Macroeconomics
Labor Market and Nature of Unemployment
A Paradox
“India is growing fast — yet graduates
struggle to find jobs. Why?”
▪ Is unemployment always bad?
▪ Can unemployment exist even in a
booming economy?
Macroeconomics studies labour
markets differently from micro job search.
Why Labour Market Matters
GDP Income Employment
Consumption Business Profits
Business Lens
o Hiring decisions
o Wage costs
o Demand forecasting
o Automation vs labour
Measuring Labour Market Outcomes
Core Indicators
• (a) Working-age population
• (b) Labour force
• (c) Employment
• (d) Unemployment
Categories of the Population
• Employed
- working at a paid job
• Unemployed
- not employed but looking for a job
• Labor force
- the amount of labor available for
producing goods and services; all
employed plus unemployed persons
• Not in the labor force
- not employed, not looking for work
Two important labor force concepts
Unemployment rate
o percentage of the labor force that is
unemployed
Labor force participation rate
o the fraction of the adult population
that “participates” in the labor force
YOU TRY:
Computing labor statistics
U.K. adult population by group, Oct 2020
Number employed = 139.1 million
Number unemployed = 14.8 million
Adult population = 238.5 million
Use the above data to calculate
▪ the labor force
▪ the number of people not in the labor
force
▪ the labor force participation rate
▪ the unemployment rate
Answers
Data: E = 139.1, U = 14.8, POP = 238.5
▪ Labor force
L = E +U = 139.1 + 14.8 = 153.9
▪ Not in labor force
NILF = POP – L = 238.5 – 153.9 = 84.6
▪ Unemployment rate
U/L x 100% = (14.8/153.9) x 100% = 9.6%
▪ Labor force participation rate
L/POP x 100% = (153.9/238.5) x 100% = 64.5%
Key Formulas
Labour Force Participation Rate
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
𝐿𝐹𝑃𝑅 =
𝑊𝑜𝑟𝑘𝑖𝑛g 𝑎𝑔𝑒 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
Unemployment Rate
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑈𝑅 =
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
Why can unemployment fall without
job creation?
Types of Unemployment
Frictional Unemployment
• Job search process
• Information gaps
• Healthy economy feature.
Structural Unemployment
• Skill mismatch
• Technology change
• Sectoral shifts
• Example: AI replacing routine work.
Types of Unemployment
Cyclical Unemployment
• Business cycle driven
• Demand shocks
Natural Rate of Unemployment
• Unemployment never equals zero.
• Natural Rate = Frictional + Structural
What do you think
“Full employment =
everyone employed.”
Okun’s Law
Formula
Percentage Change in Real GDP
= 3% − 2 × Change in Unemployment
Rate.
Why Wages Don’t Fall Easily
Wage Rigidity.
Reasons:
o Minimum wages
o Efficiency wages
o Labour contracts
o Morale/productivity effects
Efficiency Wage Theory
Firms pay above equilibrium wage because:
o Higher productivity
o Lower turnover
o Better talent
Creates persistent unemployment.
Policy Responses to Unemployment
Policy Mechanism Trade-off
Skill
Structural fix Time lag
development
Demand
Fiscal stimulus Debt risk
boost
Labour Worker
Flexibility
reforms security
Business Applications
❖Consulting firms
❖Tech companies
❖FMCG management trainee
salaries