Part 2 The Goals of Macroeconomic Policy

Macroeconomics Prof. Rushen Chahal

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Chapter 5: Part 2
Measuring unemployment
The unemployment rate

Three Types of Unemployment

Frictional unemployment Structural unemployment Cyclical unemployment

Full Employment Unemployment Insurance

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Measuring Unemployment
Four Groups: 1. Employed 2. Unemployed 3. Not in the labor force 4. Labor force

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Prof. Rushen Chahal

Employed
The employed are people who perform any paid work, as well as those who have jobs but are absent from work because of illness, strikes, or vacations

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Prof. Rushen Chahal

Unemployed
This group includes people who are not employed, but are actively looking for work or waiting to return to work. If I don t have a job, but am not looking for work, I do not count as unemployed

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Prof. Rushen Chahal

Not in the Labor Force

This includes the adult population that is keeping house, retired, too ill to work, or simply not looking for work.

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Prof. Rushen Chahal

Labor Force
This includes all those who are either employed or unemployed 2005 China had an estimated labor force of 791.4 million Labor force by occupation: agriculture 49%, industry 22%, services 29% (2003 est.) (source, CIA world factbook)
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The Unemployment Rate

People with jobs are employed People without jobs but looking for work are unemployed People without jobs who are not looking for work are outside the labor force

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Prof. Rushen Chahal

The Unemployment Rate

The unemployment rate is the number of unemployed divided by the total labor force

Unemployed Unemployment Rate = ___________ Labor Force

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Prof. Rushen Chahal

The Unemployment Rate

Assume the labor force of a country equals 150 million Six million people have no job and are looking for work One million have no job but are not looking for work. What is the unemployment rate? 4 percent (6 million/150 million)
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The Unemployment Rate

U.S. Adult population in 2003

75.2
Not in Labor Force million

Employed Unemployed Not in Labor Force

Employed million

137.6

Unemployed 9 million
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The Unemployment Rate: China

 The national bureau of statistics reported China s 2004 unemployment rate at 4.1 percent, down .1 percent from 2003  This number does not include those laid off from State Owned Enterprises  China does not count rural areas when calculating unemployment  Many western analysts put China s unemployment rate closer to 8-10%

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Prof. Rushen Chahal

Underestimated Unemployment Rate

 Some workers who work part time would like to work full time = underemployed  Some workers who would like to have a job, but have tried unsuccessfully and have given up = discouraged workers
 US Gov t est. 480,000 discouraged workers in 2003

 This leads to underestimation of the unemployment rate

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Problems with the Unemployment Rate

Some people are considered unemployed because their source of income comes from underground economies. The underground economy causes the reported unemployment rate to overstate true unemployment

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Prof. Rushen Chahal

Unemployment as an Economic and Social Problem

High unemployment is both an economic and social problem Unemployment as an economic problem represents waste of a valuable resource: labor Unemployment as a social problem represents suffering of unemployed workers as they struggle with reduced incomes

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Prof. Rushen Chahal

Unemployment as an Economic and Social Problem

When unemployment goes up, the economy is in effect throwing away the goods and services that workers could have produced

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Unemployment as an Economic and Social Problem

Average Unemployment rate (%) The great depression (1930-1939) Oil and inflation crises (19751984) Recent tranquility (1985-1996)
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GDP loss ($, billion, 1996 prices)

4,400

As percent of GDP during the period

38.5

18.2

7.7

1,250

2.5

6.3

500

0.6

Prof. Rushen Chahal

Unemployment as an Economic and Social Problem

Economic losses due to unemployment are the greatest documented wastes in a modern economy They are many times larger than the estimated inefficiencies form microeconomic waste due to monopoly or tariffs and quotas

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Unemployment as an Economic and Social Problem

Other economic problems of unemployment Lower tax revenues Higher benefit payments Social costs: crime, vandalism, family breakdowns and social welfare support, regional decay

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Three Types of Unemployment

Frictional unemployment Structural unemployment Cyclical unemployment

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Frictional Unemployment
 Frictional Unemployment is unemployment that is due to normal changing of jobs in the labor market. It includes people who are temporarily between jobs because they are moving or changing jobs.  Recently graduated students, parents who reenter the work force after having children, or those looking for better work are examples of frictional unemployment.  Frictional unemployment is generally NOT harmful.

