8.2Patterns of Unemployment

months, then rotate them out of the survey for eight months, and then interview them again for the same four months the following year, before leaving the sample permanently. Based on this survey, state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education statistics comprise components that contribute to unemployment rates. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? The Current Population Survey is a treasure trove of information about employment and unemployment. If you are wondering what the difference is between the CPS and EPS, read the following Clear it Up feature. CLEAR IT UP What is the difference between CPS and EPS? The United States Census Bureau conducts the Current Population Survey (CPS), which measures the percentage of the labor force that is unemployed. The Bureau of Labor Statistics' establishment payroll survey (EPS) is a payroll survey that measures the net change in jobs created for the month.

Criticisms of Measuring Unemployment

There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labor force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working. Although the unemployment rate gets most of the public and media attention, economic researchers at the Bureau of Labor Statistics publish a wide array of surveys and reports that try to measure these kinds of issues and to develop a more nuanced and complete view of the labor market. It is not exactly a hot news flash that economic statistics are imperfect. Even imperfect measures like the unemployment rate, however, can still be quite informative, when interpreted knowledgeably and sensibly. LINK IT UP Click here (https://openstax.org/l/BLS_CPS) to learn more about the CPS and to read frequently asked questions about employment and labor.

8.2 Patterns of Unemployment

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Explain historical patterns of unemployment in the U.S.
• Identify trends of unemployment based on demographics
• Evaluate global unemployment rates

Let’s look at how unemployment rates have changed over time and how various groups of people are affected by unemployment differently.

The Historical U.S. Unemployment Rate

Figure 8.3 shows the historical pattern of U.S. unemployment since 1955.

FIGURE 8.3The U.S. Unemployment Rate, 1948–2020The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. However, over time, the unemployment rate seems to return to a range of 4% to 6%. There does not seem to be a long-term trend toward the rate moving generally higher or generally lower. (Source: Federal Reserve Economic Data (FRED), Unemployment Rate (UNRATE), https://fred.stlouisfed.org/series/ UNRATE) As we look at this data, several patterns stand out: 1. Unemployment rates do fluctuate over time. During the deep recessions of the early 1980s, 2007–2009, and 2021, unemployment reached roughly 10%. For comparison, during the 1930s Great Depression, the unemployment rate reached almost 25% of the labor force. 2. Unemployment rates in the late 1990s and into the mid-2000s were rather low by historical standards. The unemployment rate was below 5% from 1997 to 2000, and near 5% during almost all of 2006–2007, and 5% or less from September 2015 through March 2020. The previous time unemployment had been less than 5% for three consecutive years was three decades earlier, from 1968 to 1970. 3. The unemployment rate never falls all the way to zero. It almost never seems to get below 3%—and it stays that low only for very short periods. (We discuss reasons why this is the case later in this chapter.) 4. The timing of rises and falls in unemployment matches fairly well with the timing of upswings and downswings in the overall economy, except that unemployment tends to lag changes in economic activity, and especially so during upswings of the economy following a recession. During periods of recession and depression, unemployment is high. During periods of economic growth, unemployment tends to be lower. 5. No significant upward or downward trend in unemployment rates is apparent. This point is especially worth noting because the U.S. population more than quadrupled from 76 million in 1900 to over 324 million by 2017. Moreover, a higher proportion of U.S. adults are now in the paid workforce, because women have entered the paid labor force in significant numbers in recent decades. Women comprised 18% of the paid workforce in 1900 and nearly half of the paid workforce in 2021. However, despite the increased number of workers, as well as other economic events like globalization and the continuous invention of new technologies, the economy has provided jobs without causing any long-term upward or downward trend in unemployment rates. Access multimedia content (http://openstax.org/books/principles-macroeconomics-3e/pages/8-2-patterns-of- unemployment) Unemployment Rate from 1948. Similar to the graph in the figure above, the rate moves up and down as the economy moves in and out of recessions.

Unemployment Rates by Group

Unemployment is not distributed evenly across the U.S. population. Figure 8.4 shows unemployment rates broken down in various ways: by gender, age, and race/ethnicity.

