Unemployment Highlights Measuring unemployment Simply put, not everyone in the population is eligible, or interested, in having a job. Therefore, the following diagram illustrates how we segment the population for the purpose of measuring unemployment. Population NICAP

members of armed forces those 16 and under those institutionalized

Labor Force Employed

NILFs Unemployed

NICAP  stands for Non-Institutionalized, Civilian, Adult, Population  think of this group as those individuals we would consider eligible to work  children, those in prison, and those in the armed forces are excluded from this group NILF  stands for Not In the Labor Force  retirees, stay-at-home parents, etc fall in this category Labor force  the number of individuals holding or seeking jobs  think of this group as the number of people interested in working Employed  you are employed if you currently have a job for which you are being paid Unemployed  you are unemployed if you do no not currently have a job for which you are being paid, but are actively looking for a job Unemployment rate  tracks the percentage of the population which is interested in having a job, but does not currently have one u =

Number of unemployed individuals Size of the labor force

Labor force participation rate (LFPR)  tracks the percentage of adult, noninstitutionalized, civilians who are interested in working LFPR = Labor Force NICAP Our official unemployment rate definition leads to strange behavior  switching from full-time to part-time switch leads to no change in official rate  switching from high-paying to low-paying jobs also leads to no change  if someone who is officially unemployed quits looking for work, the unemployment rate actually falls Discouraged worker  someone who has given up actively looking for a job  they are no longer considered to be part of the labor force  they are no longer considered to be unemployed Official unemployment rate fails to capture the concept of underemployment. You are underemployed if  you are working part-time when you would like to be working full-time, or  you are working at a job that doesn’t fully utilize your educatin, training, ad skills Alternative measurs of unemployment do exist. Some of these attempt to measure underemployment. See the Bureau of Labor Statistics (BLS) publication: The Unemployment Rate and Beyond: Alternative Measures of Labor Underutilization Collecting the numbers needed to calculate our unemployment rate  the unemployment rate is calculated from a BLS monthly telephone survey of 60,000 household’s known as the household survey  all samples are flawed, but this survey provides a pretty good estimate  additional data on employment is pulled from the establishment survey, also known as the payroll survey

Types of unemployment Frictional  tends to be voluntary and short-term  due to “frictions” in the job market, job-matching isn’t instantaneous  the job exists, and you have the skills to fill that position, but it takes time to connect you with the job Structural  tends to be involuntary and longer term  sometimes current workers do not have the skills employers need o often the the result of technological change  sometimes it is a result of a geographic mismatch o jobs exist, workers exist, but they aren’t in the same area of the country  sometimes it is a result of regulations and government intervention o generous benefits may deter workers from seeking new work quickly  workers do not become employed until they attain new skills or move long distances Cyclical  due to economic fluctuations  result of recessions and depressions  lasts as long as the economic business downturn lasts Full employment  defined as “the absence of cyclical unemployment”  thus, when we are at full-employment, the unemployment rate isn’t actually zero  the “full-employment” unemployment rate = frictional rate + structural rate  also known as the natural rate of unemployment  actual level is unknown  different countries may have different natural rates of unemployment if they have different structural or frictional rates  the natural rate for a country can change over time if the frictional or structural rate changes  to be on the PPF, we have to be at full-employment, which oddly doesn’t mean zero unemployment

Costs of unemployment Lost output and reduced living standards  economies with high unemployment fail to achieve their Potential GDP  lost output can never be regained  losses are cumulative over time  since output determines our living standard, lower output = lower living standards Potential GDP (PGDP)  defined to be the level of output an economy can produce when it is fulling using its resurces, including labor  the level of output we can produce at full-employment  potential GDP is achieved on the PPF Okun’s Law  essentially states that “for every one percent that our actual rate of unemployment exceeds the natural rate, we lose two percent of our output” Other costs  high unemployment is associated with other social costs o alcoholism and drug abuse o crime o social upheaval  we have to use valuable resources to manage these issues, resources that could be used to produce goods and services we could consume The incidence of unemployment has historically been quite uneven. During periods of economic downturns  women were affected more than men  minorities were affected more than whites  teens were affected more than adults  blue collar workers were affected more than white collar

Dealing with unemployment  prior of the Great Depression, there was no real role for the government in dealing with unemployment  it took a largely laissez-faire approach to the economy  national system of unemployment insurance starts with the Social Security Act of 1935 Unemployment Insurance Basics  government transfer program  funded by taxes on employers  general restrictions o must have previous work experience o cannot quit o must be actively looking for a job o receive only a portion of your previous earnings o limited time frame  achieving PGDP requires us to fully utilize the skills and training of our workforce  designed to provide workers with some support while they look for a new job that does actually use their skills and training

Why did this program come into existence?  Partly due to o Altruism  We do care for our fellow man o Self-interest  We may be worried that we will become unemployed some day  Largely to prevent recessions from turning into depressions o Prevents a downward spiral by acting as an automatic stabilizer o Injects cash quickly into the economy because unemployment recipient payments are spent almost immediately o Designed to “prop up aggregate demand”