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Measuring Unemployment

Measuring Unemployment
Bureau of Labor Statistics conducts an unemployment survey of households.
Ask each person if they are: Employed, Unemployed, Not in Labor Force.
Labor Force = # Employed + # Unemployed
Unemployment rate = # Unemployed/Labor Force
Participation Rate = Labor Force/Adult Population
Natural rate of unemployment is the rate of unemployment in the Long Run.
Cyclical Unemployment is deviation of actual unemployment rate from the
Natural rate.
Problems in Measurement
Difficult to measure unemployment.
Movements into and out of labor force very common and often difficult to
May claim unemployed although not actually looking for work.
Discouraged workers given up looking for work.
May be forced to work part-time instead of full-time..

Most unemployment episodes last for short periods but at any given time
most observed unemployment is long term.

Natural Rate of Unemployment
Goal is to identify causes of unemployment.
We assume labor is fully employed in LR of our models.
BUT all free market economies experience unemployment.
Unemployment rate in the real economy fluctuates about LR trend.
That Long Run level is called the Natural Rate of Unemployment.
Where determines the level of the Natrual Rate of Unemployment for an

Chapter 5-1
Job Loss and Job Finding
Job Separation (s)

Employed, E Unemployed, U

Job Finding (f)

let s be the rate of job separation, f the rate of job finding.

In steady-state, unemployment rate not changing, so
fU = sE, or since E = L - U, find that U/L = s/(s+f)
Natural rate of unemployment determined by s and f.
Govt policy aimed at lowering the natural rate of
unemployment must either lower rate of job separation, s,
or increase rate of job finding, f.
Reason 1: Job Search
Job search is the process by which worker skills are matched to appropriate
Frictional unemployment due to workers searching for appropriate jobs.
Sectoral shifts and search lead to efficiency in prodn.
Some search unemployment inevitable due to constant changes in economy.
Public policy can be used to reduce search time.
Unemployment insurance to laid off workers will increase frictional unemployment by
reducing its cost.
Society must trade-off against benefit to workers.
Reason 2: Real Wage Rigidity

Rigid real wage causes wait unemployment.

Workers unemployed because excess supply of labor at going wage.
Wait for jobs to become available.
One source of rigidity are minimum wage laws.
Sets the lowest wage employer can pay.
Impact of minimum wage depends on skill level.
High skills not affected, low skills affected.
Minimum wage higher than equilib. wage then:
Fewer low skill workers hired by firms, more low skill workers look for jobs.
Result is increase in low skill unemployment rate.
Reason 3: Efficiency Wages

Efficiency wage theory states firms operate more efficiently paying wages
above equilibrium level, hence less employment.
Worker health: healthier workers more productive.
Worker Turnover: costly to train new workers.
Worker Effort: provide incentives for productivity.
Worker Quality: attract more productive workers.
Problems of asymmetric information.
Adverse selection or Signaling problems.
Moral Hazard or Principal/Agent Problems.