Self-Check Questions

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