Chapter 6: Unemployment

Personal Impact of Job Loss: Lower living standards, increased anxiety, and reduced self-
esteem.

Unemployment Categories:
- Natural Rate of Unemployment: The baseline level inherent in an economy.
- Cyclical Unemployment: Fluctuations that correspond with economic cycles.

Identifying Unemployment - How Is Unemployment Measured?

- Employed: Those working as paid employees, in their own business, or as unpaid family
workers, including those temporarily absent from their jobs.
- Unemployed: Those not employed but actively seeking work in the last four weeks and
those laid off and waiting to be rehired.
- Not in the Labor Force: Those not classified as employed or unemployed, including
students, homemakers, and retirees.

Labor Force: The total number of workers, including both the employed and the
unemployed.
Unemployment Rate: The percentage of the labor force that is unemployed.
(Number of Unemployed / Labor Force) × 100.
Labor-Force Participation Rate: The percentage of the adult population that is in the labor
force.
(Labor Force / Adult Population) × 100.
Natural Rate Of Unemployment: The normal rate of unemployment around which the
unemployment rate fluctuates

Cyclical Unemployment: The deviation of unemployment from its natural rate

Discouraged Workers: Individuals who would like to work but have given up looking for a
job.

January 2019 Data Example:

- 156.7 million employed and 6.5 million unemployed.
- Unemployment rate: 4.0%.
- Labor force: 163.2 million.
- Adult population: 258.2 million.
- Labor force participation rate: 63.2%.

Frictional Unemployment: Unemployment that results because it takes time for workers to
search for the jobs that best suit their tastes and skills.
Structural Unemployment: Unemployment that results because the number of jobs available
in some labor markets is insufficient to provide a job for everyone who wants one.
1. the population of Ectenia is 100 people: 40 work full-time, 20 work half-time but
would prefer to work full-time, 10 are looking for a job, 10 would like to work but are
so discouraged that they have given up looking, 10 are not interested in working
because they are full-time students, and 10 are retired. What is the number of
unemployed?
- 0 are looking for a job.
- 10 would like to work but have given up looking, so they are discouraged workers.
- Therefore, the total number of unemployed individuals is 10+10=20
2. using the numbers in the preceding question, what is the size of Ectenia’s labor
force?
a. 50 b. 60 c. 70 d. 80
- 40 people work full-time.
- 20 people work half-time but would prefer to work full-time.
- 10 people are looking for a job.
The total number of individuals in the labor force is the sum of these categories:
- 40 (full-time) + 20 (half-time) + 10 (looking for a job) = 70.

Job Search
- The process by which workers find appropriate jobs given their tastes and skills.
Why Some Frictional Unemployment Is Inevitable
- Sectoral Shifts: Changes in consumer preferences or economic conditions lead to temporary
unemployment as workers transition between jobs.
- Geographical Variations: Economic shifts can cause employment to rise in one region
while declining in another, causing joblessness.
- International Trade Changes: Global trade development and industries adapting.
- Economic Evolution: The continuous development of the economy, with some industries
shrinking while others expand.
Unemployment Insurance: A government program that partially protects the incomes of
workers who become unemployed.
3. the main policy goal of unemployment insurance is to reduce the
a. search effort of the unemployed. b. income uncertainty that workers face.
c. role of unions in wage setting. d. amount of frictional unemployment.
4. one unintended consequence of unemployment insurance is that it reduces the
a. search effort of the unemployed. b. income uncertainty that workers face.
c. role of unions in wage setting. d. amount of frictional unemployment.

5. in a competitive labor market, an increase in the minimum wage results in a(n)

_________ in the quantity of labor supplied and a(n) _________ in the quantity of labor
demanded.
a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease
6. Approximately what percent of U.S. workers are directly affected by the minimum
wage?
a. 1 b. 6 c. 12 d. 25

Unions and Collective Bargaining

Union: A worker association that bargains with employers over wages, benefits, and
working conditions.
Collective Bargaining: The process by which unions and firms agree on the terms of
employment.
Strike: The organized withdrawal of labor from a firm by a union.

7. in the united States, unionized workers are paid about _________ percent more than
similar nonunion workers.
a. 2
b. 5
c. 15
d. 40
8. in many European nations, unions
a. are considered cartels in violation of antitrust laws.
b. conspire with firms to keep wages below competitive levels.
c. are social clubs without any economic impact.
d. play a much larger role than they do in the united States.

9. According to the theory of efficiency wages,

a. firms may find it profitable to pay above equilibrium wages.
b. an excess supply of labor puts downward pressure on wages.
c. sectoral shifts are the main source of frictional unemployment.
d. right-to-work laws reduce the bargaining power of unions.
10. When a firm pays an efficiency wage, it may
a. have trouble attracting enough workers.
b. have to monitor its workers more closely.
c. experience declines in worker quality.
d. find that its workers quit less frequently.

1. What are the three categories into which the Bureau of Labor Statistics divides
everyone? How does the BLS compute the labor force, the unemployment rate, and the
labor-force participation rate?
- The BLS divides everyone into three categories: employed, unemployed, and not in the
labor force.
- Unemployment Rate: The percentage of the labor force that is unemployed. (Number of
Unemployed / Labor Force) × 100.
- Labor-Force Participation Rate: The percentage of the adult population that is in the labor
force. (Labor Force / Adult Population) × 100.

