The second reading assignment for Unit Two is pp. 165 – 173

Our next topic is employment and unemployment. Our starting point is to define the labor force. The total U.S. population, approximately 300 million, may be divided into those who are in the labor force and those who are not. As it happens, there is about a 50-50 split. The civilian labor force is roughly 150 million. It is defined as those who are 16+ years of age and gainfully employed or actively seeking employment. Homemakers, retirees, and those who are in jails or mental hospitals are excluded from the labor force. So are individuals who are disabled or who are under the age of sixteen.

Suppose that out of the 150 million in the U.S. labor force, 142 million are employed and 8 million are unemployed. Unemployed means a person does not have a job but is actively seeking employment. In this case, to figure the unemployment rate, divide 8M by 150M. State the answer as a percentage rate of inflation, one place to the right of the decimal point. The answer is 8/150 = .0533 or 5.3%.

In measuring unemployment, the federal government, with the assistance of various state labor departments, surveys about 60,000 households per month. The results of this survey include the macro unemployment rate, 5.3% in the example above. The government uses certain guidelines as part of its methodology in doing this survey. They include:

Both are considered in the labor force and both are treated as employed. Almost certainly, some part-time employees would prefer full-time work but cannot find it. However, no adjustment is made for this. It is also true that some part-time employees are perfectly content to work part-time. This methodology has the effect of slightly understating the unemployment rate.

A person who possesses a college degree in engineering who can’t find work in his or her field and ends up sweeping floors at a fast-food restaurant is underemployed. This is not good for the individual, nor is it desirable for the macroeconomy because the potential contribution to Gross Domestic Product that could have been received from this individual is not being fully realized. There is no convenient method for quantifying the extent of underemployment and so no adjustment is made for this. Again, the net result of this treatment is to understate the unemployment rate.

A "discouraged" worker is one who has found job prospect to be so poor that he or she has quit looking for the time being. That being the case, such a person is no longer considered as in the labor force. Remember, if an individual does not have a job, then that person must be actively seeking employment in order to be included in the labor force. Here, too, the effect of this method is to understate the unemployment rate.

An alternative method for measuring labor force activity is the labor force participation rate. We compare the actual labor force to the potential labor force. The actual labor force in the example above is 150 million. The potential labor force consists of all persons over 16 years old who are not institutionalized. That is, homemakers and retirees could participate in the commercial workforce if they chose to do so. Suppose the potential labor force in the U.S. economy is 215 million. Then the labor force participation rate = 150M/215M = 70%. The general trend for the labor force participation rate over the past twenty years or so has been up. The primary reason for this is the increased participation of women in the labor force. Currently, women make up about 49% of the U.S. work force.

There are several standard types of unemployment that occur on a regular basis. Sometimes the lines between the various types are blurry.

Frictional unemployment occurs when a person is "in-between" jobs. It is a short-term unemployment, say three to six months at most. One who is frictionally unemployed has marketable skills and that is why it should be a short period of unemployment. It includes voluntary and involuntary situations. One could quit a position because he or she is accompanying a spouse to a job in a new location and expects to find new employment soon. Or one could be fired by the boss due to a personality conflict. It could be a graduating college student seeking his or her first job in a field related to what they studied. All of these are examples of frictional unemployment.

Structural unemployment occurs when there is a mismatch between the skills desired by prospective employers and the skills possessed by the set of individuals who are unemployed. This can happen in several different ways. Perhaps a draftsman who used to be skilled and current in his knowledge never learned how to use a computer and his skills became obsolete. If he loses his job, he will be structurally unemployed until he goes back to school or educates himself on how to use a computer.

A tire factory could close down in a small city. Some employees may have worked there for many years and have skills that do not transfer easily to other employers in the local area. The corporation that closed the factory offers these employees positions at another factory, but it is located 1,000 miles away. Many employees are reluctant to move so far. Unemployed persons are in one place and the open jobs are far away. This also is structural unemployment.

Cyclical unemployment, as suggested by the label, refers to business cycle related unemployment. When overall business activity sags, there is an insufficient amount of aggregate demand in the economy. As a result, spending diminishes. When spending goes down, goods remain unsold and production is reduced. Layoffs occur. Household income drops and, once again, spending decreases. This negative feedback loop continues until the economy turns around and heads back up the business cycle. As long as the economy is heading down toward a trough of the business cycle, the unemployment rate will rise.

Seasonal unemployment is self-explanatory. Construction workers may be seasonally unemployed during poor weather months such as January and February. A teacher who has no summer teaching opportunities may be seasonally unemployed during this time. The government makes seasonal adjustments when measuring employment and unemployment in its monthly survey. For instance, employers have greater labor needs as the holiday season approaches toward the end of the year and a seasonal adjustment is needed to avoid distortion in the data used to measure the unemployment. Without an adjustment, the unemployment rate would be artificially low during this time. An adjustment is also made when college students seek summer employment or else the unemployment rate would be artificially high.

Full employment is the lowest unemployment rate that can occur in the economy that is consistent with maintaining price stability. This is sometimes known as the natural or built-in rate of unemployment. Some have referred to it as the non-accelerating inflation rate of unemployment. The proposition is that we want unemployment to be as low as possible consistent with price stability. Price stability is typically measured by the Consumer Price Index (CPI), the Producer Price Index (PPI), and the GDP implicit price deflator. All of these inflation-measuring devices will be examined in the next section. We want the inflation rate to stay below 4%. If it does, we will have relatively stable prices. At one time, the thought was that if the unemployment rate became too low, then high inflation would occur. Alternatively, if unemployment went up, then there would be slack in the economy and inflation would be tame. This inverse relationship came to be known as the Phillips curve, although many economists have questioned its validity in recent years.

Many economists believe that an unemployment rate of 4.5% to 5.5% is the best we can achieve. If the rate went any lower, they believe the economy would lose its price stability.

One of the reasons labor is considered the most important factor of production, in addition to the fact that labor receives the bulk of the returns earned by the various factors, is that the consequences of unemployment are serious. Some of these consequences are economic costs and others are social costs.

Although the overall unemployment rate might be, say, 5.3%, there is considerable variance among various population subsets. For instance, black unemployment might be 13% while white unemployment is 5%. Teenage unemployment (16-19 years old and not a full-time student and actively seeking work) could be 15% while adult unemployment (20+ years of age) is 4.7%. Single females heading households may have an unemployment rate of 8%. It is clear that the burden of unemployment is uneven among different demographic groups.

In a time of higher unemployment, we would expect divorce rates, alcoholism, and other mental health issues to increase in frequency and severity. Perhaps this is because in our culture we are defined by what we do in the commercial labor force.

It's also clear that when unemployment goes up, claims for unemployment compensation and various forms of public assistance (e.g., Temporary Assistance to Needy Families or TANF) will increase also. The "lost" production associated with higher unemployment puts downward pressure on our standard of living. We can try to measure this lost production by considering the difference between the target rate of unemployment, say 5%, and the actual rate, say 7%. The 2% excessive unemployment can then be converted into a dollar amount of lost production by multiplying the number of workers represented by this 2% times the average contribution to Gross Domestic Product that each unemployed person would make. This average contribution is figured by taking the current GDP amount and dividing it by the number of persons actually employed in producing it. This lost production amount is an economic cost of unemployment.

In the next section, we will consider the other traditional evil for a macroeconomy, namely inflation.

You are now ready to do the Problems and Exercises for Unit Two, Assignment Two.