Measuring the Unemployment Rate and the Labor Force Participation Rate

© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.

Fernando & Yvonn Quijano

Prepared by:

Chapter

8

Unemployment and Inflation

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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 36

Labor force The sum of employed and unemployed workers in the economy.

Unemployment rate The percentage of the labor force that is unemployed.

Measuring the Unemployment Rate and the Labor Force Participation Rate

Learning Objective 8.1

The Household Survey

Discouraged workers People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

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FIGURE 8-1

The Employment Status of the Civilian Working-Age Population, April 2007



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100Number of unemployed

Unemployment rateLabor force


• The unemployment rate measures the percentage of the labor force that is unemployed.



• The labor force participation rate measures the percentage of the working-age population in the labor force.

100Labor force

Labor force participation rateWorking-age population

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Problems with Measuring the Unemployment Rate

Although the BLS reports the unemployment rate measured to the tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy.

The unemployment rate provides some useful information about the employment situation in the country, but it is far from an exact measure of joblessness in the economy.

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FIGURE 8-2

Trends in the Labor Force Participation Rates of Adult Men and Women Since 1948


Trends in Labor Force Participation

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What Explains the Increase in “Kramers”?

Makingthe

Connection

Why do more men seem to be adopting Kramer’s lifestyle?

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FIGURE 8-3

Unemployment Rates in the United States by Demographic Group, April 2007


Unemployment Rates for Demographic Groups

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Table 8-1

Duration of Unemployment

LENGTH OF TIME UNEMPLOYED PERCENTAGE OF TOTAL UNEMPLOYED

Less than 5 weeks 35.6%

5 to 14 weeks 31.3

15 to 26 weeks 15.7

27 weeks or more 17.5


How Long Are People Usually Unemployed?

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Table 8-2

Household and Establishment Survey Data for March and April 2007

HOUSEHOLD SURVEY ESTABLISHMENT SURVEY

MARCH APRIL CHANGE MARCH APRIL CHANGE

EMPLOYED 146,254,000 145,786,000 −468,000 137,596,000 137,684,000 +88,000

UNEMPLOYED 6,724,000 6,801,000 +77,000

LABOR FORCE 152,979,000 152,587,000 −392,000

UNEMPLOYMENT RATE 4.4% 4.5% +0.1%


The Establishment Survey: Another Measure of Employment

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Types of Unemployment


FIGURE 8-4

The Annual Unemployment Rate in the United States, 1950–2006

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Frictional Unemployment and Job Search

Frictional unemployment Short-term unemployment that arises from the process of matching workers with jobs.


Structural unemployment Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

Cyclical unemployment Unemployment caused by a business cycle recession.

Cyclical Unemployment

Structural Unemployment

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Natural rate of unemployment The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

Full Employment


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Unemployment Insurance and Other Payments to the Unemployed

Government Policies and the Unemployment Rate

Explaining Unemployment

In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government.

In the United States, these payments are equal to about half the average wage.

Unemployment insurance helps the unemployed maintain their income and spending, which lessens the personal hardship of being unemployed and also helps reduce the severity of recessions.

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Minimum Wage Laws

Government Policies and the Unemployment Rate


In 1938, the federal government enacted a national minimum wage law.

If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.

Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.

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Efficiency Wages

Efficiency wage A higher-than-market wage that a firm pays to increase worker productivity.

Labor Unions


Labor unions are organizations of workers that bargain with employers for higher wages and better working conditions for their members.

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Why Does Costco Pay Its Workers So Much More Than Wal-Mart Does?

Makingthe

Connection

Costco’s relatively high wages and health benefits reduce employee turnover and raise morale and productivity.

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Measuring Inflation


The Consumer Price Index

FIGURE 8-6

The CPI Market Basket, December 2006

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Measuring Inflation


Consumer price index (CPI) An average of the prices of the goods and services purchased by the typical urban family of four.

The Consumer Price Index

BASE YEAR (1999) 2008 2009

PRODUCTQUANTIT

Y PRICE EXPENDITURES PRICE

EXPENDITURES(ON BASE-YEAR

QUANTITIES) PRICE

EXPENDITURES (ON BASE-

YEAR QUANTITIES)

Eye examinations 1 $50.00 $50.00 $100.00 $100.00 $85.00 $85.00

Pizzas 20 10.00 200.00 15.00 300.00 14.00 280.00

Books 20 25.00 500.00 25.00 500.00 27.50 550.00

Total $750.00 $900.00 $915.00

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Real versus Nominal Interest Rates


Nominal interest rate The stated interest rate on a loan.

Real interest rate The nominal interest rate minus the inflation rate.

Real interest rate = Nominal interest rate − Inflation rate

Deflation A decline in the price level.

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Real versus Nominal Interest Rates


FIGURE 8-7

Nominal and Real InterestRates, 1970–2006

Measuring the Unemployment Rate and the Labor Force Participation Rate

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