Chapter

15

Unemployment
 Identifying Unemployment
• How is unemployment measured?
• Employed
– People who work
• Unemployed
– Not employed
• Want to work
• Looking for a job
• Not in the labor force
– Not employed
– Not unemployed
2
Figure 1
The breakdown of the population in 2007

The Bureau of
Labor Statistics
divides the adult
population into
three categories:
employed,
unemployed, and
not in the labor
force.

3
 Identifying Unemployment
• How is unemployment measured?
• Labor force
– Total number of workers
• Employed
• Unemployed
• Labor force = Number of employed + Number
of unemployed

4
 Identifying Unemployment
• How is unemployment measured?
• Unemployment rate
– Percentage of labor force that is unemployed
Numberof unemployed
Unemployme
ntrate 100
Laborforce
• Labor-force participation rate
– Percentage of adult population that is in the
labor force
Laborforce
Labor- forceparticipat
ionrate 100
Adultpopulation
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Table 1
The labor-market experiences of various
demographic groups
Demographic Group Unemployment Rate Labor-force Participation Rate
Adults (ages 20 and older)
White, male 3.7% 76.3%
White, female 3.6 60.1
Black, male 7.9 71.2
Black, female 6.7 64.0
Teenagers (ages 16–19)
White, male 15.7 44.3
White, female 12.1 44.6
Black, male 33.8 29.4
Black, female 25.3 31.2

This table shows the unemployment rate and the labor-force participation rate of
various groups in the U.S. population for 2007

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 Identifying Unemployment
• Labor-market experiences
– Women ages 20 and older
– Lower rates of labor-force participation than men
– Once in the labor force
– Men and women - similar rates of unemployment
– Blacks ages 20 and older
– Similar rates of labor-force participation as whites
– Much higher rates of unemployment
– Teenagers
– Lower rates of labor-force participation
– Much higher rates of unemployment than older workers
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Figure 2
Unemployment rate since 1960

This graph uses annual data on the U.S. unemployment rate to show the
percentage of the labor force without a job. The natural rate of unemployment is the
normal level of unemployment around which the unemployment rate fluctuates
8
 Identifying Unemployment
• Natural rate of unemployment
– Normal rate of unemployment
– Around which the unemployment rate
fluctuates
• Cyclical unemployment
– Deviation of unemployment from its natural
rate

9
 Labor-force participation of men and
women in the U.S. economy
• Women’s role in American society
– Changed dramatically over the past century
– New technologies
• Reduced the amount of time required to complete routine
household tasks
– Improved birth control
• Reduced the number of children born to the typical family
– Changing political and social attitudes

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 Labor-force participation of men and
women in the U.S. economy
• Data on labor-force participation
• 1950 – difference between participation rates
– 33% of women - working or looking for work
– 87% of men - working or looking for work
• 2007 – difference between participation rates
– 59% of women - working or looking for work
– 73% of men - working or looking for work

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 Labor-force participation of men and
women in the U.S. economy
• Fall in men’s labor-force participation
– Young men - stay in school longer
– Older men - retire earlier and live longer
– With more women employed
• More fathers now stay at home to raise their children
• Counted as being out of the labor force
– Full-time students
– Retirees
– Stay-at-home dads

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 Figure 3
Labor-force participation rates for men and
women since 1950

This figure shows the percentage of adult men and women who are members of the labor force.
It shows that over the past several decades, women have entered the labor force, and men have
left it. 13
 Identifying Unemployment
• Does the unemployment rate measure what
we want it to?
• Official unemployment rate
– Useful
– Imperfect measure of joblessness
• Movements into and out of the labor force
– Common
– More than one-third of unemployed
• Recent entrants into the labor force
14
 Identifying Unemployment
• Does the unemployment rate…?
– Not all unemployment ends with the job
seeker finding a job
• Half of all spells of unemployment
– End when the unemployed leaves the labor force
• Some of those who report being unemployed
– May not be trying hard to find a job
• Want to qualify for a government help
• Working but paid “under the table”

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 Identifying Unemployment
• Does the unemployment rate…?
• Some of those who are out of labor force
– May want to work
• Discouraged workers
• Discouraged workers
– Individuals who would like to work
– Have given up looking for a job

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Table 2
Alternative measures of labor underutilization
Measure and Description Rate
U-1 Persons unemployed 15 weeks or longer, as a percentage of the civilian labor force 1.6%
(includes only very long-term unemployed)
U-2 Job losers and persons who have completed temporary jobs, as a percentage of the 2.5
civilian labor force (excludes job leavers)
U-3 Total unemployed, as a percentage of the civilian labor force (official unemployment 4.8
rate)
U-4 Total unemployed, plus discouraged workers, as a percentage of the civilian labor force 5.1
plus discouraged workers
U-5 Total unemployed plus all marginally attached workers, as a percentage of the civilian 5.8
labor force plus all marginally attached workers
U-6 Total unemployed, plus all marginally attached workers, plus total employed part-time 8.9
for economic reasons, as a percentage of the civilian labor force plus all marginally
attached workers
The table shows various measures of joblessness for the U.S. economy. The data are for February 2008.
• Marginally attached workers are persons who currently are neither working nor looking for work but
indicate that they want and are available for a job and have looked for work sometime in the recent past.
• Discouraged workers are marginally attached workers who have given a job-market-related reason for
not currently looking for a job.
• Persons employed part-time for economic reasons are those who want and are available for full-time
work but have had to settle for a part-time schedule. 17
 Identifying Unemployment
• How long are the unemployed without work?
– Most spells of unemployment are short
– Most unemployment observed at any given
time is long-term
– Most people who become unemployed
• Will soon find jobs
– Most of the economy’s unemployment
problem
• Attributable to the relatively few workers who are
jobless for long periods of time
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 Identifying Unemployment
• Why are there always some people
unemployed?
• Unemployment rate
– Never falls to zero
– Fluctuates around the natural rate of
unemployment
• Frictional unemployment
– Results because it takes time for workers to
search for the jobs
• That best suit their tastes and skills
19
 Identifying Unemployment
• Why are there always some people
unemployed?
• Structural unemployment
– Results because the number of jobs available
in some labor markets
• Is insufficient to provide a job for everyone who
wants one

