PRINCIPLES OF ECONOMICS

Chapter 21 Unemployment
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FIGURE 21.1

Borders was one of the many companies unable to recover from the economic
recession of 2008-2009.
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LABOR MARKET

Employed: Currently working for pay

Unemployed: Out of who work, but actively

looking for work

Labor Force: Employed + Unemployed

Out of Labor Force: Out of who work, but not

looking for work
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UNEMPLOYMENT

An unemployed person is any one who is:

• Sixteen years old or older

• Out of who work

• Actively searching for work: he/she has made

specific efforts to find work during the previous
four weeks
MEASURING UNEMPLOYMENT
EMPLOYMENT DATA
 PATTERNS OF UNEMPLOYMENT

The U.S. unemployment rate moves up and down as the economy

moves in and out of recessions. But over time, the unemployment rate
seems to return to a range of 4% to 6%. Highest rate was about 10%
in 1983-84 and 2007-09 recession.
PATTERNS OF UNEMPLOYMENT
 TYPES OF UNEMPLOYMENT

Frictional unemployment: Unemployment due to

searching time for jobs and waiting time between jobs

e.g., Jennifer, just graduated from college, is looking for a

job that matches her qualifications

Structural unemployment: Unemployment due to

changes in the structure of the economy that result in a
loss of jobs in certain industries

e.g., Ken, a farm laborer, lost his job due to mechanization.

He is getting trained to be a security officer.
 TYPES OF UNEMPLOYMENT

Cyclical unemployment: Unemployment due to

labor lay-offs in a recession

e.g., Nancy, an engineer, is let go as her employer

attempts to cut labor cost.

Seasonal unemployment: Unemployment due to

seasonal changes

e.g., Tom, a ski instructor, loses his job when winter

Ends.
 TYPES OF UNEMPLOYMENT

Natural Rate of Unemployment: Unemployment

that occurs as a normal functioning of the economy.
=
Frictional Unemployment + Structural Unemployment

Usually 4 to 5 percent of the labor force is searching for

jobs, waiting between jobs, or getting trained for new jobs.

Unemployment rate above the natural rate is

considered to be cyclical, e.g., 7.5% – 5% = 2.5%
 THE CLASSICAL VIEW: WAGE FLEXIBILITY

The labor market is brought to equilibrium by rising

and falling wage rates.

There should not be any persistent unemployment

above the natural rate.
 THE CLASSICAL VIEW: WAGE FLEXIBILITY

In a labor market with flexible wages, the equilibrium will

occur at wage We and quantity Qe, where the demand for
labor intersect the supply of labor.
 THE KEYNESIAN VIEW: WAGE RIGIDITY

Wages are “rigid” or “sticky” downward.

Sticky Wages refers to the downward rigidity

of wages as an explanation for the existence
of unemployment.
 THE KEYNESIAN VIEW: WAGE RIGIDITY

Because the wage rate is stuck at W, above the

equilibrium, the number of job seekers (Qs) is greater than
the number of job openings (Qd). The result is
unemployment = Qs – Qd.
 ADJUSTMENT TO INCREASED DEMAND

a) In a labor market where wages could rise,

an increase in the demand for labor leads
to an increase in equilibrium wage and
employment.

b) In a labor market where wages could not

fall, a decline in the demand for labor
leads to a loss of employment at the
original wage. At the fixed wage of W0,
unemployment = Q0 – Q2
ADJUSTMENT TO INCREASED DEMAND
ADJUSTMENT TO PRODUCTIVITY INCREASED

o Productivity improves, increasing the demand for

labor, wage, and employment.
o Then productivity stops increasing. Still, wages
keep rising.
o But, the demand for labor has not increased, so at
a market wage, unemployment exists.

 There is no improvement in productivity.

 There is no wage increase.
 Now, productivity improves, increasing the demand
for labor and creating more jobs.
ADJUSTMENT TO PRODUCTIVITY INCREASED