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21 Unemployment Introduction to Unemployment We can draw some comparisons to the dramatic increase in unemployment that accompanied COVID-19 in the data that starts in April 2020. First, unemployment is a lagging indicator of business activity. It didn’t begin to increase until a few months after the onset of the recession, and it didn’t begin to decline until several months after the recovery. Second, the decline in the unemployment rate was quite slow, with the pre-recession unemployment rate only reaching a higher level than six years after the recession ended. This reflects a combination of slow increase in the number of jobs and ongoing increases in the size of the population and the labor force. Graphically, this means that the economy exists below the production possibilities frontier. When millions of unemployed but willing workers cannot find jobs, economic resource are unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that the unemployed workers could have produced. 21.1 How Economists Define and Compute Unemployment Rate Those who are out of the labor force include those who do not have a job AND are not looking for a job. people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force or not in the labor force. What is important to note here is that the unemployment rate is not determined by who files for unemployment benefits. It is determined through a survey distributed to a random sample. monthly survey carried out by the U.S. Bureau of the Census, 21 Unemployment Important Concepts Connections & Relationships Enrichment Key Terms These are the conditions that must be met to be classified as unemployed. unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. A country's civilian (non-military) and non-institutional (not confined to a prison, hospital, or long-term care facility) population can be placed in these four categories. Employed: currently working for pay Unemployed: Out of work and actively looking for a job Out of the labor force: Out of paid work and not actively looking for a job Labor force: the number of employed plus the unemployed The unemployment is the ratio of those who are unemployed to the total labor force. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labor force but who do not have jobs: Due to the precise definitions of each of these terms, people might be placed in an
inappropriate category. For instance, a person with a college degree would be considered employed if they worked at a part-time job that didn't require their skills. Even with the “out of the labor force” category, there are still some people who are mislabeled in the categorization of employed, unemployed, or out of the labor force. Underemployed are individuals who are employed, but who are not receiving as many hours as they want or are not using the skills they acquired. who have only part time or temporary jobs, and they are looking for full time and permanent employment that are counted as employed, although they are not employed in the way they would like or need to be. Additionally, there are individuals who are underemployed Unemployment rate= × 100 Unemployed people Total labor force Discouraged workers are not employed nor are they unemployed. They are not in the labor force. Thus, the more discouraged workers there are, the lower the unemployment rate. Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group The labor force participation rate is the ratio of those who are in the labor force (the sum of employed and unemployed) over the size of the total adult population. labor force participation rate. This is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job. Although the unemployment rate is calculated with a survey delivered to a sample, information about the labor market is supplemented with data from the establishment payroll survey. While the unemployment rate is calculated by asking people questions, the establishment payroll survey asks questions of employers. The payroll survey is based on a survey of about 147,000 businesses and government agencies throughout the United States. It generates payroll employment estimates by the following criteria: all employees, average weekly hours worked, and average hourly, weekly, and overtime earnings. One of the criticisms of this survey is that it does not count the self-employed. It also does not make a distinction between new, minimum wage, part time or temporary jobs and full time jobs with “decent” pay. The CPS collects quite detailed data about those who are unemployed. This data can help us understand the cause of the unemployment and what can be done to reduce it. Based on this survey, state, industry, urban and rural areas, gender, age, race or ethnicity, and level of education statistics comprise components that contribute to unemployment rates. A wide variety of other information is available, too. For example, how long have people been unemployed? Did they become unemployed because they quit, or were laid off, or their employer went out of business? Is the unemployed person the only wage earner in the family? Although the CPS and the EPS try to measure the same thing, they measure it through a different method. What is the difference between CPS and EPS?
quadrupled from 76 million in 1900 to over 324 million by 2017. Moreover, a higher proportion of U.S. adults are now in the paid workforce, because women have entered the paid labor force in significant numbers in recent decades. Women comprised 18% of the paid workforce in 1900 and nearly half of the paid workforce in 2017. However, despite the increased number of workers, as well as other economic events like globalization and the continuous invention of new technologies, the economy has provided jobs without causing any longterm upward or downward trend in unemployment rates. Keep in mind that these comparisons do not necessarily mean there is discrimination in the labor market. These differences reflect the shared challenges that some face -- such as access to child care and access to transportation. Unemployment Rate by Demographic Group (a) By gender, 1972–2016. Unemployment rates for men used to be lower than unemployment rates for women, but in recent decades, the two rates have been very close, often– and especially during and soon after the Great Recession – with the unemployment rate for men somewhat higher. (b) By age, 1972–2016. Unemployment rates are highest for the very young and become lower with age. (c) By race and ethnicity, 1972–2016. Although unemployment rates for all groups tend to rise and fall together, the unemployment rate for blacks is typically about twice as high as that for whites, while the unemployment rate for Hispanics is in between. (Source: www.bls.gov) The reason why an individual is unemployed becomes important for guiding public policy that helps these individuals find employment. four reasons for unemployment and the percentages of the currently unemployed that fall into each category. Table Although the United States has a lower unemployment compared to other countries, each country measures unemployment differently. The unemployment rate in a country also reflects the culture and the society's values. cross-country comparisons of unemployment rates with care, because each country has slightly different definitions of unemployment, survey tools for measuring unemployment, and also different labor markets. 21.3 What Causes Changes in Unemployment over the Short Run What is interesting to note is that the level of employment is based on the expectations by firms about the future. If firms believe that business is expanding, then at any given wage they will desire to hire a greater quantity of labor, and the labor demand curve shifts to the right. Cyclical unemployment is the unemployment that changes based on where the economy is at along the business cycle. Economists call the variation in unemployment that the economy causes moving from expansion to recession or from recession to expansion (i.e. the business cycle) cyclical unemployment. Some people may be unemployed because of dissatisfaction with the equilibrium wage. However, most are unemployed by the jobs that workers want do not exist. Probably a few people are unemployed because of unrealistic expectations about wages, but they do not represent the majority of the unemployed.
