Chapter

6
Jobs and
Unemployment

CHAPTER OUTLINE
1. Define the unemployment rate and other labor market indicators.
A. Current Population Survey
B. Population Survey Criteria
C. Three Main Labor Market Indicators
1. The Unemployment Rate
2. The Employment-Population Ratio
3. The Labor Force Participation Rate
D. Alternative Measures of Unemployment
1. Marginally Attached Workers
2. Part-Time Workers Who Want Full-Time Work
2. Describe the trends and fluctuations in the indicators of the state of the
U.S. labor market.
A. Unemployment Rate
B. The Participation Rate
1. Downward Trend Since 2000
C. Alternative Measures of Unemployment
3. Describe the sources and types of unemployment, define full employment,
and explain the link between unemployment and real GDP.
A. Frictional Unemployment
B. Structural Unemployment
C. Cyclical Unemployment
D. “Natural” Unemployment
1. The Age Distribution of the Population
2. The Pace of Structural Change
3. The Real Wage Rate
4. Unemployment Benefits
D. Unemployment and Real GDP
 CHAPTER LECTURE

n 6.1 Labor Market Indicators

Current Population Survey
• The U.S. Census Bureau measures the population, labor force, and level of employment.
The working-age population is the total number of people aged 16 years and over who
are not in jail, a hospital, or some other form of institutional care or in the U.S. Armed
Forces. The labor force is the sum of the number of people employed and the number of
people unemployed.
• To be counted as unemployed, a person must not have a job and be available for work
and must be either:
• Without work but has made specific efforts to find a job within the previous four
weeks
• Waiting to be recalled back to a job from which he or she has been laid off
Three Main Labor Market Indicators
• The unemployment rate is the percentage of the people in the labor force who are un-
(Number of people unemployed)
employed. It equals ´ 100.
(Labor force)
• The employment-population ratio is the percentage of the people of working age who
are employed. It equals (Number of people employed) ´ 100.
(Working - age population)
• The labor force participation rate is the percentage of working-age population who are
(Labor force)
members of the labor force. It equals ´ 100.
(Working - age population)

Alternative Measures of Unemployment

• A marginally attached worker is a person who does not have a job, is available and will-
ing to work, has not made specific efforts to find a job within the previous four weeks,
but has looked for work sometime in the recent past. A discouraged worker is a margin-
ally attached worker who has not made specific attempts to find a job within the previ-
ous four weeks because previous unsuccessful attempts were discouraging. Other mar-
ginally attached workers differ from discouraged workers only in their reasons for not
looking for jobs. Marginally attached workers are not included in the labor force partici-
pation rate or in the unemployment rate.
• Full-time workers are those who usually work 35 hours or more a week. Part-time
workers are those who usually work less than 35 hours a week. People who work part
time for economic reasons (also known as involuntary part-time workers) are people who
work 1 to 34 hours per week but who are looking for full-time work and cannot find it
because of unfavorable business conditions. These workers are not considered strictly
unemployed, but are certainly underemployed – and, like unemployment, they indicate
slack in the labor market.
n 6.2 Labor Market Trends and Fluctuations
Unemployment Rate
• Since 1948, the average U.S. unemployment rate has been 5.8 percent, with much higher
rates during the 1973-1975, 1981-1982 and 2008-2009 recessions and lower rates during
the expansions of the 1950s, 1960s, and 1990s. The Great Depression was a period of
high unemployment, low incomes, and extreme economic hardship that lasted from 1929
to 1939. By 1933, real GDP had decreased by 30 percent and the unemployment rate rose
to 25 percent.
The Participation Rate
• Since 1960, the labor force participation rate for men has decreased and for women has
increased, though in 2016 the labor force participation rate for men (about 70 percent)
remains higher than that for women (less than 60 percent). The overall labor force partic-
ipation rate has increased from about 59 percent in 1960 to about 67 percent in 1999, be-
fore declining to around 63 percent by 2016. The cyclical fluctuations in the participation
rate are small, though the declining participation rate since 2000 may be partially at-
tributable to unemployed workers leaving the labor force as a result of the 2001 and 2008-
2009 recessions.

Alternative Measures of Unemployment

• Because the unemployment rate does not include marginally attached workers and peo-
ple who work part time for economic reasons, the BLS also now provides three broader
measurements of unemployment (or underemployment).
• U-3 is the official unemployment rate.
• U-4 is U-3 plus discouraged workers.
• U-5 is U-4 plus other marginally attached workers.
• U-6 is U-5 plus employed part time for economic reasons.
• The broader the measurement, the higher the rate at any given time period, though all of
these measurements tend to have similar fluctuations over the course of the business cy-
cle. Unemployment measurements tend to lag behind the business cycle, continuing to
rise even after a recession officially ends. This is a result of firms being slow to hire ini-
tially after the trough and from marginally attached workers reentering the labor force.
n 6.3 Unemployment and Full Employment
Types of Unemployment
• Frictional unemployment is the unemployment that arises from normal labor turnover
as people enter and leave the labor force, quit jobs to find better ones, and from the ongo-
ing creation and destruction of jobs. These workers are searching for jobs and unem-
ployment related to this search process is a permanent phenomenon in a dynamic, grow-
ing economy. Frictional unemployment increases when more people enter the labor mar-
ket or when unemployment benefits increase.
• Structural unemployment is the unemployment that arises when changes in technology
or international competition change the skills needed to perform jobs or change the loca-
 tions of jobs. Sometimes there is a mismatch between skills demanded by firms and skills
provided by workers, especially when there are great technological changes in an indus-
try. Structural unemployment generally last longer than frictional unemployment.
• Cyclical unemployment is the fluctuating unemployment over the business cycle. Cycli-
cal unemployment increases during a recession and decreases during an expansion.
“Natural” Unemployment
• Full employment does not mean that there is no unemployment. Full employment oc-
curs when there is no cyclical unemployment or, equivalently, when all the unemploy-
ment is frictional and structural.
• The unemployment rate at full employment is called the natural unemployment rate.
The term “natural” refers to the idea that some positive level of unemployment is the out-
come in any dynamic economy. The most important factors that influence the natural un-
employment rate are:
• The Age Distribution of the Population: An economy with a young population has a
large number of new job seekers and a high level of frictional unemployment.
• The Pace of Structural Change: An increase in the pace of technological change and in-
ternational competition will lead to a higher level of structural unemployment.
• The Real Wage Rate: A real wage rate higher than the equilibrium real wage rate (such
as from minimum wage or efficiency wages) will create a surplus of labor and in-
creases the natural unemployment rate.
• Unemployment Benefits: Unemployment benefits lower the opportunity cost of job
search and can increase the natural unemployment rate.

Unemployment and Real GDP

• The quantity of real GDP at full employment is called potential GDP. Potential GDP is
the value of real GDP when all the economy’s factors of production—labor, capital, land,
and entrepreneurial ability—are fully employed.
• When the economy is at full employment, the unemployment rate equals the natural rate
of unemployment (no cyclical unemployment) and real GDP equals potential GDP.
When the unemployment rate is less than the natural rate of unemployment (negative
cyclical unemployment), real GDP is greater than potential GDP. And when the unem-
ployment rate is greater than the natural rate of unemployment (positive cyclical unem-
ployment), real GDP is less than potential GDP. Real GDP minus potential GDP ex-
pressed as a percentage of potential GDP is called the output gap.