FIGURE 8.4Unemployment Rate by Demographic Group (a) By gender, 1948–2020. Unemployment rates for men used to be lower than unemployment rates for women, but in recent decades, the two rates have been very close, often– and especially during and soon after the Great Recession – with the unemployment rate for men somewhat higher. (b) By age, 1948–2020. Unemployment rates are highest for the very young and become lower with age. (c) By race and ethnicity, 1974–2020. Although unemployment rates for all groups tend to rise and fall together, the unemployment rate for Black people is typically about twice as high as that for White people, while the unemployment rate for Hispanic people is in between. (Source: www.bls.gov) The unemployment rate for women had historically tended to be higher than the unemployment rate for men, perhaps reflecting the historical pattern that women were seen as “secondary” earners. By about 1980, however, the unemployment rate for women was essentially the same as that for men, as Figure 8.4 (a) shows. During the pandemic-induced recession of 2020 and in the immediate aftermath, the unemployment rate for women exceeded the unemployment rate for men. Subsequently, however, the gap has narrowed. LINK IT UP Read this report (https://openstax.org/l/BLS_recession) for detailed information on the 2008–2009 recession. It also provides some very useful information on the statistics of unemployment. Younger workers tend to have higher unemployment, while middle-aged workers tend to have lower unemployment. Younger workers move in and out of jobs more than middle-aged workers, as part of the process of matching of workers and jobs, and this contributes to their higher unemployment rates. In addition, middle-aged workers are more likely to feel the responsibility of needing to have a job more heavily. Elderly workers have extremely low rates of unemployment, because those who do not have jobs often exit the labor force by retiring, and thus are not counted in the unemployment statistics. Figure 8.4 (b) shows unemployment rates for women divided by age. The pattern for men is similar. The unemployment rate for African-Americans is substantially higher than the rate for other racial or ethnic groups, a fact that surely reflects, to some extent, a pattern of discrimination that has constrained Black people’s labor market opportunities. However, the gaps between unemployment rates for White, Black, and Hispanic people have diminished in the 1990s, as Figure 8.4 (c) shows. In fact, unemployment rates for Black and Hispanic people were at the lowest levels for several decades in the mid-2000s before rising during the recent Great Recession. Finally, those with less education typically suffer higher unemployment. In November 2021, for example, the unemployment rate for those with a college degree was 2.3%; for those with some college but not a four year degree, the unemployment rate was 3.7%; for high school graduates with no additional degree, the unemployment rate was 5.2%; and for those without a high school diploma, the unemployment rate was 5.7%. This pattern arises because additional education typically offers better connections to the labor market and higher demand. With less attractive labor market opportunities for low-skilled workers compared to the opportunities for the more highly-skilled, including lower pay, low-skilled workers may be less motivated to find jobs.

Breaking Down Unemployment in Other Ways

The Bureau of Labor Statistics also gives information about the reasons for unemployment, as well as the length of time individuals have been unemployed. Table 8.2, for example, shows the four reasons for unemployment and the percentages of the currently unemployed that fall into each category. Table 8.3 shows the length of unemployment. For both of these, the data is from November 2021.(bls.gov) Reason Percentage New Entrants 6.5% Re-entrants 31.8% Job Leavers 12.5% Job Losers: Temporary 11.8% Job Losers: Non Temporary 37.3% TABLE 8.2Reasons for Unemployment, November 2021 Length of Time Percentage Under 5 weeks 22.3% 5 to 14 weeks 22.3% 15 to 26 weeks 17.6% Over 27 weeks 37.7% TABLE 8.3Length of Unemployment, November 2021 LINK IT UP Watch this speech (https://openstax.org/l/droids) on the impact of droids on the labor market.

