Unemployment Measures

• Am I unemployed?

  • Shiloh, a 2 year old, who spends his day playing with toy cars, train sets, and bobbleheads? ❌
  • Peter, a 70 year old who has retired after working over 45 years in sales? ❌
  • Grace, a 35 year old housewife, who chooses not to work, despite having graduated from Stanford University, in order to take care of her two kids, Jinhee and Stone? ❌

• Employed

  • People currently holding a job in the economy (either full-time or part-time)

• Unemployed

  • People who are actively looking for work but have not found a job

• Labor Force

  • Sum of employed and unemployed

• Labor Force Participation

  • Percentage of the population 16 or older that is in the labor force

  • $\text{Labor force participation rate} = \dfrac{\text{Labor force}}{\text{Population age 16 and older}} \times 100$

• Unemployment rate

  • Defined as the percentage of total number of people in the labor force (employed + unemployed) who are unemployed

  • $\text{Unemployment rate} = \dfrac{\text{Number of unemployed workers}}{\text{Labor force}} \times 100$

• Example

  

• Unemployment rate = (14.3 / 154.2) × 100 = 9.3 percent

• Labor-force participation rate = (154.2 / 235.9) × 100 = 65.4 percent

• Is it possible for the unemployment rate to increase and yet be a positive sign for the economy? Explain

  • Increase in unemployment could be a positive sign for the economy

  • The number of employed labor also depends on the Labor Force Participation Rate

Limitation of the Unemployment Rate

• Unemployment tends to understate the employment situation because you are unemployed only if you have been actively looking for labor

• Marginally attached to labor force

  • Not in labor force, wanted and were available for work in prior 12 months but had not searched for work in the 4 weeks preceding BLS survey

• Discouraged worker

  • part of marginally attached workers who give up because they believe no jobs are available for them

• Underemployed

  • workers who would like full-time jobs but are working part-time or someone who is overqualified for his job position

Types of Unemployment

• Frictional unemployment

  • part of the "natural" job process in which a worker spends to find a job

  • ie. a college graduate entering the labor force or someone who has voluntarily quit his job

• Structural unemployment

  • exists when the quantity of labor supplied exceeds the quantity of labor demanded, usually because workers lack the skills demanded for the jobs available

• Cyclical unemployment

  • share of unemployment that occurs as a result of the business cycle or deviation of the actual rate of unemployment from a natural rate

  

• Examples

  • A person who moves to a new city to find a new job experiences

    • voluntary situation

    • natural "normal" process

    • Frictional unemployment

  • What type of unemployment is created by a recession

    • Cyclical unemployment

Effect of Minimum Wage on Labor Market

Natural Unemployment Rate

• Because friction unemployment is considered to be "normal" and some structural unemployment is seen to be as unavoidable in some economies, economists have coined the term "natural unemployment rate"

• Natural unemployment = Frictional unemployment + Structural unemployment

• Actual unemployment = Natural unemployment + Cyclical unemployment

• Full time employment is a situation in which there exists no cyclical unemployment