Chapter 4

Unemployment
In this chapter,
look for the answers to these questions:

• How is unemployment measured?

• What is the “natural rate of unemployment”?
• Why are there always some people
unemployed?
• Categories of Unemployment
• Types of Unemployment
• Public Policy and Job Search

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Labor Force Statistics
For Labor force statistics, the population is usually divided
into 3 groups:
 Employed: paid employees, self-employed,
and unpaid workers in a family business
 Unemployed: people not working who have looked
for work during previous 4 weeks
 Not in the labor force: everyone else

The labor force is the total # of workers, including the

employed and unemployed.

2
What is Unemployment?
 Unemployment
 Total number of adults (aged 16 years or older)
willing and able to work(labor force) and who
are actively looking for work but have not found
a job.
 Unemployment creates a cost to the entire
economy in terms of lost output – often ranging
in the billions of dollars.

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 Labor Force
 Individuals aged 16 years or older who either
have jobs or who are looking and available for
jobs; the number of employed plus the number
of unemployed
 The unemployment rate is the percentage of the
measured labor force that is unemployed.

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 Question
 What are the costs of unemployment?

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Unemployment
 Answers
 Lost output
 During early 2000s for example in the USA
unemployment rate rose by 2 percentage points
today its about 9%
 Firm output was 80% of potential
 Lost output was $200 billion of goods and services
that could have been produced
 What are the figures(lost output) for UAE? Or any
other country of interest
 Personal psychological impact

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Calculation of Unemployment

Labor force = The employed + The unemployed

Unemployed
Unemployment rate = x 100
Labor force

7
Calculation of Unemployment
 Labor Force Participation Rate
 Important when calculating the unemployment
rates. The proportion of non-institutionalized
working-age individuals who are employed or
seeking employment

8
Labor Force Statistics
Unemployment rate (“u-rate”):
% of the labor force that is unemployed

# of unemployed
u-rate = 100 x
labor force

Labor force participation rate:

% of the adult population that is in the labor force

labor force labor force

= 100 x
participation rate adult population
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ACTIVE LEARNING 1
Calculate labor force statistics
Compute the labor force, u-rate, adult population,
and labor force participation rate using this data:

Adult population by group

# of employed 139.7 million

# of unemployed 13.7 million

not in labor force 85.7 million

ACTIVE LEARNING 1
Answers
Labor force = employed + unemployed
= 139.7 + 13.7
= 153.4 million

U-rate = 100 x (unemployed)/(labor force)

= 100 x 13.7/153.4
= 8.9%
ACTIVE LEARNING 1
Answers
Population = labor force + not in labor force
= 153.4 + 85.7
= 239.1

LF partic. rate = 100 x (labor force)/(population)

= 100 x 153.4/239.1
= 64.2%
Labor Force Statistics for Different Groups
 Many countries publish these statistics for
demographic groups within the population.
 These data can reveal widely different labor
market experiences for different groups.

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Unemployment
 Categories of individuals without work
 Job loser
 Reentrant
 Job leaver
 New entrant

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Categories of Unemployment
 Job Loser
 An individual whose employment was
involuntarily terminated or who was laid off
 40–60% of the unemployed

 Reentrant
 An individual who has worked a full-time job
before but left the labor force and has now
reentered it looking for a job
 20–30% of the unemployed
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Categories of Unemployment
 Job Leaver
 An individual who voluntarily quit
 10 to 15% of the unemployed

 New Entrant
 An individual who has never worked a full-time
job for two weeks or longer
 10 to 15% of the unemployed

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Figure 1.3 The Logic of the
Unemployment Rate

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The Duration of Unemployment
Most spells of unemployment are short:
 Typically 1/3 of the unemployed
have been unemployed under 5 weeks,
2/3 have been unemployed under 14 weeks.
 Only 20% have been unemployed over 6 months.
Yet, most observed unemployment is long term.
 The small group of long-term unemployed persons
has fairly little turnover, so it accounts for most of
the unemployment observed over time.
Knowing these facts helps policymakers design
better policies to help the unemployed.
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Unemployment
 Question
 What is likely to happen to the duration of
unemployment during a downturn in the
economy?

