Chapter 6

Jobs and Unemployment

Potential GDP
Potential GDP is the value of real GDP when all
the economy’s factors of production are fully
employed.

Our changing standard of living is captured by

1. The growth of potential GDP per person

2. Fluctuations of real GDP per person around

potential GDP

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 Business Cycle
• Fluctuations in the pace of economic activity is
called the business cycle.
• The business cycle is a periodic irregular up-
and down movement of total production and
other measure of economic activity.

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 Business Cycle
The four stages of a business cycle are expansion,
recession, peak, and trough.
 Increases in overall economic activity; often
identified as increases in real GDP is called an
expansion.
 “Peak” is the highpoint in a business cycle.
 Decreases in overall economic activity; often
identified as reductions in real GDP is called a
recession.
 “Trough” is a low-point in a business cycle.

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Source: research.stlouisfed.org
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 Current Population Survey
• Divides the population into working-age
population and others
– Working-age population is the total number of
people aged 16 years and over who are not in a
jail, hospital, or some other form of institutional
care or in the U.S. Armed Forces.
• Divides the working-age population into those in
the labor force and those not in the labor
force
– Labor force is the number of people employed
plus the number unemployed.

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 Employed – Definition
The survey counts as employed all persons who,
during the week before the survey:
1. Worked at least 1 hour in a paid job or 15
hours unpaid in family business.
2. Were not working but who had jobs from
which they were temporarily absent.

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 Unemployed – Definition
The survey counts as unemployed all persons
who, during the week before the survey:
1. Had no employment
2. Were available for work,
and either:
1. Had made efforts to find employment during
the previous four weeks, or
2. Were waiting to be recalled to a job from
which they had been laid off.

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 Notes
• Part-time workers ARE included in the labor
force and ARE counted as employed.
• Full-time homemakers are not included in the
labor force so are not counted as unemployed.
• Full-time students (non working) are not included
in the labor force so are not counted as
unemployed.

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Date: June 2009

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 Main Labor Market Indicators

• The unemployment rate

• The labor force participation rate

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 Unemployment rate
Unemployment rate is the percentage of people in
the labor force who are unemployed.

Number of
people unemployed
Unemployment rate = x 100%
Labor force

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The unemployment rate increases in recessions and
decreases in expansions.

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 Labor force participation rate
Labor force participation rate is the percentage of
the working-age population who are members of
the labor force.

Labor force Labor force

participation rate = x 100%
Working-age population

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 Sources of Unemployment

People who become unemployed are

• Job losers (fires and layoffs)—people who are
laid off from their jobs
• Job leavers (quits)—people who voluntarily quit
their jobs
• Entrants and reentrants—people who have just
left school or who are now looking for a job after
a period out of the labor force.

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 Marginally Attached Workers and
Discouraged Workers
• A marginally attached worker is a person who
does not have a job, is available and willing to
work, has not made specific efforts to find a job
within the previous four weeks, but has looked
for work sometime in the recent past.
• A discouraged worker is a marginally
attached worker who has not made specific
efforts to find a job within the previous four
weeks because previous unsuccessful attempts
were discouraging.
• They are NOT included in the labor force and
hence NOT officially counted as unemployed

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 Types of Unemployment
• Seasonal unemployment is the unemployment
that arises because of seasonal nature of some
jobs.
Examples: agricultural jobs, tourism jobs.
• Frictional unemployment is 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.
Examples: Quits or fires due to matching problems
between employer and employee; New entrants (or re-
entrants) searching for a job.

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 Types of Unemployment
• Structural unemployment is the
unemployment that arises due to change of
location of jobs or change in the requirement of
skills needed to perform jobs (due to a change
in technology).
• Cyclical unemployment is the fluctuating
unemployment over the business cycle that
increases during a recession (due to fires and
layoffs) and decreases during an expansion.

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 Full Employment
• Full employment occurs when there is no
cyclical unemployment or, equivalently, when all
the unemployment is frictional, structural, or
seasonal.
– Note: This does NOT imply a zero unemployment
rate
• Natural unemployment rate is the
unemployment rate when the economy is at full
employment.

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 Potential GDP
• Potential GDP (“full employment” GDP) is the
level of real GDP that the economy would
produce if it were at full employment.
• It can be thought of as the capacity level of the
economy, the level of real GDP that the
economy is capable of producing on a
sustained basis.

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 Unemployment and Real GDP
• Because the unemployment rate fluctuates
around the natural unemployment rate, real GDP
fluctuates around potential GDP.
• When the unemployment rate is above the
natural rate, real GDP is below potential GDP.
• When the unemployment rate is below the
natural unemployment rate, real GDP is above
potential GDP.

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