International Unemployment Comparisons

From an international perspective, the U.S. unemployment rate typically has looked a little better than average. Table 8.4 compares unemployment rates for 1991, 1996, 2001, 2006 (just before the Great Recession), and 2019 (just before the pandemic-induced recession) from several other high-income countries. Country 1991 1996 2001 2006 2019 United States 6.8% 5.4% 4.8% 4.4% 3.7% Canada 9.8% 8.8% 6.4% 6.2% 5.7% Japan 2.1% 3.4% 5.1% 4.5% 2.4% France 9.5% 12.5% 8.7% 10.1% 8.5% Germany 5.6% 9.0% 8.9% 9.8% 3.1% Italy 6.9% 11.7% 9.6% 7.8% 10.0% Sweden 3.1% 9.9% 5.0% 5.2% 7.0% United Kingdom 8.8% 8.1% 5.1% 5.5% 3.9% TABLE 8.4International Comparisons of Unemployment Rates However, we need to treat cross-country comparisons of unemployment rates with care, because each country has slightly different definitions of unemployment, survey tools for measuring unemployment, and also different labor markets. For example, Japan’s unemployment rates appear quite low, but Japan’s economy has been mired in slow growth and recession since the late 1980s, and Japan’s unemployment rate probably paints too rosy a picture of its labor market. In Japan, workers who lose their jobs are often quick to exit the labor force and not look for a new job, in which case they are not counted as unemployed. In addition, Japanese firms are often quite reluctant to fire workers, and so firms have substantial numbers of workers who are on reduced hours or officially employed, but doing very little. We can view this Japanese pattern as an unusual method for society to provide support for the unemployed, rather than a sign of a healthy economy. LINK IT UP We hear about the Chinese economy in the news all the time. The value of the Chinese yuan in comparison to the U.S. dollar is likely to be part of the nightly business report, so why is the Chinese economy not included in this discussion of international unemployment? The lack of reliable statistics is the reason. This article (https://openstax.org/l/ChinaEmployment) explains why. Comparing unemployment rates in the United States and other high-income economies with unemployment rates in Latin America, Africa, Eastern Europe, and Asia is very difficult. One reason is that the statistical agencies in many poorer countries lack the resources and technical capabilities of the U.S. Bureau of the Census. However, a more difficult problem with international comparisons is that in many low-income countries, most workers are not involved in the labor market through an employer who pays them regularly. Instead, workers in these countries are engaged in short-term work, subsistence activities, and barter. Moreover, the effect of unemployment is very different in high-income and low-income countries. Unemployed workers in the developed economies have access to various government programs like unemployment insurance, welfare, and food stamps. Such programs may barely exist in poorer countries. Although unemployment is a serious problem in many low-income countries, it manifests itself in a different way than in high-income countries.

8.3 What Causes Changes in Unemployment over the Short Run

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Analyze cyclical unemployment
• Explain the relationship between sticky wages and employment using various economic arguments
• Apply supply and demand models to unemployment and wages

We have seen that unemployment varies across times and places. What causes changes in unemployment? There are different answers in the short run and in the long run. Let's look at the short run first.

Cyclical Unemployment

Let’s make the plausible assumption that in the short run, from a few months to a few years, the quantity of hours that the average person is willing to work for a given wage does not change much, so the labor supply curve does not shift much. In addition, make the standard ceteris paribus assumption that there is no substantial short-term change in the age structure of the labor force, institutions and laws affecting the labor market, or other possibly relevant factors. One primary determinant of the demand for labor from firms is how they perceive the state of the macro economy. If firms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor, and the labor demand curve shifts to the right. Conversely, if firms perceive that the economy is slowing down or entering a recession, then they will wish to hire a lower quantity of labor at any given wage, and the labor demand curve will shift to the left. Economists call the variation in unemployment that the economy causes moving from expansion to recession or from recession to expansion (i.e. the business cycle) cyclical unemployment. From the standpoint of the supply-and-demand model of competitive and flexible labor markets, unemployment represents something of a puzzle. In a supply-and-demand model of a labor market, as Figure 8.5 illustrates, the labor market should move toward an equilibrium wage and quantity. At the equilibrium wage (We), the equilibrium quantity (Qe) of labor supplied by workers should be equal to the quantity of labor demanded by employers.