Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 18

Employment and Unemployment

18-2

1. Employment and Unemployment Statistics

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Employed Persons

o Employed persons include 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, etc.

18-4

Employment-Population Ratio

For June 2009:

Employment-Population Ratio =

employed persons

noninstitutional population 16 years of older

* 100

Employment-Population Ratio =

154,926,000

235,655,000 * 100 = 65.7%

18-5

Unemployed Personso Unemployed persons include 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

18-6

Unemployment Rate

Unemployment Rate

=unemployed persons

unemployed + employed persons

* 100

Unemployment Rate =

unemployed persons

labor force* 100

or

For June 2009:

LFPR

= 14,729,000

154,926,000* 100 = 9.5%

18-7

Employment-Population Ratio

• The employment-population ratio has risen over the past 4 decades.

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Unemployment Rate

• The unemployment rate been highly variable over the past 4 decades.

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Advantages of Household Surveyo The unemployment rate and

employment-population 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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Disadvantages of Household Survey

o The monthly household survey has the following disadvantages: • 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.

• All unemployed persons are counted equally. • The data contain no information about minimum

acceptable wages.

18-11

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.

Population Not in the Labor Force

Unemployed

Employed

• 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.

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Determining Full Employmento Some unemployment is voluntary and some

unemployment is involuntary.

o 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 the expected and actual rates of inflation are equal.

o The natural rate of unemployment changes over time.

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Question for Thought

1. Do you expect the natural rate of unemployment to (a) increase, (b) decrease, or (c) remain at the present level over the next decade? Explain your reasoning.

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2. Macroeconomic Output and Employment Determination

18-15

Aggregate Demand

o 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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Aggregate Demando 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.

• Foreign purchases effect∞ A lower price level will reduce the price of U.S. goods relative to

foreign goods and so foreigners will increase their spending on U.S. goods.

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Aggregate Supplyo 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.

• The aggregate supply curve is vertical at the natural rate of output.

∞ Greater demand increases can’t increase output since the economy is at full-employment.

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Real Output Determination

• The intersection of the aggregate demand and supply curves D and SkAASSc c produces equilibrium price and real output levels P0 and Qn.

Real Output

Price Level

Sc

D

Qn

P0

Sk

A

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Employment Determination

• 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.

• Employment level En is the natural rate of employment; it is the amount of labor needed to produce the natural level of real output.

Employment

Wage rateSL

DL

En

W0

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3. Frictional Unemployment

18-21

Frictional Unemployment

o Frictional unemployment is unemployment due to voluntary quits, job switches, and new entrants or reentrants into the labor force.

o 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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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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4. Structural Unemployment

18-24

Structural Unemploymento 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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5. Demand-Deficient Unemployment

18-26

Demand Deficient 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.

Employment

Wage rateSL

DL

En

W0

DL1

E1

ab

18-27

Wage Rigidity

o Nominal wages are inflexible downward is unemployment due to:• Unions• Bias toward layoffs by firms• Implicit contracts• Insider-Outsider theories

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Question for Thought

1. Define the term structural unemployment and distinguish it from frictional and demand-deficient unemployment. Why might structural unemployment fall when demand-deficient unemployment declines?

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6. The Distribution of Unemployment

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Distribution of Unemployment

o Unemployment rates are higher for:• Less skilled workers• Teenagers• African Americans

o Men and women now have unemployment rates that are very similar.

o The percentage of persons unemployed for a long duration (15+ weeks) rises during recessions.

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7. Reducing Unemployment: Public Policies

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Reducing Unemployment

o Expansionary fiscal and monetary policy can be used to reduce demand-deficient unemployment.

o Complications arise from conducting stabilization policy.• Time lags

∞ It takes time for changes in policy to affect the unemployment rate.

• 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