 years of older
For June 2001:
EmploymentPopulation Ratio =
135,923,000
211,725,000
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* 100 = 64.2%

4. Unemployed Persons

Unemployed persons includes those 16
years of age and older, who are not
working but are available for work, and
either:
(1) engaged in some job-seeking activity in
the past 4 weeks.
(2) were waiting to be called back to a job
from which they were temporarily laid off.
(3) would have been looking for job but
were temporarily ill.
(4) waiting to report for a new job within
30 days.
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5. Unemployment Rate

Unemployment =
Rate
unemployed persons
unemployed + employed * 100
persons
or
Unemployment
=
Rate
unemployed persons
labor force
For June 2001:
=
LFPR
6,422,000
141,354,000
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* 100 = 4.5%
* 100

6. Employment-Population Ratio

• The employmentpopulation ratio has
risen over the past 4
decades.
Employment-Population Ratio
Employment-Population
Ratio
66%
64%
62%
60%
58%
56%
54%
52%
50%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Employment-Population Ratio
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7. Unemployment Rate

• The unemployment
rate been highly
variable over the past
4 decades.
Employment-Population Ratio
Unemployment Rate
12%
10%
8%
6%
4%
2%
0%
1960 1965 1970 1975 1980 1985 1990 1995 2000
Unemployment Rate
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8. Advantages of Household Survey

The unemployment rate and employmentpopulation ratios come from a monthly
household survey which has the
following advantages:
Time-consistent and large survey
Time lag in obtaining data is short.
Data is available on a disaggregated basis.
The unemployment rate provides
information about the business cycle.
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9. Shortages of Household Survey

The monthly household survey has the
following shortcomings:
Part-time workers are counted as fully
employed even if they wanted to work as
a full-time worker.
Unemployed persons must be actively
seeking work.
It does not measure persons who are
subemployed.
Persons may provide false information.
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10. Stock-Flow Model

• At any point in time,
there is a measurable
stock of people in each
of the three boxes that
represent categories of
labor force status.
• But these stocks are
simultaneously being
depleted by flows in
and out of each
category.
• Changes in the rates of
these flows can
significantly affect the
unemployment rate.
Population Not in the Labor Force
Unemployed
Employed
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11. Determining Full Employment

Some unemployment is voluntary and some
unemployment is involuntary.
The natural rate of unemployment is
The unemployment rate at which there is
neither excess demand nor excess supply in
the labor market or
The unemployment rate that will occur in
the long run if he expected and actual rates
of inflation are equal.
The natural rate of unemployment changes
over time.
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12.

2. Macroeconomic
Output and Employment
Determination
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13. Aggregate Demand

Aggregate demand for goods and services
indicates the total quantity of goods and
services that domestic consumers,
businesses, government, and foreign
buyers will collectively desire to purchase
at each price level.
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14. Aggregate Demand

The aggregate demand curve slopes
downward because of the
Interest rate effect
A lower price level will reduce money
demand and thus interest rates.
The lower interest rate will increase
spending on goods such as housing.
Wealth or real balances effect
A lower price level will increase the real
value of assets whose value is fixed in
nominal terms and thus raise spending.
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15. Aggregate Demand

Foreign purchases effect
A lower price level will reduce the price
of domestic goods relative to foreign
goods and so foreigners will increase their
spending on domestic goods.
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16. Aggregate Supply

Aggregate supply of goods and services is
the relationship between the price level
and total quantity of real output that firms
are willing to produce and offer for sale.
The aggregate supply curve is upward
sloping below the natural rate of output.
Since wages are inflexible downward, a
decrease in demand will result in layoffs
and reduce output.
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17. Aggregate Supply

The aggregate supply curve is vertical at
the natural rate of output.
Greater demand increase can’t increase
output since the economy is at fullemployment
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18. Real Output Determination

• The intersection of the
aggregate demand and supply Price Level
curves D and SkASc produces
equilibrium price and real
output levels P0 and Qn.
Sc
A
P0
D
Sk
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Qn
Real Output

19. Employment Determination

Wage rate
• In the aggregate labor market,
the equilibrium wage rate and
level of total employment are
determined by the intersection of
the aggregate labor demand
supply curves.
W0
• Employment level En is the
natural rate of employment; it
is the amount of labor needed
to produce the natural level of
real output.
SL
DL
En
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Employment

20.

3. Types of
Unemployment
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21. Frictional Unemployment

Frictional unemployment is
unemployment due to voluntary quits, job
switches, and new entrants or reentrants
into the labor force.
Sources of frictional unemployment:
Search unemployment which is caused by
individuals searching for the best wage
offer and firms searching for workers to
fill job openings.
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22. Frictional Unemployment

Wait unemployment which is caused by
the excess supply of workers that results
from non-market clearing wages.
Temporary layoffs
• Workers on temporary layoff usually don’t
search for another job
Union job queues
• Workers may wait in a union job queue rather
than take a nonunion job
Efficiency wages
• Efficiency wages contribute to frictional
unemployment since firms pay high wages to
increase worker productivity.
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23. Structural Unemployment

Structural unemployment is
unemployment due:
Mismatch between the skills required for
available job openings and the skills
possessed by those seeking work.
Geographic mismatch between the
locations of job openings and job seekers.
Workers losing jobs because of permanent
plant closing or job cutbacks.
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24. Demand Deficient (Cyclical) Unemployment

• A decline in aggregate demand
reduces the demand for labor
(from DL to DL1).
• Assuming a rigid nominal wage
W0, the decline in labor
demand results in involuntary
demand-deficient
unemployment by the amount
ab.
Wage rate
SL
W0
b
a
DL
DL1
E1
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En
Employment

25. Wage Rigidity

Nominal wages are inflexible downward
due to:
Unions
Bias toward layoffs by firms
Implicit contracts
Insider-Outsider theories
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26.

7. Reducing
Unemployment:
Public Policies
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27. Reducing Unemployment

Expansionary fiscal and monetary policy
can used to reduce demand-deficient
unemployment.
Complications arise from conducting
stabilization policy.
Time lags
It takes time for changes in policy to
affect the unemployment rate
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28. Reducing Unemployment

Crowding out effect
Higher government spending causes the
government to borrow more funds and
thus raise interest rates and reduce private
spending.
Tendency to create inflation.
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