Unemployment
Chapter 26
Categories of Unemployment
The problem of unemployment is usually
divided into two categories.
The long-run problem and the short-run
problem:
The natural rate of unemployment
The cyclical rate of unemployment
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Natural Rate of Unemployment
The natural rate of unemployment is
unemployment that does not go away on
its own even in the long run.
It is the amount of unemployment that
the economy normally experiences.
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Cyclical Unemployment
Cyclical unemployment refers to the
year-to-year fluctuations in
unemployment around its natural rate.
It is associated with with short-term ups
and downs of the business cycle.
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Describing Unemployment
Three Basic Questions:
How does government measure the
economy’s rate of unemployment?
What problems arise in interpreting the
unemployment data?
Major reasons why unemployment occurs
in an economy.
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How is Unemployment Measured?
Unemployment is measured by the
Bangladesh Bureau of Statistics (BBS).
The survey is called the Labor Force Survey
(LFS).
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How is Unemployment Measured?
Based on the answers to the survey
questions, the BBS places each adult
into one of three categories:
Employed
Unemployed
Not in the labor force
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How is Unemployment
Measured?
The BBS considers a person
an adult if he or she is 15
years or older.
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How is Unemployment Measured?
A person is considered employed if he
or she has spent the previous week
working at a paid job.
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How is Unemployment Measured?
A person is unemployed if he or she is
on temporary layoff, is looking for a
job, or is waiting for the start date of a
new job.
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How is Unemployment Measured?
A person who fits neither of these
categories, such as a full-time
student, homemaker, or retiree, is
not in the labor force.
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How is Unemployment Measured?
The BBS defines the labor force as
the sum of the employed and the
unemployed.
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The Breakdown of the Population
Employed Labor force
Adult
population
Unemployed
Not in labor
force
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How is Unemployment Measured?
The unemployment rate is
calculated as the percentage of the
labor force that is unemployed.
Numberunemployed
Unemployme
nt rate= 100
Laborforce
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How is Unemployment Measured?
The labor-force participation rate is
the percentage of the adult
population that is the labor force.
Laborforce
Labor- forceparticipat
ionrate= 100
Adultpopulation
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Unemployment Problem
Suppose the population of Bangladesh in 2019 was
170 million out of which 60% were adults. If the
number of people employed was 20 million and the
number of people unemployed was 30 million, then
calculate the unemployment rate and the labor
force participation rate of Bangladesh in 2019.
LF= 20 mil. + 30 mil.= 50 mil.
UR= (30 mil./50mil.) x100= 60%
LFPR= (50 mil./102 mil. x 100)= 49%
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Labor-force Participation Rates
Women
Participation Rate (in
100
Labor-force
80
percent)
60
40 Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 ’98
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Does the Unemployment Rate Measure
What We Want It To??
It is difficult to distinguish between a person
who is unemployed and a person who is not in
the labor force.
Discouraged workers, people who would like to
work but have given up looking for jobs after
an unsuccessful search, don’t show up in
unemployment statistics.
Other people may claim to be unemployed in
order to receive financial assistance, even
though they aren’t looking for work.
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Types of Unemployment
1. Frictional unemployment refers to the
unemployment that results from the time
that it takes to match workers with jobs.
In other words, it takes time for workers
to search for the jobs that are best suited
for them.
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Job Search Unemployment
Job search is the process by which
workers find appropriate jobs given their
tastes and skills.
Job search unemployment results from
the fact that it takes time for qualified
individuals to be matched with
appropriate jobs.
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Job Search Unemployment
This unemployment is different from the
other types of unemployment.
It is caused by the time spent searching for
the “right” job.
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Types of Unemployment
2. Structural unemployment occurs
when the quantity of labor supplied
exceeds the quantity demanded.
Structural unemployment is often
thought to explain longer spells of
unemployment.
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Unemploymet Formulas
Frictional Unemployment + Structural
Unemployment= Natural Rate of
Unemployment
Natural Rate of Unemployment +
Cyclical Unemployment Rate =
Unemployment Rate
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Two major reasons why
unemployment occurs in an economy
Minimum-wage law
Efficiency wage theory
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Minimum-Wage Laws
When the minimum wage is set above the
level that balances supply and demand, it
creates unemployment.
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Unemployment from a Wage Above the
Equilibrium Level...
Wage
Surplus of labor = Labor
Unemployment supply
Efficienc
y Wage
WE
Labor
demand
0 LD LE LS Quantity
of Labor
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Theory of Efficiency Wages
Efficiency wages are above-equilibrium
wages paid by firms in order to increase
worker productivity.
The theory of efficiency wages states that
firms operate more efficiently if wages
are above the equilibrium level.
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Theory of Efficiency Wages
A firm may prefer higher than
equilibrium wages for the following
reasons:
Worker Turnover: A higher paid worker is
less likely to look for another job.
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Theory of Efficiency Wages
A firm may prefer higher than
equilibrium wages for the following
reasons:
Worker Effort: Higher wages motivate
workers to put forward their best effort.
Worker Quality: Higher wages attract a
better pool of workers to apply for jobs.
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Unemployment Rate is a good measure of
joblessness but it is NOT a perfect measure.
Unemployment Benefits given by the
govt.
Illegal Workers
Discouraged Workers
Alternative UR= {(Unemployed+DW)/(LF+DW)} x100
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Summary
The unemployment rate is the
percentage of those who would like to
work but don’t have jobs.
The Bureau of Labor Statistics
calculates this statistic monthly.
The unemployment rate is an
imperfect measure of joblessness.
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Summary
In the U.S. economy, most people who
become unemployed find work within a
short period of time.
Most unemployment observed at any
given time is attributable to a few people
who are unemployed for long periods of
time.
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Summary
One reason for unemployment is the time it
takes for workers to search for jobs that
best suit their tastes and skills.
A second reason why our economy always
has some unemployment is minimum-wage
laws.
Minimum-wage laws raise the quantity of
labor supplied and reduce the quantity
demanded.
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Summary
A third reason for unemployment is the
market power of unions.
A fourth reason for unemployment is
suggested by the theory of efficiency
wages.
High wages can improve worker health,
lower worker turnover, increase worker
effort, and raise worker quality.
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Graphical
Review
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The Breakdown of the Population
in 1998
Employed Labor force
(131.5 (137.7 million)
million)
Adult
population
(205.2 Unemployed (6.2
million) million)
Not in labor
force
(67.5 million)
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Unemployment Rate Since 1960
Percen
t of
Labor
Force
Unemployment rate
10
4
Natural rate of
unemployment
2
0
1960 1965 1970 1975 1980 1985 1990 1995 2000
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Labor-force Participation Rates
for Men and Women Since 1950
Participation Rate (in
100
Men
Labor-force
80
percent)
60
40 Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 ’98
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Unemployment from a Wage Above the
Equilibrium Level...
Wage
Surplus of labor = Labor
Unemployment supply
Minimu
m wage
WE
Labor
demand
0 LD LE LS Quantity
of Labor
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