Employment and Unemployment 5 Monitoring Jobs and Inflation Why Unemployment is a Problem Results in Lost Incomes and Production Lost Human Capital Current Population Survey Population is divided into two broad groups Lost production means lower living consumption and a lower investment in capital which lowers the living standard in both the present and the future Prolonged unemployment permanently damages a person s job prospects by destroying human capital Ex manager loses job b c of downsizing and has to drive a taxi Years later he cant compete with new MBA graduates He gets hired as a manager but for lower pay The working age population is the total number of people aged 16 years and over who are not in jail hospital or some other form of institutional care Others who are too young to work or who live in institutions and are unable to work Classified as not in the labor force Working age population is then divided into two other groups Those in the labor force Divided into Unemployed 1 Without work but has made specific efforts to find a job within the previous four weeks 2 Waiting to be called back to a job from which he or she has been laid off 3 Waiting to start a new job within 30 days Employed Must have either a full time job or part time job Those not in the labor force The labor force is the sum of the employed and the unemployed Three Labor Market Indicators The Census Bureau calculates 3 indicators of the state of the labor market 1 The unemployment rate Amount of unemployment is an indicator or the extent to which people who want jobs but can t find them Unemployment Rate percentage of people in the labor force who are unemployed Fluctuates over the business cycle and reaches a peak value after a recession ends 2 The employment to population ratio The number of people of working age who have jobs is an indicator of both the availability of jobs and the degree of match between peoples skills and jobs Employment to population ratio is the percentage of people who have jobs Also fluctuates Falls during a recession and increases during an expansion 3 The labor force participation rate The number of people in the labor force is an indicator of the willingness of people of working age to take jobs Labor force participation rate percentage of the working age population who are members of the labor force Chapter 5 pg 1 Other Definitions of Unemployment Marginally Attached Workers he or she wants and is available for a job and has looked for work sometime in the recent past Marginally attached worker is a person who currently is neither working nor looking for work but has indicated that Discouraged Worker A marginally attached worker who has stopped looking for a job because of repeated failure to find one The official unemployment measure excludes marginally attached workers because they haven t made specific efforts to find a job within the past four weeks In all other respects they are unemployed Part Time Workers Who Want Full Time Jobs Some part time workers would like full time jobs but can t find them In the official statistics these workers are called economic part time workers and they are partially unemployed Most Costly Unemployment All unemployment is costly but the most costly is long term unemployment that results from job loss Few weeks of unemployment is not as costly as those who are unemployed for many weeks People who voluntarily quit their jobs to find better ones is not as costly as losing their job and are forced back into the job market Unemployment rate doesn t distinguish among these different categories of unemployment Alternative Measures of Unemployment 6 Alternative measures of unemployment U1 Long term unemployment U2 Unemployed Job Losers U3 Official unemployment rate U4 Discouraged Workers U5 Marginally attached workers U6 economic part time workers Structural Unemployment Cyclical Unemployment Natural Unemployment Economy experiences frictions structural change and cycles Frictional Unemployment Unemployment and Full Employment The flows into and out of the labor force and the process of job creation and job destruction create the need for people to search for jobs and for businesses to search for workers Frictional Unemployment The unemployment that arises from the normal labor turnover from people entering and leaving the labor force and from the ongoing creating and destruction of jobs Permanent and healthy phenomenon in a dynamic growing economy Structural Unemployment The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs Lasts longer than frictional because workers must retrain and possibly relocate to find a job Cyclical Unemployment The higher than normal unemployment at a business cycle trough and the lower than normal unemployment at a business cycle peak Natural Unemployment is the unemployment that arises from frictions and structural change when there is no cyclical Natural Unemployment Rate natural unemployment as a percentage of the labor force Influenced by unemployment when all unemployment is frictional and structural The Age Distribution of the Population Economy with young population has large number of new job seekers every year and a high level of frictional unemployment Economy with aging population has fewer job seekers and lower level of frictional unemployment Chapter 5 pg 2 The scale of structural change Sometimes small Same jobs using the same machines remain in place for many years Sometimes there is technological upheaval Old ways are swept aside and millions of jobs are lost and skill to perform them loses value The real wage rate Real wage rates that bring unemployment are Minimum wage Efficiency wage wage set above the going market wage to enable firms to attract more productive workers get them to work hard and discourage them from quitting Unemployment benefits Increase the natural employment rate by lowering the opportunity cost of job search Full Unemployment a situation in which the unemployment rate equals the natural unemployment rate Real GDP and Unemployment Over the Cycle Potential GDP is the quantity of real GDP at full employment Over the business cycle the real GDP fluctuates around potential GDP Output Gap The gap between real GDP and potential GDP When the economy is at full employment The unemployment rate equals the natural unemployment rate Real GDP equals potential GDP so the output gap