Chapter 7

Unemployment

Copyright © 2021 W. W. Norton & Company

Previously
Gross domestic product (GDP)
• The market value of all final goods and services
produced in a specific period of time
• GDP = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
• To find real GDP, we must adjust nominal GDP for
inflation.
Business cycle
• Short-run fluctuations in economic activity that can
cause output to be above or below the long-run
trend
Big Questions
1. What are the major reasons for unemployment?
2. What can we learn from the employment data?
Unemployment

Types of Interpreting
Unemployment Unemployment
• Structural • Ways to look at
• Frictional unemployment

• Cyclical • Shortcomings
Key Terms
Unemployment: when a worker who is not currently
employed is searching for a job without success

Unemployment rate (u): the percentage of the labor

force that is unemployed

𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
×100
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
Structural Unemployment—1
Structural unemployment: unemployment caused by
changes in the industrial makeup of the economy

Cause: creative destruction

Example: decline in bookstores leading to job losses in

the book sale industry
Structural Unemployment—2
Creative destruction: when the introduction of new
products and technologies leads to the end of other
industries and jobs
• The term was first coined by Joseph Schumpeter to
describe the process of economic evolution: as new
industries are created, some old ones are destroyed.
• Although it leads to unemployment, it is often a sign
of a healthy, growing economy.
• Example: book industry
Structural Unemployment—3
Over the past 200 years, jobs in the United States have
evolved from being primarily agricultural to industrial
and then to service.
Structural Unemployment—4
Ways to reduce structural unemployment:
• Workers must retrain, reeducate, relocate, or change
expectations about work and pay.
• The government can help with training programs or
relocation subsidies.
Luddites
Luddites
• Nineteenth-century English textile workers
• Destroyed automated looms that could be operated
cheaply to produce clothing
Goal
• Trying to protect themselves from structural
unemployment
Question to think about
• The industrial revolution left many people structurally
unemployed. What are the trade-offs of technological
progress and structural unemployment?
Practice What You Know—1
1. Which of the following is an example of structural
unemployment?
A. Alfred the welder is unemployed because the
plant where he once worked now uses robots.
B. Macy the construction worker is unemployed
because no one is building houses right now.
C. Lucy the restaurant chef is unemployed because
she and her wife recently moved to a new city.
Frictional Unemployment—1
• Frictional unemployment: unemployment caused by
delays in matching available jobs and workers
• No matter how healthy the economy, there is always
frictional unemployment.
• Example: recent college graduate
Frictional Unemployment—2
Causes:
• Information availability
• Any factors that shorten job searches also
decrease frictional unemployment.
• Government policies
• Any factors that lengthen the job search process
increase frictional unemployment.
Frictional Unemployment—3
Government policies:
• Unemployment insurance and incentives
• Regulations on hiring and firing
Practice What You Know—2
2. Which of the following is an example of frictional
unemployment?
A. Alfred the welder is unemployed because the
plant where he once worked now uses robots.
B. Macy the construction worker is unemployed
because no one is building houses right now.
C. Lucy the restaurant chef is unemployed because
she and her wife recently moved to a new city.
Cyclical
Unemployment
Cyclical unemployment:
unemployment caused by
economic downturns
• Causes greatest concern among
policymakers and economists
Cause: an unhealthy economy
Example: unemployment due to
COVID-19

16
Natural Rate of Unemployment
Natural rate of unemployment: typical unemployment rate
that occurs when the economy is growing normally

Unemployment during Unemployment during

healthy macroeconomic recession
conditions (u*)

Cyclical

Structural Structural
Natural
unemployment
Frictional Frictional
The Natural Rate of Unemployment and Full-Employment Output
Full-employment output: output by an economy with
no cyclical unemployment
Healthy Recession Exceptional
economy expansion

Unemployment
(u) relative to u* u=u* u>u* u<u*

Economic output
(Y) relative to Y* Y=Y* Y<Y* Y>Y*

Level of cyclical
unemployment Zero Positive Negative
Population Breakdown

Work-eligible population:
civilian, noninstitutionalized,
and age 16 or older
Labor force: people who are
employed or actively seeking
work
• Accounts for just 25 percent
of Americans
Main Measures of Employment
Unemployment rate (u): the percentage of the labor
force that is unemployed

𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
×100
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒

Labor force participation rate (LFPR): the percentage of

the work- eligible population that is in the labor force

𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
×100
𝑊𝑜𝑟𝑘 − 𝐸𝑙𝑖𝑔𝑖𝑏𝑙𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
Practice What You Know—3

3. Who is considered unemployed?

A. Jean, a college student who is currently not
working
B. Zoe, a recent college graduate who sent out job
applications but has yet to hear back from the
businesses
C. Michael, a stay-at-home dad
D. all of the above
U.S. Unemployment Rate and Recessions, 1970–2021

There is always some unemployment, but when the

economy is in a downturn (shaded area), cyclical
unemployment increases.
U.S. Labor Force Participation Rate, 1995–2021
In the past two decades, the LFPR has decreased and is
expected to keep doing so as Baby Boomers retire.
Trends in U.S. Labor Force Participation, 1950–2020
Since 1950, the proportion of men in the labor force has
steadily declined, and the LFPR of women, despite
significantly increasing since 1950, has also decreased in
the past decade.
Shortcomings of Using the Unemployment Rate

1. It can be too narrow.

2. It does not reveal who is unemployed.
3. It is a lagging indicator.
Unemployment Rate Can Be Too Narrow—1
Discouraged workers: those who are not working, have
looked for a job in the past 12 months and are willing to
work, but have not sought employment in the past four
weeks
• Referred to as marginally attached workers
• Example: PhD student bagging groceries
Unemployment Rate Can Be Too Narrow—2
• Underemployed workers: those who have part-time jobs
but would prefer to work full time
• Example: person who works in the mornings but would
like to work all day
A Broader Measure of U.S. Labor Market Problems,
2000–2021
In recessions, more people become discouraged and
underemployed, increasing the gap between U-3 (officially
unemployed) and U-6 (unemployed plus discouraged and
underemployed workers).
Does Not Reveal Who Is Unemployed
• Do not know who is unemployed
• Do not know how long they have been out of work
• Short-run unemployment may not be a big concern, but
long-term unemployment is a big concern.
Labor Market Data: Race and Gender
Lagging versus Leading Indicators
Leading indicator Lagging indicator
• Helps us predict what’s • Usually changes after the
coming and will usually economy as a whole changes,
change before the economy so it doesn’t have much
as a whole does predictive power
• Example: average weekly • Example: average duration
hours for manufacturing of unemployment
• Example: building permits • Example: change in the price
index
Conclusion: Unemployment Rate
• Monitored as an indicator of macroeconomic health
• Helps us gauge labor market conditions
• Can be misleading and incomplete, since it lags behind
economic activity and doesn’t account for
underemployment and discouraged workers
• Includes different types of unemployment, some worse
than others
• Can be influenced by government policy. This seems to
have played a big part in propping up rates in the
aftermath of the 2008 recession.