C H A P T E R C H E C K L I S T

When you have completed your study of this chapter, you will be able to

C H A P T E R C H E C K L I S T

Define the unemployment rate and other labor market indicators.

1

Describe the trends and fluctuations in the indicators of labor market performance in the United States.

Describe the sources and types of unemployment, define full employment, and explain the link between unemployment and real GDP.

2

3

21.1 LABOR MARKET INDICATORS

Current Population Survey

Every month, the U.S. Census Bureau surveys 50,000 households to establish the sex, age, and job market status of each member of the household.

Working-age population

Total number of people aged 16 years and over who are not in a jail, hospital, or some other form of institutional care.


The working-age population is divided into those in the labor force and those not in the labor force.

Labor force

The number of people employed plus the number unemployed.


Population Survey Criteria

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 did not work but who had jobs from which they were temporarily absent.


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.


Figure 21.1 shows population labor force categories.

The figure shows the data for June 2002.


Two Main Labor Market Indicators• The unemployment rate• The labor force participation rate

Unemployment rate

The percentage of people in the labor force who are unemployed.

Unemployment rate =

Number ofpeople unemployed

x 100Labor force


Labor force participation rate

The percentage of the working-age population who are members of the labor force.

Labor force participation rate = Working-age population

x 100%Labor force


Discouraged Workers

Discouraged workers

People available to work but have not made efforts to find a job within the previous 4 weeks.


Part-Time Workers

Full-time workers

People who work 35 hours per week.

Part-time workers

People who work less than 35 hours per week.

Involuntary part-time workers

People working 1 to 34 hours per week and are seeking full-time work.


Aggregate Hours

The total number of hours worked by all the people employed during a year.

In June 2002, 135 million people worked an average of 34.7 hours per week.

In the year there are 50 workweeks, so aggregate hours in 2002 were 234.2 billion.

21.2 LABOR TRENDS AND FLUCTUATIONS

Unemployment

Figure 21.2 shows the U.S. unemployment rate: 1962–2002

The average unemployment rate between 1962 and 2002 was 5.9 percent.


The Participation Rate

The participation rate increased from 59 percent during the 1960s to 67 percent during the 1990s.

Between 1962 and 2002, the participation rate for women increased from 38 percent to 60 percent.

Between 1962 and 2002, the participation rate for men decreased from 82 percent to 74 percent.


Figure 21.3 shows the changing face of the labor market.

The labor force participation rate of women has increased.


The labor force participation rate of men has decreased.

The average participation rate of both sexes hasincreased.


Part-Time Workers

Part-time work is attractive to workers because they:• Balance family with work

Part-time work is attractive to employers because:• Benefits are not paid to part-time workers• Less government regulation of part-time workers


Figure 21.4 shows part-time workers from 1972 to 2002.

Part-time workers up from 16 percent of labor force in 1972 to 17 percentin 2002.


The figure also shows involuntary part-time workers.

Involuntary part-time work peaked during the 1982 recession.


Aggregate and Average Hours

Between 1960 and 2000, the number of people employed doubled (up 105 percent) but aggregate hours increased by only 84 percent.

The reason: average hours per worker decreased.


Figure 21.5(a) shows aggregate hours: 1962–2002

Between 1962 and 2002, aggregate hours increased by an average of 1.5 percent a year.


Figure 21.5(b) shows average weekly hours from 1962 to 2002.

21.3 UNEMPLOYMENT

Sources of Unemployment

People who become unemployed are:• Job losers—people who are laid off from their jobs• Job leavers—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.

21.3 UNEMPLOYMENT

Figure 21.6 shows unemployment by reasons.

Job losers are the biggest group, and their number fluctuates most.

21.3 UNEMPLOYMENT

How Unemployment Ends

People who end a period of unemployment are either:• Hires and recalls—people who have been hired in

a new job or recalled after a temporary layoff. • Withdrawals—people who have stopped looking

for jobs.

21.3 UNEMPLOYMENT

Figure 21.6 summarizes the labor market flows.

21.3 UNEMPLOYMENT

Job losers and job leavers become unemployed or leave the labor force.

21.3 UNEMPLOYMENT

Entrants and reentrants become unemployed or get jobs.

21.3 UNEMPLOYMENT

Unemployment ends when a person is hired or recalled….

21.3 UNEMPLOYMENT

… or when a person withdraws from the labor force.

21.3 UNEMPLOYMENT

Types of Unemployment

Frictional unemployment

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.

Structural unemployment

The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs.

21.3 UNEMPLOYMENT

Seasonal unemployment

The unemployment that arises because of seasonal weather patterns.

Cyclical unemployment

The fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion.

21.3 UNEMPLOYMENT

Duration and Demographics of Unemployment

The average duration of unemployment varies over the business cycle.

Figure 21.8(a) compares the duration of unemployment in 2000 with 1983

21.3 UNEMPLOYMENT

Duration and Demographics of Unemployment

The lower the average unemployment rate, the shorter is the average duration of unemployment.

The average unemployment rate was less in 2000 than in 1983.

21.3 UNEMPLOYMENT

Figure 21.8(b) shows unemployment demographics.

Black unemployment is more than twice that of white.

Teenage unemployment is three times that of workers aged 20 and over.

21.3 UNEMPLOYMENT

Full Employment

Full employment

When there is no cyclical unemployment or, equivalently, when all the unemployment is frictional or structural.

Natural unemployment rate

The unemployment rate at full employment.

21.3 UNEMPLOYMENT

Unemployment and Real GDP

Because the unemployment rate fluctuates around the natural rate, real GDP fluctuates around potential GDP.

Potential GDP

The level of real GDP that the economy would produce if it were at full employment.

When the unemployment rate is above the natural rate, real GDP is below potential GDP.

When the unemployment rate is below the natural rate, real GDP is above potential GDP.

Figure 21.9(a)shows the relationship between unemployment and real GDP.

As the unemployment rate fluctuatesaround the natural rate unemployment (part a), real GDP fluctuates around potential GDP (part b).

21.3 UNEMPLOYMENT

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