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CH 8 - How Is Unemployment Measured Current Population...

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Unformatted text preview: How Is Unemployment Measured? Current Population Survey: a monthly survey of a sample of U.S. households done by the U.S. Census Bureau. It measures employment, unemployment, the labor force, and other characteristics of the U.S. population. The U.S. Census Bureau surveys a sample of 60,000 households in the United States. Definitions Employed person: someone who has a job outside the home or a paid job inside the home. Unemployed person: a person who does not have a job and is looking for work. Labor force: all workers who are either employed or unemployed. Workingage population: persons 16 years of age or older who are not in an institution such as a jail or a hospital. Unemployment rate: the percentage of workers who are unemployed How to Find Labor Market Indicators Note: Statistics used are for December 2006. Labor market indicators Three Labor Market Indicators 1. 2. 3. The unemployment rate: the percentage of the labor force that is unemployed. The labor force participation rate: the ratio of the labor force to the workingage population. The employmenttopopulation ratio: the ratio of employed workers to the workingage population. Formulas Unemployment Rate = Unemployed/Labor Force Labor force participation rate = Labor Force Working age population Employment to population ratio = Employed Workingage population How to Find Labor Market Indicators (contd) Note: Statistics used are for December 2006. Facts Facts: The employmenttopopulation ratio for women has increased steadily since the 1950s. The employmenttopopulation ratio for men has declined since the 1950s. The employmenttopopulation ratio for both men and women has leveled off since the 1990s. EmploymenttoPopulation Ratio for Men, Women, and Everyone Aggregate Hours of Labor Input Aggregate hours: the total number of hours worked in the economy in a given period of time; the most comprehensive measure of labor input to the production of real GDP. Growth of aggregate hours of labor input for the United States averaged 2 percent per year from 1976 to 1996. The growth rate has slowed in the last decade to 1.25 percent per year. The reason for the slowdown is that the growth rate of the workingage population is slowing. Classification of Unemployment Natural unemployment rate: the unemployment rate that exists when there is neither a recession nor a boom and real GDP is equal to potential GDP. 3 Other types of unemployment: Cyclical unemployment Frictional unemployment Structural unemployment The Unemployment Rate Cyclical Unemployment Cyclical unemployment: unemployment due to a recession, when the rate of unemployment exceeds the natural rate of unemployment. Examples: Auto workers who lost their jobs when Ford cut production during the 2001 recession Workers who lost their jobs when the factories they worked in closed down during the Great Depression Frictional Unemployment Frictional unemployment: unemployment arising from normal turnover in the labor market, such as when people change occupations or locations, or are new entrants. Examples: Bob quits his job in California to live with his new wife in Arizona. Jim quits his job because his boss is annoying. Structural Unemployment Structural unemployment: unemployment due to structural problems such as poor skills, insufficient work incentives, or changes in the demand for certain skills. Reasons People Are Unemployed Job losers: people who were previously employed but lost their jobs. Job quitters: people who quit their jobs (but are not forced out). New entrants: people who entered the labor force for the first time. Reentrants: people who reentered the labor force after being out of it for a while. Job Losers, Job Leavers, New Entrants, and Reentrants (December 2006) Facts Job Losers The unemployment rate in December 2006 was 4.5 percent, and less than half of those unemployed (2.1 percent) were job losers. In that month, 4.5 million people lost their jobs (but 4.9 million people found jobs). Job Leavers On average, Americans change jobs every 3 to 4 years. Only a small part of the unemployed who quit do it to look for a new job. The number of job leavers decreases during a recession, partly because of the reduced number of job openings during a recession. Facts New Entrants and Reentrants A huge increase in the unemployment rate occurs every June as graduates try to find jobs for the first time. The increase in the number of unemployed during this month is classified as seasonal unemployment because it occurs during a particular time of the year--the "graduation season." The Duration of Unemployment The next graph shows the duration of the unemployment in December 2006. About 1.8 percentage points of the 4.5 percent unemployed have been unemployed for less for than 5 weeks, 2.0 percentage points have been unemployed for 5 to 26 weeks, and 0.7 percentage point has been unemployed for more than 26 weeks. Unemployment by Duration (December 2006) Unemployment Rates for Different Groups The unemployment experience varies with workers' age, gender, and race and ethnicity. Table 1 shows the unemployment rates experienced by different demographic groups in three years (1994, 1999, and 2004). Labor Demand and Supply Labor demand curve: a downwardsloping relationship showing the quantity of labor firms are willing to hire at each wage. Labor supply curve: the relationship showing the quantity of labor workers are willing to supply at each wage. Labor Demand and Supply The intersection of the labor supply curve and the labor demand curve is the labor market equilibrium. The real wage coordinate of the market equilibrium is the equilibrium real wage. The quantity coordinate of the equilibrium is the equilibrium employment. Labor Supply, Labor Demand, and Equilibrium Employment Real Wage Real wage: the wage or price of labor adjusted for inflation. In contrast, the nominal wage is not adjusted for inflation. Real wage = Nominal wage Price level Modeling the Labor Market During an Economic Expansion Excess Supply of Labor and Unemployment Why Is the Unemployment Rate Always Greater Than Zero? Reason 1 Job rationing: a reason for unemployment in which the quantity of labor supplied is greater than the quantity of labor demanded because the real wage is too high. 1. 2. 3. Minimum wages Insiders versus outsiders Efficiency wages Job Rationing Insider: a person who works for a firm and has some influence over wage and hiring policy. Outsider: someone who is not working for a particular firm, making it difficult for him or her to get a job at that firm even though the person is willing to work for a lower wage. Job Rationing Efficiency wage: a wage rate higher than the market equilibrium, given to encourage workers to be more efficient. Reasons why worker productivity increases with wage: 1. Lower turnover 2. Less shirking Why Is the Unemployment Rate Always Greater Than Zero? Reason 2 Job search: a reason for unemployment in which uncertainty in the labor market and workers' limited information require people to spend time searching for a job. Job Search This explanation for unemployment assumes that the labor market is always in a state of flux, with jobs being created and destroyed and people moving from one location or job to another. As a result, the labor supply and demand curves are always changing, and the market equilibrium is stochastic, rather than fixed. Policies to Reduce the Unemployment Rate Job Rationing Model 1. Lower the minimum wage. (A lower minimum wage could reduce the unemployment rate for young and unskilled workers.) 2. Encourage a more flexible unionemployer relationship. 3. Lower costs to train employees. 4. Lower efficiency wages. Policies to Reduce the Unemployment Rate Job Search Model 1. Improve job placement. 2. Increase incentives for the unemployed to look for jobs. 3. Lower unemployment compensation. Key Terms unemployed person labor force workingage population labor force participation rate employmentto population ratio aggregate hours natural unemployment rate cyclical unemployment frictional unemployment structural unemployment job vacancies labor demand curve labor supply curve job rationing job search insider outsider efficiency wage ...
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