If the wage rate (price of labor) is not flexible and stuck at a higher level, some unemployment may exist. If a labor market model with flexible wages does not describe unemployment very well—because it predicts that anyone willing to work at the going wage can always find a job—then it may prove useful to consider economic models in which wages are not flexible or adjust only very slowly. There are a number of reasons why wages might not be flexible in a downward direction - implicit contract, efficiency wage theory, adverse selection of wage cuts, insider-outsider model, and the relative wage coordination argument. Many have proposed a number of different theories, but they share a common tone. Under the implicit contract notion, the relationship between employers and employees is guided by an unsaid rule that wages will not fall when the economy is weak. implicit contract, which is that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong. The efficiency wage theory explanation for wages being higher than the equilibrium is that higher wages ensure that workers are more productive. Efficiency wage theory argues that workers' productivity depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. Under the adverse selection of wage cuts argument for wages, wages can be higher than the equilibrium because employers face a disincentive to lower wages during an economic slowdown. The lowering of wages during an economic slowdown would cause the employer to attract not the best workers. adverse selection of wage cuts argument points out that if an employer reacts to poor business conditions by reducing wages for all workers, then the best workers, those with the best employment alternatives at other firms, are the most likely to leave. The insider-outsider model for wages suggests that wages shouldn't be lowered because insiders that keep the firm 'running' would be disillusioned and be less productive. The insider-outsider model of the labor force, in simple terms, argues that those already working for firms are “insiders,” while new employees, at least for a time, are “outsiders.” Under the relative wage coordination argument, workers strongly resist wage cuts because they perceive it as hurting them both absolutely and relatively. relative wage coordination argument points out that even if most workers were hypothetically willing to see a decline in their own wages in bad economic times as long as everyone else also experiences such a decline, there is no obvious way for a decentralized economy to implement such a plan. 21.4 What Causes Changes in Unemployment over the Long Run Even when economists say that there is full employment in the economy, they do not mean that the unemployment rate is 0%. Why is the unemployment rate never zero? The natural rate of unemployment is the unemployment that exists when the economy is
workers. https://www.irs.gov/businesses/small-businesses-self-employed/independentcontractor-defined The funding for the program is a federal tax collected from employers. The federal government requires tax collection on the first $7,000 in wages paid to each worker; however, states can choose to collect the tax on a higher amount if they wish, and 41 states have set a higher limit. States can choose the length of time that they pay benefits, although most states limit unemployment benefits to 26 weeks—with extensions possible in times of especially high unemployment. The states then use the fund to pay benefits to those who become unemployed. Average Key Terms The argument that there is adverse selection during a wage cut involves good workers being the first to leave when an employer reduces wages. adverse selection of wage cuts argument if employers reduce wages for all workers, the best will leave This is the kind of unemployment that results from the movement along the business cycle. When we are at the peak of the business cycle, the cyclical unemployment would be lower. When we are at the trough of the business cycle, the cyclical unemployment would be higher. cyclical unemployment unemployment closely tied to the business cycle, like higher unemployment during a recession What distinguishes a discouraged worker from an unemployed worker is that the discouraged worker is not looking or work and the unemployed worker is looking for work. The higher the number of discouraged workers, the lower the unemployment rate. discouraged workers those who have stopped looking for employment due to the lack of suitable positions available The efficiency wage theory theorizes that if we incentivize workers with more pay, they will be more productive because their job is a "good" job that they don't want to lose. This is one reason why wages are 'sticky' in a downward direction. efficiency wage theory the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more Frictional unemployment exists in market economies as workers change their employers and as employers search for new employees. frictional unemployment unemployment that occurs as workers move between jobs This is one reason why wages are 'sticky' in a downward direction. implicit contract an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong This is one reason why wages are 'sticky' in a downward direction.
insider-outsider model those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires The labor force participation rate provides an indication of how many adults are either working or looking for work. This statistic tells us how large the active workforce is and how healthy the economy is. labor force participation rate this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job The natural rate of unemployment is what the unemployment rate would be if the economy was growing and employers were not furloughing or laying off employees. The only people who would be unemployed would be those who are frictionally unemployed and those who are structurally unemployed. natural rate of unemployment the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time Those not in the labor force can be the lazy who choose to not work, those who are ill or are disabled (but are not hospitalized or institutionalized), students, and those who are retired. out of the labor force those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force” This is one reason why wages are 'sticky' in a downward direction. relative wage coordination argument across-the-board wage cuts are hard for an economy to implement, and workers fight against them Structural unemployment is the unemployment that emerges as the goods and services produced in the economy changes. Structural unemployment tends to be longer in length because of the needed re-training. structural unemployment unemployment that occurs because individuals lack skills valued by employers Underemployed workers are counted as employed. An underemployed worker either has chosen to not use all of their skills in their job or has no better options to use their skills. underemployed individuals who are employed in a job that is below their skills This is the ratio where the number of unemployed workers is in the numerator and the total labor force (number of employed plus the number of unemployed) is in the denominator. unemployment rate the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs Key Concepts and Summary When there is unemployment, the economy exists below the production possibilities