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Prof. Rushen Chahal

Structural Unemployment
Structural unemployment refers to workers who have lost their jobs because they have been replaced by machines or because their skills are no longer needed in the economy. This can be caused by such factors as technological change, international trade, and changing ways of doing business.

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Prof. Rushen Chahal

Structural Unemployment
Structural unemployment is a necessary part of economic growth Progress creates structural unemployment

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Cyclical Unemployment
Cyclical Unemployment exists when the overall demand for labor is low Cyclical Unemployment is a result of decreased output in an economy, and thus a decreased demand for labor Recessions and depressions are some of the main causes for cyclical unemployment
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Cyclical Unemployment
As economies recover from recessions or depressions, jobs are re-created. As a result the cyclically unemployed return to their old jobs or find new ones. In this way cyclical unemployment diminishes and eventually disappears
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What type of unemployment is it?

 Long term unemployment related to lack of marketable skills
 Structural Unemployment

 Temporary unemployment related to finding a job or switching jobs

 Frictional Unemployment

 Unemployment related to a recession

 Cyclical Unemployment

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Who are the Unemployed?

Unemployment rate of different groups (% of labor force) Unemployment rate of different groups (% of labor force)

Labor Market Group

Recessio n (1982)

Boom (1989)

Recessio n (1982)

Boom (1989)

Age 16-19
20+

23.2 8.6 8.6 17.3 8.8 8.3 9.7

14.7 4.6 4.6 9.4 4.3 5.0

Prof. Rushen Chahal

18.5 81.5 77.2 22.8 58.5 41.5 100.0

17.7 82.3 74.5 25.5 51.1 48.9 100.0

Race White
Black

Sex Male
Female
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All

5.3

Duration of Unemployment
40 35 30 25 20 15 10 5 0 Less Than 5 5-14 15-26 More than 26 Percent of unemployed workers

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Duration of unemployment, 1997 (weeks)

Prof. Rushen Chahal

Sources of Unemployment
Unemployment by reason (% of labor force that is
unemployed for different reasons)
5.7 Job loser Reentrant New Entrant Job Leaver

2.4 2.2 1.5 1.1 0.8

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0.6 0.8 1989

Prof. Rushen Chahal

1982

Unemployment by Age and Race

Unemployment Rate (% of labor force)
Age 16-17 18-19 20-24 25-34 35-44 45-54 55-64
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White 17.3 11.6 6.3 3.5 3.0 2.4 2.6 3.0 Rushen Chahal Prof.

Black 39.2 32.6 20.1 10.1 5.9 5.1 3.4 3.8

65+

Full Employment
Over time, the natural unemployment rate tends to settle at a few percentage points above zero. This is due to the presence of structural and frictional unemployment. Natural rate of unemployment structural and frictional unemployment.
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Full Employment
 Full Employment equals 100% minus the natural rate of unemployment.  Full employment occurs at less than 100% employment, because the natural rate of unemployment exceeds 0%.  The natural rate of unemployment in America is thought to be about 5% of the U.S. workforce. .

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Prof. Rushen Chahal

Unemployment Insurance
After the great depression, the United States implemented Unemployment Insurance. This provides unemployed people with some money to get by while they try and look for a new job.

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Unemployment Insurance
Generally to qualify for welfare you must: Have held a job for at least 6 months Have held a job recently Have been fired Have actively been looking for a new job

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Prof. Rushen Chahal

Unemployment Insurance
Average weekly benefit check: $262 About 49% of average earnings However, only about 41 percent of those unemployed (about 8.75 million people) were eligible for welfare benefits

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Prof. Rushen Chahal