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Unemployment
 Discouraged Workers phenomenon
 Individuals who have stopped looking for a job
because they are convinced they will not find a
suitable one, when the economy is not growing
on average these workers increase.

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The Major Types of Unemployment
 The major types of unemployment
 Frictional
 Structural
 Cyclical
 Seasonal

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The Major Types of Unemployment
 Frictional Unemployment
 Results from the fact that workers must search
for appropriate job offers ie
 Individual has many offers
 This takes time, so they remain temporarily
unemployed

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The Major Types of Unemployment
(cont'd)
 Structural Unemployment
 Results from a poor match of workers’ abilities
and skills with current requirements of
employers
 Considerable evidence shows that government
labor market policies influence how many jobs
businesses wish to create, thereby affecting
structural unemployment.

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The Major Types of Unemployment
 Cyclical Unemployment
 Results from business recessions that occur
when aggregate (total) demand is insufficient to
create full employment, for example in the
recession there results to increased hiring of
contractual workers.

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The Major Types of Unemployment
 Seasonal Unemployment
 Results from the seasonal pattern of work in
specific industries

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Full Employment and the Natural
Rate of Unemployment
 Full Employment
 An arbitrary level of unemployment that
corresponds to “normal” friction in the labor
market

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Full Employment and the Natural
Rate of Unemployment
 Natural Rate of Unemployment
 The unemployment rate that is estimated to
prevail in the long-run macroeconomic
equilibrium
 Should not reflect cyclical unemployment
 When adjusted, the natural rate should include
only frictional and structural unemployment.

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Cyclical Unemployment vs. the Natural Rate
There’s always some unemployment, though the
u-rate fluctuates from year to year.
Natural rate of unemployment
 the normal rate of unemployment around which
the actual unemployment rate fluctuates
Cyclical unemployment
 the deviation of unemployment from its
natural rate
 associated with business cycles,
which we’ll study in later chapters

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Explaining the Natural Rate: An Overview

Even when the economy is doing well, there is

always some unemployment, including:
Frictional unemployment
 occurs when workers spend time searching for the
jobs that best suit their skills and tastes
 short-term for most workers
Structural unemployment
 occurs when there are fewer jobs than workers
 usually longer-term

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Job Search
 Workers have different tastes & skills, and
jobs have different requirements.
 Job search is the process of matching workers
with appropriate jobs.
 Sectoral shifts are changes in the composition of
demand across industries or regions of the country.
 Such shifts displace some workers,
who must search for new jobs appropriate
for their skills & tastes.
 The economy is always changing,
so some frictional unemployment is inevitable.
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Public Policy and Job Search
 Govt employment agencies
provide information about job vacancies to
speed up the matching of workers with jobs.
 Public training programs
aim to equip workers displaced from declining
industries with the skills needed in growing
industries.

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Unemployment Insurance
 Unemployment insurance (UI):
a govt program that partially protects workers’
incomes when they become unemployed
 UI increases frictional unemployment.
To see why, recall one of the
Ten Principles of Economics:
People respond to incentives.
UI benefits end when a worker takes a job,
so workers have less incentive to search or
take jobs while eligible to receive benefits.

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Unemployment Insurance
Benefits of UI:
 Reduces uncertainty over incomes
 Gives the unemployed more time to search,
resulting in better job matches and thus higher
productivity

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SU MMA RY

• The unemployment rate is the percentage of

those who would like to work who do not have
jobs.
• Unemployment and labor force participation vary
widely across demographic groups.
• The natural rate of unemployment is the normal
rate of unemployment around which the actual
rate fluctuates. Cyclical unemployment is the
deviation of unemployment from its natural rate
and is connected to short-term economic
fluctuations.
Summary Discussion of Learning
Objectives
 How governments calculate the official
unemployment rate
 Percentage of the total number of adults willing and
able to work who are actively looking for work but
have not found a job
Categories of Unemployment
 Job loser
 Reentrant
 Job leaver
 New entrant

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SU MMA RY

• The natural rate includes frictional

unemployment and structural unemployment.
• Frictional unemployment occurs when workers
take time to search for the right jobs.
• Structural unemployment occurs when above-
equilibrium wages result in a surplus of labor.