Key Concepts and Summary

Key Terms

adverse selection of wage cuts argument if employers reduce wages for all workers, the best will leave cyclical unemployment unemployment closely tied to the business cycle, like higher unemployment during a recession discouraged workers those who have stopped looking for employment due to the lack of suitable positions available efficiency wage theory the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more frictional unemployment unemployment that occurs as workers move between jobs implicit contract an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong insider-outsider model those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires labor force participation rate this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job natural rate of unemployment the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time out of the labor force those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force” relative wage coordination argument across-the-board wage cuts are hard for an economy to implement, and workers fight against them structural unemployment unemployment that occurs because individuals lack skills valued by employers underemployed individuals who are employed in a job that is below their skills unemployment rate the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

Key Concepts and Summary

8.1 How Economists Define and Compute Unemployment Rate

Unemployment imposes high costs. Unemployed individuals experience loss of income and stress. An economy with high unemployment suffers an opportunity cost of unused resources. We can divide the adult population into those in the labor force and those out of the labor force. In turn, we divide those in the labor force into employed and unemployed. A person without a job must be willing and able to work and actively looking for work to be counted as unemployed; otherwise, a person without a job is counted as out of the labor force. Economists define the unemployment rate as the number of unemployed persons divided by the number of persons in the labor force (not the overall adult population). The Current Population Survey (CPS) conducted by the United States Census Bureau measures the percentage of the labor force that is unemployed. The establishment payroll survey by the Bureau of Labor Statistics measures the net change in jobs created for the month.

8.2 Patterns of Unemployment

The U.S. unemployment rate rises during periods of recession and depression, but falls back to the range of 4% to 6% when the economy is strong. The unemployment rate never falls to zero. Despite enormous growth in the size of the U.S. population and labor force in the twentieth century, along with other major trends like globalization and new technology, the unemployment rate shows no long-term rising trend. Unemployment rates differ by group: higher for African-Americans and Hispanic people than for White people; higher for less educated than more educated; higher for the young than the middle-aged. Women’s unemployment rates used to be higher than men’s, but in recent years men’s and women’s unemployment rates have been very similar. In recent years, unemployment rates in the United States have compared favorably with unemployment rates in most other high-income economies.

8.3 What Causes Changes in Unemployment over the Short Run

Cyclical unemployment rises and falls with the business cycle. In a labor market with flexible wages, wages will adjust in such a market so that quantity demanded of labor always equals the quantity supplied of labor at the equilibrium wage. Economists have proposed many theories for why wages might not be flexible, but instead may adjust only in a “sticky” way, especially when it comes to downward adjustments: implicit contracts, efficiency wage theory, adverse selection of wage cuts, insider-outsider model, and relative wage coordination.

8.4 What Causes Changes in Unemployment over the Long Run

The natural rate of unemployment is the rate of unemployment that the economic, social, and political forces in the economy would cause even when the economy is not in a recession. These factors include the frictional unemployment that occurs when people either choose to change jobs or are put out of work for a time by the shifts of a dynamic and changing economy. They also include any laws concerning conditions of hiring and firing that have the undesired side effect of discouraging job formation. They also include structural unemployment, which occurs when demand shifts permanently away from a certain type of job skill.

Self-Check Questions

1 . Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million (of whom 139.1 million are employed). How many people are “not in the labor force?” What are the proportions of employed, unemployed and not in the labor force in the population? Hint: Proportions are percentages. 2 . Using the above data, what is the unemployment rate? These data are U.S. statistics from 2010. How does it compare to the February 2015 unemployment rate computed earlier? 3 . Over the long term, has the U.S. unemployment rate generally trended up, trended down, or remained at basically the same level? 4 . Whose unemployment rates are commonly higher in the U.S. economy: a. White or non-White people? b. The young or the middle-aged? c. College graduates or high school graduates? 5 . Beginning in the 1970s and continuing for three decades, women entered the U.S. labor force in a big way. If we assume that wages are sticky in a downward direction, but that around 1970 the demand for labor equaled the supply of labor at the current wage rate, what do you imagine happened to the wage rate, employment, and unemployment as a result of increased labor force participation? 6 . Is the increase in labor force participation rates among women better thought of as causing an increase in cyclical unemployment or an increase in the natural rate of unemployment? Why? 7 . Many college students graduate from college before they have found a job. When graduates begin to look for a job, they are counted as what category of unemployed?

Review Questions

8 . What is the difference between being unemployed and being out of the labor force? 9 . How do you calculate the unemployment rate? How do you calculate the labor force participation rate? 10 . Are all adults who do not hold jobs counted as unemployed? 11 . If you are out of school but working part time, are you considered employed or unemployed in U.S. labor