Unemployment

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part. 1
 IN THIS CHAPTER
• How is unemployment measured?
• What is the “natural rate of
unemployment”?
• Why are there always some people
unemployed?
• How is unemployment affected by unions
and minimum wage laws?
• What is the theory of efficiency wages, and
how does it help explain unemployment?

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 How Is Unemployment Measured?
• Population into 3 groups:
– Employed: paid employees, self-employed, and unpaid
workers in a family business, full-time and part-time
– Unemployed: people not working, are available for work, and
have looked for work
– Not in the labor force: everyone else
• Labor force = Employed + Unemployed
– The total number of workers

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 Unemployment Rate and LFPR
• Unemployment rate, u-rate
– Percentage of labor force that is unemployed
# of unemployed
u−rate = 100 ×
Labor force
• Labor-force participation rate, LFPR
– Percentage of adult population that is in the
labor force
Labor force
Labor−force participation rate = 100 ×
Adult population

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Active Learning 1: Calculate labor force statistics

Compute the labor force, u-rate, adult population, and labor

force participation rate using this data:

Adult population of the U.S.

by group, July 2022

# of employed 158.3 million

# of unemployed 5.7 million

not in labor force 100.1 million

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Active Learning 1: Answers

Labor force = employed + unemployed =

= 158.3 + 5.7 = 164 million
u-rate = 100 x (unemployed)/(labor force) =
= 100 x 5.7/164 = 3.5%
Adult population = labor force + not in labor
force
= 164 + 100.1 = 264.1 million
LFPR = 100 x (labor force)/(adult population)
= 100 x 164/264.1 = 62.1%

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 Unemployment
• Natural rate of unemployment
– The normal rate of unemployment around which the
unemployment rate fluctuates
• Cyclical unemployment
– The deviation of unemployment from its natural rate

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 U.S. Unemployment rate 1960 – 2022

Unemployment rate

Natural rate of
unemployment

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 LF participation rates of women and men, 1948–2022

LFPR men

LFPR women

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Active Learning 2: Limitations of the u-rate
In each of the following, what happens to the u-rate?
Does the u-rate give an accurate impression of what’s
happening in the labor market?
A. Hailey lost her job and begins looking for a new
one.
B. Josiah, a steelworker who has been out of work
since his mill closed last year, becomes
discouraged and gives up looking for work.
C. Karim, sole earner in his family of 5, just lost his
$80,000 job as a research scientist. Immediately,
he takes a part-time job at McDonald’s until he can
find another job in his field.
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Active Learning 2: Answers, A
A. Hailey lost her job and begins looking for a new one.
u-rate rises
Number of unemployed increases, labor force stays the
same.
A rising u-rate gives the impression that the labor market is
worsening, and it is.

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Active Learning 2: Answers, B
B. Josiah, steelworker, has been out of work since last year,
becomes discouraged, stops looking for work.
Discouraged workers would like to work but have given up looking
for jobs. Classified as “not in the labor force” rather than
“unemployed”
U-rate falls because Josiah is no longer counted as unemployed.
A falling u-rate gives the impression that the labor market is
improving, but it is not.

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Active Learning 2: Answers, C
C. Karim lost his $80,000 job, and takes a part-time job at
McDonald’s until he finds a better one.
U-rate unchanged because a person is “employed” whether
they work full or part time.
Number of unemployed and labor force stay the same.
Things are worse, but the u-rate fails to show it.

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 Measuring the Unemployment Rate
• The u-rate:
– Not a perfect indicator of joblessness or the health of the
labor market
• It excludes discouraged workers.
• It does not distinguish between full-time and part-time work, or
people working part time because full-time jobs not available.
• Some people misreport their work status
– Still a very useful barometer of the labor market &
economy.

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 Why Are Always Some People Unemployed?
• Frictional unemployment
– Results because it takes time for workers to
search for the jobs that best suit their tastes and
skills
– Short-term for most workers
• Structural unemployment
– Results because the number of jobs available in
some labor markets is insufficient to provide a
job for everyone who wants one
– Due to wages stuck above the equilibrium level
– Usually, longer-term
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 Job Search
• Job search
– Process by which workers find appropriate jobs given their
tastes and skills
• Some frictional unemployment is inevitable
– Because the economy is always changing
– Sectoral shifts: changes in the composition of demand
among industries or regions
– Changing patterns of international trade

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 Public Policy and Job Search – 1
• Government-run employment agencies
– Provide information about job vacancies
• Public training programs
– Aim to ease workers’ transition from declining to growing
industries
– Help disadvantaged groups escape poverty
• Advocates:
– Keeps the labor force more fully employed
– Reduce the inequities inherent in a constantly changing market
economy
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 Public Policy and Job Search – 2
• Critics:
– Should the government get involved with the process of
job search?
– Is better to let the private market match workers and jobs
– The government is most likely worse:
• Disseminating the right information to the right workers
• Deciding what kinds of worker training would be most valuable

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 Unemployment Insurance – 1
• Unemployment insurance, UI
– A government program that partially protects workers’
incomes when they become unemployed
– Reduces the hardship of unemployment
– Increases unemployment
• UI benefits end when a worker takes a job, so workers have
less incentive to search or take jobs while eligible to receive
benefits.

