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MacroLecture3
Jobs and Unemployment
Lecture Highlights
the labor market status of the population
the trends and fluctuations in the
indicators of labor market performance
sources and types of unemployment,
define full employment, and explain the
link between unemployment and real GDP
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Recessions, depressions, and
Unemployment
The business cycle describes the periodic
ups and downs in the economy, or
deviations of output and employment away
from the long-run trend.
A recession is roughly a period in which
real GDP declines for at least two
consecutive quarters. It is marked by
falling output and rising unemployment
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Contd.
A depression is a prolonged and deep
recession. The precise definitions of
prolonged and deep are debatable.
Capacity utility rates, which show the
percentage of factory capacity being used
in production are one indicator of a
recession.
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Defining and Measuring
Unemployment
The most frequently discussed symptom
of a recession is unemployment.
The working-age population total
number of people age 16 years and over
who are not in jail, hospital,or some other
form of institutional care.
Labor force the number of people
employed plus the number unemployed.
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Contd.
An employed person is any person 16 years
old or older.
(i) Who works for pay, either for someone else or
in his or her own business for 1 or more hours
per week.
(ii) Who works without pay for 15 hours or more
hours per week in a family enterprise, or
(iii) Who has a job but has been temporarily
absent, with or without pay.
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Contd.
An unemployed person is a person 16 years old or older
who
(i) is not working.
(ii) is available for work, and
(iii) has made specific efforts to find work during the
previous 4 weeks.
A person who is not looking for work, either because he
or she does not want a job or has given up looking, is not
in the labor force.
Unemployment rate the percentage of the people in
the labor force who are unemployed.
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Contd.
unemployment rate = no. of people unemployed X 100
____________________
Labor force

e.g. In June 2002, the number of people unemployed was
8.7 million and the labor force was 143.7 million.
Unemployment rate = 8.7 X 100 = 6.1%
____
143.7
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Contd.
labor force participation rate the percentage of
the working-age population who are members of
the labor force.
Labor participation rate = Labor force X 100
__________
working-age population
e.g. In June 2002, the labor force was 143.7 million and the working-
age population was 213.8 million.
Labor force participation rate = 143.7 X 100
_____ = 67.2%
213.8
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The Discouraged-Worker Effect
The discouraged-worker effect lowers the
unemployment rate.
Discouraged workers are people who want
to work but cannot find jobs. They grow
discouraged and stop looking for work,
thus dropping out of the ranks of the
unemployed and the labor force.
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The Sources and Types of
Unemployment
How do people become unemployed, how long do
they remain unemployed and who is at greatest risk to
become unemployed?
sources of unemployment
some people move into the labor force, and some
move out of it.
People who become unemployed are
(i) Job losers
(ii) Job leavers
(iii) Entrants or reentrants
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Job losers
People who are fired or laid off from their jobs either permanently
or temporarily.
Reasons people lose their jobs:
(i) Not a good match for the job theyre doing.
(ii) Firms fail.
(iii) New technology destroys some jobs.
A job loser has two choices: look for another job or withdraw from
the labor force.
A job loser who decides to look for a new job remains in the labor
force unemployed.
Those withdraw from the labor force is not counted as being
unemployed.
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Job leavers
People who voluntarily quit their jobs.
People who leave their jobs for two reasons:
(i) Either theyve gotten a better job or theyve
decided to withdraw from the labor force.
Neither of these types of job leavers becomes
unemployed.
(ii) A few people quit their jobs because they want
a better job unemployed.
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Entrants and reentrants
People who have just left school and entered the
job market are called entrants.
Many entrants spend time searching for their
first job during this period, they are
unemployed.
People who have previously had jobs, then quit
and left the labor force and have now decided to
look for jobs are called reentrants.
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Contd.
How unemployment ends
People who end a period of unemployment are either hires
and recalls or withdrawals.
Hires and recalls
People who have been unemployed but have been hired to
start a new job are called hires.
People who have been temporarily laid off and who start
work again are called recalls.
Withdrawals
People who have been unemployed and who decide to
stop looking for jobs are called withdrawals.
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Labor market flow
unemployed employed
Not in labor force
Entrants, reentrants
Hires,
entrants
Job losers, job
leavers
Job losers, job leavers, retirees
withdrawals
Entrants,
reentrants
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Types of Unemployment
Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment
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Frictional unemployment
the unemployment that arises from normal
labor turnover. From people entering and
leaving the labor force and from the ongoing
creation and destruction of jobs.
The amount of frictional unemployment depends
on
(i) The rate at which people enter and reenter the
labor force and on the rate at which jobs are
created and destroyed.
(ii) Unemployment compensation increases the
number of unemployed higher frictional
unemployment.
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Structural unemployment
the unemployment that arises when
changes in technology or international
competition change the skills needed to
perform jobs or change the locations of
jobs.
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Seasonal unemployment
the unemployment that arises because of
seasonal weather patterns.
Unemployment increases during the winter
months and decreases during the spring
and summer.
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Cyclical unemployment
the fluctuating unemployment over the
business cycle. Unemployment increases
during a recession and decreases during
an expansion.
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Full employment
full employment occurs when there is no cyclical
unemployment or when all the unemployment is
frictional, structural, and seasonal.
the divergence of the unemployment rate from
full employment is cyclical unemployment.
The unemployment rate at full employment is
called the natural unemployment rate.
potential GDP the level of real GDP that the
economy would produce if it were at full
employment.