Key Terms

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