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 Unemployment Insurance – 2
• Benefits of UI:
– Reduces income uncertainty
– Unemployed have more time to search
– Unemployed can look for jobs that better suit their tastes
and skills
– Improves the ability of the economy to match each worker
with the most appropriate job

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 Explaining Structural Unemployment
Structural
unemployment occurs unemployment
when there are not W S
enough jobs to go actual
W1
wage
around.
WE
• Occurs when wage
is kept above
equilibrium.

• There are three D

L
reasons for this.

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 1. Minimum-Wage Laws
• The minimum wage (if binding)
– Matter most for those with low levels of skill and
experience, such as teenagers
– Causes structural unemployment
– Quantity of labor supplied exceeds the quantity of labor
demanded
– Workers are unemployed because they are waiting for
jobs to open up

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 2. Unions
• Union:
– Worker association that
bargains with employers
over wages, benefits,
and working conditions “Gentlemen, nothing
– Exert their market power stands in the way of a
to negotiate higher final accord except that
management wants
wages for workers. profit maximization and
the union wants more
moola.”

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 The Economics of Unions
• Unions raise the wage above equilibrium:
– Quantity of labor demanded falls and unemployment results.
– “Insiders” – workers who remain employed, are better off.
– “Outsiders” – workers who lose their jobs,
are worse off.
• Some outsiders go to non-unionized labor markets, which
increases labor supply and reduces wages in those markets.

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 Are Unions Good or Bad for the Economy?

• Critics:
– Unions are cartels: they raise wages above
equilibrium, which causes unemployment and
depresses wages in non-union labor markets
– Inefficient and inequitable
• Advocates:
– Unions counter the market power of large firms
– Make firms more responsive to workers’
concerns
– Keep a happy and productive workforce

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 3. Efficiency Wages
• The theory of efficiency wages:
– Firms voluntarily pay above-equilibrium wages to boost
worker productivity and increase firm profitability
• Different types of efficiency wage theory
– Suggest different reasons why firms pay high wages.

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 Efficiency Wage Theory – 1
1. Worker health
– In less developed countries, poor nutrition is a common
problem.
– Better-paid workers eat a more nutritious diet, and
workers who eat a better diet are healthier and more
productive.
– A firm may find it profitable to pay high wages to ensure
its workers are healthy and productive.

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 Efficiency Wage Theory – 2
2. Worker turnover
– Hiring & training new workers is costly
– Paying higher wages gives workers more incentive to
stay, reduces turnover
3. Worker quality
– Offering higher wages attracts better job applicants,
increases quality of the firm’s workforce.

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 Efficiency Wage Theory – 3
4. Worker effort
– Workers have discretion over how hard
to work, and some may choose to work
as little as possible.
– Is being fired a good deterrent?
• Depends on how hard it is to find another
job.
• If market wage is above equilibrium wage,
there aren’t enough jobs to go around, so
workers have more incentive to work hard

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 Efficiency Wage Theory – 3
5. Worker morale
– High wages improve worker morale; content
workers are more productive.
– Workers are less productive if they think are
being treated unfairly.

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Active Learning 3: Structural or frictional unemployment?

Which of the following would be most likely to

reduce frictional unemployment?
A. The government eliminates the minimum wage.
B. The government increases unemployment
insurance benefits.
C. A new law bans labor unions.
D. More workers post their resumes at
LinkedIn.com, and more employers use
LinkedIn.com to find suitable workers to hire.
E. Sectoral shifts become more frequent.

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Active Learning 3: Answers A, B, C
A. The government eliminates the minimum
wage.
– Likely to reduce structural unemployment,
not frictional unemployment.
B. The government increases unemployment
insurance benefits.
– Likely to increase frictional unemployment,
not reduce it.
C. A new law bans labor unions.
– Likely to reduce structural unemployment,
not frictional unemployment.
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Active Learning 3: Answers D, E
D. More workers post their resumes at
LinkedIn.com, and more employers use
LinkedIn.com to find suitable workers to
hire.
– Likely to speed up the process of matching
workers & jobs, which would reduce frictional
unemployment.
E. Sectoral shifts become more frequent.
– Likely to increase frictional unemployment, not
reduce it.

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 THINK-PAIR-SHARE
While watching the news, the news anchor
says, “Unemployment statistics released by the
Department of Labor today show an increase in
unemployment from 6.1 to 6.2%. This is the third
month in a row where the unemployment rate has
increased.” Your roommate says, “Every month there
are fewer and fewer people with jobs. I don’t know
how much longer the country can continue like this.”
A. Can your roommate’s statement be deduced from
the unemployment rate statistic? Why or why not?
B. What information would you need to determine
whether there are really fewer people with jobs?
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 CHAPTER IN A NUTSHELL
• The unemployment rate
• Percentage of those who would like to work bur don’t have jobs.
• Calculated monthly by the BLS, based on a survey of thousands of
households.
• Imperfect measure of joblessness. Some people who call
themselves unemployed may actually not want to work, and some
who would like to work are not counted as unemployed because
they have left the labor force after an unsuccessful search.

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 CHAPTER IN A NUTSHELL
• Most people who become unemployed find work within a short period
of time.
• Most unemployment observed at any given time is attributable to the
few people who are unemployed for long periods.
• Frictional unemployment: it takes time to search for jobs. Increases
with unemployment insurance.
• Structural unemployment: quantity of labor demanded is smaller than
the quantity of labor supplied. Caused by minimum-wage laws, the
market power of unions, and efficiency wages.

Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40