1. In June 2009, at the trough of the Great Recession, the Bureau of Labor Statistics
announced that of all adult Americans, 140,196,000 were employed, 14,729,000 were
unemployed, and 80,729,000 were not in the labor force. Use this information to
calculate:
a. the adult population.
b. the labor force.
c. the labor-force participation rate.
d. the unemployment rate.
2. Explain whether each of the following events increases, decreases, or has no effect on
the unemployment rate and the labor-force participation rate.
a. After a long search, Jon finds a job.
b. Tyrion, a full-time college student, graduates and is immediately employed.
c. After an unsuccessful job search, Arya gives up looking and retires.
d. Daenerys quits her job to become a stay-at-home mom.
e. Sansa has a birthday, becomes an adult, but has no interest in working.
f. Jaime has a birthday, becomes an adult, and starts looking for a job.
g. Cersei dies while enjoying retirement.
h. Jorah dies working long hours at the office.
4. Between January 2012 and January 2019, U.S. employment increased by 17.3 million
workers, but the number of unemployed workers declined by only 6.3 million. How are
these numbers consistent with each other? Why might one expect a reduction in the
number of people counted as unemployed to be smaller than the increase in the number
of people employed?
- The difference between the U.S. employment increase by 17.3 million and the decline in
unemployment by only 6.3 million is due to new labor force entrants and population growth,
not all new jobs coming from previously unemployed individuals. This scenario is
influenced by:
- New labor force entrants like recent graduates.
- Population and labor force potential growth.
- Variations in labor force participation rates due to economic, societal, and demographic
changes.
- Employment status definitions, affect how people are categorized based on their job search
activity.
- In essence, the larger increase in employment compared to the decrease in unemployment
can be attributed to factors like labor force growth and changes in participation rates,
alongside how unemployment is defined.

5. Economists use labor-market data to evaluate how well an economy is using its most
valuable resource—its people. Two closely watched statistics are the unemployment
rate and the employment population ratio (calculated as the percentage of the adult
population that is employed). Explain what happens to each of these statistics in the
following scenarios. In your opinion, which statistic is the more meaningful gauge of
how well the economy is doing?
a. An auto company goes bankrupt and lays off its workers, who immediately start looking
for new jobs.
b. After an unsuccessful search, some of the laid-off workers quit looking for new jobs.
c. Numerous students graduate from college but cannot find work.
d. Numerous students graduate from college and immediately begin new jobs.
e. A stock market boom induces newly enriched 60-year-old workers to take early
retirement.
f. Advances in healthcare prolong the life of many retirees.
6. Are the following workers more likely to experience short-term unemployment or
long-term unemployment? Explain.
a. a construction worker who is laid off because of bad weather
b. a manufacturing worker who loses his job at a plant in an isolated area
c. a stagecoach-industry worker who is laid off because of competition from railroads
d. a short-order cook who loses his job when a new restaurant opens across the street
e. an expert welder with little formal education who loses his job when the company installs
automatic welding machinery
a. Short-term unemployment - The construction worker laid off due to bad weather is likely
to experience short-term unemployment because the job loss is temporary and expected to
reverse once the weather improves.
b. Long-term unemployment - The manufacturing worker in an isolated area may face long-
term unemployment due to the specific job's location and the potential lack of nearby
employment opportunities in the same field.
c. Long-term unemployment - The stagecoach-industry worker displaced by railroads is
likely to face long-term unemployment because this represents a structural change in the
industry, requiring the worker to possibly retrain or relocate.
d. Short-term unemployment - The short-order cook might experience short-term
unemployment, as the skills required for the job are transferrable, and there could be similar
job openings in the area, especially given the dynamic nature of the restaurant industry.
e. Long-term unemployment - The expert welder could face long-term unemployment if the
job loss is due to technological advancements making the skill obsolete, requiring significant
retraining or a career change to find new employment.

7. Using a diagram of the labor market, show the effect of an increase in the minimum
wage on the wage paid to workers, the number of workers supplied, the number of
workers demanded, and the amount of unemployment.

Wage Paid to Workers:

- Initially, the equilibrium wage rate (W*) is determined by the intersection of the demand
curve (D) and the supply curve (S).
- When the minimum wage is increased, it creates a new price floor (MW) above the
equilibrium wage.
- As a result, the wage paid to workers increases from W* to MW.

Number of Workers Supplied:

- With the increase in the minimum wage, more workers are willing to supply their labor at
the higher wage rate.
- The supply curve shifts to the right, indicating an increase in the number of workers
supplied.

Number of Workers Demanded:

- At the higher wage rate, firms are willing to hire fewer workers due to the increased cost of
labor.
- The demand curve shifts to the left, indicating a decrease in the number of workers
demanded.

Amount of Unemployment:
- The gap between the quantity of labor supplied and the quantity of labor demanded at the
new wage level represents the amount of unemployment created by the minimum wage
increase.
- This gap is shown by the shaded area between the supply and demand curves above the
equilibrium quantity of labor.

In the diagram:
- Initially, the equilibrium wage (W*) and quantity of labor are determined by the
intersection of the demand (D) and supply (S) curves.
- After the increase in the minimum wage (MW), the new wage level is shown by the - -
vertical line.
- The quantity of labor supplied increases due to the higher wage, shifting the supply curve
to the right.
- The quantity of labor demanded decreases due to the higher wage, shifting the demand
curve to the left.
- The gap between the quantity of labor supplied and demanded represents the amount of
unemployment created by the minimum wage increase.

1. a 2. c 3. b 4. a 5. b 6. a 7. c 8. d 9. a 10. d