3.3.2 Low Unemployment

3.3.
2 Low
Unemployment
1. Defi ne unemployment
2. Explain how unemployment and
unemployment rate are calculated
3. Explain the difficulties of measuring
unemployment
4. Explain the cost of unemployment
Learning (personal, social and economic)
outcomes 5. Explain the causes of unemployment:
cyclical, structural, seasonal and frictional
6. Diagrams
7. Explain the natural rate of unemployment
is the sum of structural, seasonal and
frictional unemployment
Unemployment refers to people of working age
who are actively looking for a job but who are
not employed.
Underemployment refers to people of working age ① with part-time jobs
when they would rather work full time, or ② with jobs that do not make full
use of their skills and education.
Both unemployment and underemployment mean that an economy is

wasting scarce resources by not using them fully.
Calculation
Unemployment can be measured as a number or a percentage.
As a number, it measures the number of unemployed persons in an
economy;
as a percentage, it is called unemployment rate, calculated by:
L a b o r Fo r c e （劳动力） :
1. According to the Wold Bank, a country's labor force

comprises people ages 15 and older who supply labour for
the production of goods and services. It is the sum of
employed and unemployed persons aged 15 and over.
2. Those do not count into labor force:

• full-time students
• retirees
• housewives
• the disabled
• discouraged workers
Discouraged
workers （丧志工人）
Those who are able to work, but not
actively seeking employment because
they are discouraged about their
prospects for fi nding employment, are
referred to as discouraged workers.
Hidden unemployment =
underemployment + discouraged
workers
Composition of population
Non Non labor

labor force
Unemploy
Populatio force
ed
n
Labor
Employed
force
Examples
1. a part-time retail sales clerk LF

2. a full-time nurse LF
3. a stay-at-home mother NLF
4. a volunteer working in a community centre NLF
5. a factory worker who is applying for a new job LF
6. a discouraged worker who has given up the job
search NLF
7. a recent college graduate interviewing at
LF
diff erent companies
8. an engineer who goes back to school to earn a
NLF
teaching degree
Exercise
• Suppose there is an economy with 35.5 million people, of whom

17.3 million in the labour force, 1.5 million work part time though
they would rather work full time, and 1.4 million are looking for work
but cannot find any. What is the unemployment rate?
Answer:
the unemployment rate:
Diffi culties in measuring the 'real' unemployment
Divergent approaches of measuring

unemployment
Based on registration: those who register as
unemployed
Employment benefits collector
Through national survey…
The divergence of measuring methods could

lead to inaccuracies and inconsistencies in
measuring unemployment
Offi cial statistics may

underestimate the true level of Offi cial statistics may
unemployment because of overstate the true level
hidden unemployment of unemployment
Some individuals
intentionally conceal
1. The existence of their true employment
Difficulties in
discouraged workers (either fearing loss of
measuring!!! transfer payments, or
2. Does not distinguish
unemployment and they are employed in
underemployment underground economic
activities.)
Offi cial statistics often underestimate true unemployment

because of hidden unemployment, arising from the following:
○ Unemployment fi gures include unemployed persons who are
actively looking for work. This excludes discouraged
workers.
○ Unemployment fi gures do not make a distinction between
full-time and part-time employment, and count people with
part-time jobs as having full time jobs.
○ Unemployment fi gures make no distinction on the type of
work done.(e.g. highly trained person works as a waiter)
○ Unemployment fi gures do not include people on retraining
programmes who previously lost their jobs, as well as
people who retire early.
Offi cial statistics may overestimate true unemployment

because:
○ Unemployment fi gures do not include people
working in the underground economy (or informal
economy). This is the portion of the economy that
is unregistered, legally unregulated and not
reported to tax authorities. Some people may be
offi cially registered as unemployed, yet they may
be working in an unreported (underground)
activity.
• In general, during recession the number
of part-time workers and of discouraged
workers increases. Actual unemployment
is more likely to be higher during the
downturn of the business cycle than the
offi cial statistics suggests.
• During a boom the number of people