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 Job Search
• Job search
• Process by which workers find appropriate jobs given
their tastes and skills
• Frictional unemployment
• Results from the process of matching workers and
jobs
• Why some frictional unemployment is inevitable
• Changes in demand for labor among different firms
• Changes in composition of demand among industries
or regions (sectoral shifts)

21
 Job Search
• Public policy and job search
• Reduce time for unemployed to find jobs
– Reduce Natural rate of unemployment
• Government programs
– Government-run employment agencies
– Public training programs

22
 Job Search
• Unemployment insurance
– Government program
– Partially protects workers’ incomes
• When they become unemployed
– Increases frictional unemployment
• Without intending to do so

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 Minimum-Wage Laws
• Structural unemployment
– Results when the number of jobs is
insufficient for the number of workers
• Minimum-wage laws
– Can cause unemployment
– Forces the wage to remain above the
equilibrium level
• Higher quantity of labor supplied
• Smaller quantity of labor demanded
• Surplus of labor – unemployment
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 Figure 4
Unemployment from a wage above equilibrium
level Wage
Labor
Surplus of labor = supply
Unemployment

Minimum wage

WE

Labor
demand

0 LD LE LS Quantity of Labor

In this labor market, the wage at which supply and demand balance is W E. At this equilibrium
wage, the quantity of labor supplied and the quantity of labor demanded both equal L E. By
contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a
minimum-wage law, the quantity of labor supplied rises to L S, and the quantity of labor demanded
falls to LD. The resulting surplus of labor, LS – LD, represents unemployment. 25
 Minimum-Wage Laws
• Wages may be kept above equilibrium level
– Minimum-wage laws
– Unions
– Efficiency wages
• If the wage - kept above the equilibrium level
– Result: unemployment

26
 Unions and Collective Bargaining
• Union
– Worker association
– Bargains with employers over
• Wages, benefits, and working conditions
• The economics of unions
– Collective bargaining
• Process: unions and firms agree on the terms of
employment
– Strike
• Organized withdrawal of labor from a firm by a union
27
 Unions and Collective Bargaining
• The economics of unions
• Union - raises the wage above the equilibrium
level
– Higher quantity of labor supplied
– Smaller quantity of labor demanded
– Unemployment
– Better off: employed workers (insiders)
– Worse off: unemployed (outsiders)
• May stay unemployed
• Take jobs in firms that are not unionized
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 Unions and Collective Bargaining
• The economics of unions
• Union - raises the wage above equilibrium
– Supply of labor – increase in industries not
unionized
• Lower wage
• Workers in unions
– Reap the benefit of collective bargaining
• Workers not in unions
– Bear some of the cost
29
 Unions and Collective Bargaining
• Are unions good or bad for the economy?
• Critics
– Unions - a type of cartel
– Allocation of labor
• Inefficient
– High union wages reduce employment in unionized
firms below the efficient level
• Inequitable
– Some workers benefit at the expense of other workers

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 Unions and Collective Bargaining
• Are unions good or bad for the economy?
• Advocates
– Unions - necessary antidote to the market
power of the firms that hire workers
• In the absence of a union
– Firm - pay lower wages and offer worse working
conditions
– Unions - help firms respond efficiently to
workers’ concerns
• Keep a happy and productive workforce
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 The Theory of Efficiency Wages
• Efficiency wages
– Above-equilibrium wages paid by firms to
increase worker productivity
• Worker health
– Better paid workers
• Eat a more nutritious diet
– Healthier and more productive
• Worker turnover
– Firm - can reduce turnover among its workers
• By paying them a high wage
32
 The Theory of Efficiency Wages
• Worker quality
– Firm – pays a high wage
• Attracts a better pool of workers
• Increases the quality of its workforce
• Worker effort
– High wages – make workers more eager to
keep their jobs
• Give workers an incentive to put forward their
best effort

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 Henry Ford and the very generous
$5-a-day wage
• Henry Ford - founder of Ford Motor Company
– Introduced modern techniques of production
– Built cars on assembly lines
• Unskilled workers were taught to perform the same
simple tasks over and over again
– Output: Model T Ford
• 1914, Ford - the $5 workday
– Twice the going wage
– Long lines of job seekers
• Number of workers willing to work > number of workers
Ford needed
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 Henry Ford and the very generous
$5-a-day wage
• Ford’s high-wage policy – efficiency wage
– Turnover fell
– Absenteeism fell
– Productivity rose
– Workers – so much more efficient
• Ford’s production costs were lower despite higher wages
– Profitable for the firm
– Closely linked to Ford’s use of the assembly line
• Assembly line - highly interdependent workers

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