Measuring the Unemployment Rate and the Labor Force Participation Rate

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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 1 of 36

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

•Employed can be in any job -- part-time, underemployed

Unemployment rate The percentage of the labor force that is unemployed: not working and looking.

Measuring the Unemployment Rate and the Labor Force Participation Rate

The Household Survey

Discouraged workers: Available for work but haven’t looked for a job (for the past four weeks) because they believe no jobs are available for them.

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

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100Number of unemployed

Unemployment rateLabor force

• Unemployment rate: the percentage of the labor force that is unemployed … not working and looking.

• Labor force participation rate: the percentage of the working-age civilian population in the labor force.

100Labor force

Labor force participation rateWorking-age population

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Solved Problem 8-1What Happens if You Include the Military?

In the BLS household survey, people on active military service are not included in the totals for employment, the labor force, or the working-age population. Suppose people in the military were included in these categories.

100Labor force

Working-age population

100Number of unemployed

Labor force

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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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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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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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Learning Objective 8.1

Establishments Creating and Eliminating Jobs, April–June 2006

NUMBER OF ESTABLISHMENTS

NUMBER OF JOBS

ESTABLISHMENTS CREATING JOBS

Existing establishments 1,558,000 6,286,000

New establishments 360,000 1,475,000

ESTABLISHMENTS ELIMINATING JOBS

Existing establishments 1,543,000 5,937,000

Closing establishments 341,000 1,358,000

Measuring the Unemployment Rate and the Labor Force Participation Rate

Job Creation and Job Destruction Over Time

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

Types of Unemployment

Structural unemployment Unemployment because of persistent mismatch between worker skills and characteristics and job requirements.

•Declining industries and regions / Expanding industries and regions

Cyclical unemployment Unemployment caused by a business cycle recession.

Cyclical Unemployment

Structural Unemployment

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Full Employment and “Natural” Rate of Unemployment

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

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Average Unemployment Rates in the United States, Canada, Japan, and Europe, 1997–2006

International Comparisons

Government Policies and the Unemployment Rate

Explaining Unemployment

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Unemployment Insurance and Other Payments to the Unemployed

Explaining Unemployment

Minimum Wage Laws

Labor Unions / Work Rules

Seniority / Probation Periods

Efficiency Wages: higher-than-market wage that a firm pays to increase worker productivity wait unemployment.

•Reduce hiring costs, turnover, monitoring costs, shirking•Increase morale

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Measuring Inflation

Price level (= P) A measure of the average prices of goods and services in the economy.

Inflation rate (= π) The percentage increase in the price level from one year to the next.

Π = 100 x (Pt - Pt-1 ) / Pt-1

Price Indices of Note•GDP Deflator•Consumer Price Index

•Core CPI: CPI excluding energy and food•Producer Price Index

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Measuring Inflation

The Consumer Price Index

The CPI Market Basket, December 2006

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


BASE YEAR (1999) 2008 2009

PRODUCTQUANT-

ITY PRICEEXPEND-ITURES PRICE

EXPENDITURES

(ON BASE-YEAR

QUANTITIES) PRICE

EXPENDITURES (ON

BASE-YEAR QUANTITIES)

Eye exams 1 $50 $50 $100 $100 $85 $85

Pizzas 20 10 200 15 300 14 280

Books 20 25 500.00 25 500 27.50 550

Total $750 $900 $915

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APPLIED TO 2008 APPLIED TO 2009

120100750$

900$

122100750$

915$

CPI = 100year base in the esExpenditur

yearcurrent in the esExpenditur

122 120100 1.7%

120

2008 - 2009 Inflation Rate = Π = 100 x (P2009 - P2008 ) / P2008

Π =

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Is the CPI Accurate?

• Substitution bias.

• Increase in quality bias.

• Outlet bias.

• New product bias.

CPI inflation overstates the increase in the “Cost of Living”

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Using Price Indexes to Adjust for the Effects of Inflation

YEARNOMINAL AVERAGE HOURLY EARNINGS

CPI(1982-1984 = 100)

2004 $15.69 188.9

2005 16.13 195.3

2006 16.76 201.6

Value in constant 1983$ = Value in 2006$ x [CPI in 1983/CPI in 2006]

= Value in $2006$ x [100/CPI in 2006]

Calculating Real Average Hourly Earnings (Real Wage)

YEARNOMINAL AVERAGE HOURLY EARNINGS

CPI(1982-1984 = 100)

REAL AVERAGEHOURLY EARNINGS

(1982-1984 DOLLARS)

2004 $15.69 188.9 $8.31

2005 16.13 195.3 8.26

2006 16.76 201.6 8.31

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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

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Does Inflation Impose Costs on the Economy?

Inflation Affects the Distribution of Income– Arbitrary redistribution

• Debtors gain / Creditors lose disincentive to save• Pensioners lose

The Problem with Anticipated Inflation

Menu costs The costs to firms of changing prices.

The Problem with Unanticipated Inflation

Price Uncertainty fear Stagnation

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Consumer price index (CPI)

Cyclical unemployment

Deflation

Discouraged workers

Efficiency wage

Frictional unemployment

Inflation rate

Labor force

Labor force participation rate

Menu costs

Natural rate of unemployment

Nominal interest rate

Price level

Producer price index (PPI)

Real interest rate

Structural unemployment

Unemployment rate

K e y T e r m s

Measuring the Unemployment Rate and the Labor Force Participation Rate

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