who work in the underground economy
increases. Actual unemployment may be
lower than the reported offi cial statistics.
Fu r t h e r d i ffi c u l t i e s i n
measuring...
The national unemployment rate is an average fi gure over the
entire population, therefore it does not account for diff erences
in unemployment rate among various social groups. Within a
national population, unemployment may diff er by:
○ Region
○ Gender
○ Ethnic groups
○ Age
○ Occupational and educational attainment
The city of Detroit: bankrupt in 2013
Unemployment in the city of Detroit
Men and Women’s labour force participation rate in
the US.
High unemployment among Chinese Youth
Summary: difficulties in measuring unemployment
Different approaches of
measuring
Hidden unemployment
Distribution of unemployment
TOK question
Recession-proof occupations might include the following:
○ Government officials (civil servants)
○ Doctors in the public sector
○ Firefighter in the public sector
○ Jobs at fast food retailers such as McDonald's
Why do you think this is? What does it say about human
behaviour's relationship with knowledge and evidence?
Consequences of Unemployment
1. Economic 2. Personal and social
A. A loss of real output A. Personal problems

B. A loss of income for unemployed workers B. Greater social
C. A loss of tax revenue for the gov. problems
D. Costs to the gov. of unemployment
benefits
E. Costs to the gov. of dealing with social
problems resulting from unemployment
F. More unequal distribution of income
G. Unemployed people may have difficulties
finding work in the future.
Ty p e s o f U n e m p l o y m e n t
1. Structural 2. Frictional
unemployment (Search)unemployment
3. Seasonal 4. Cyclical
unemployment unemployment
Reasons:
1. Changes in technology
1. changes in demand
for particular types of 2. Changes in economic
labour skills <mismatch structure
between labour skills
demanded by
employers and skills
supplied by workders>
Structural 2. changes in the

unemployment geographical location
(lasting long of industries and jobs
time) can be <mismatch>
caused by
3. labour market
rigidities
If you are off ered a job in Africa...
Labour market rigidities
• Minimum wage legislation
• Labour union activities

and wage barganing with
employers
• Employment protection
laws (making it costly to
fi re, thus fi rms will
become cautious about
hiring)
• Generous unemployment
benefi ts
Frictional (Search) unemployment &
seasonal unemployment
• Frictional unemployment occurs when

workers are between jobs. Workers
may leave their job because they
have been fired, or because they are
in search of a better job, or they may
be waiting to start a new job.
• Seasonal unemployment occurs when

the demand for labour in certain
industries changes on a seasonal
basis because of variations in needs.
Frictional unemployment
Seasonal unemployment
Seasonal unemployment
The nutural rate of
unemployment
The natural rate of unemployment is equal to the

sum of structural, frictional plus seasonal
unemployment. Another way of saying this is that
when an economy has reached 'full employment'.
Cyclical unemployment
Cyclical unemployment occurs

during the downturn of the
business cycle, when the
economy is in a
defl ationary/recessionary gap.
The downturn is seen arising from
declining or low aggregate
demand, and so is also known as
demand-defi cient unemployment.
The four types of unemployment in AD-AS model

3.3.2 Low Unemployment

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3.3.2 Low Unemployment

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3.3.

Both unemployment and underemployment mean that an economy is

1. According to the Wold Bank, a country's labor force

2. Those do not count into labor force:

Non Non labor

1. a part-time retail sales clerk LF

• Suppose there is an economy with 35.5 million people, of whom

Divergent approaches of measuring

The divergence of measuring methods could

Offi cial statistics may

Offi cial statistics often underestimate true unemployment

Offi cial statistics may overestimate true unemployment

• During a boom the number of people

A. A loss of real output A. Personal problems

Structural 2. changes in the

• Minimum wage legislation

• Labour union activities

• Frictional unemployment occurs when

• Seasonal unemployment occurs when

The natural rate of unemployment is equal to the

Cyclical unemployment occurs

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