Measuring Employment and Unemployment

Measuring Employment and Unemployment

• The potential adult labor force includes the civilian non-institutional population aged 16 years and older.
• An employed individual has a full-time or part-time paid job.
• A parent raising kids at home would not be considered employed.
• A worker is unemployed if they do not have a job, are actively looking for one in the prior 4 weeks, and are available for work.
• Given an unemployment rate of 6% and a labor force of 200 million, about 188 million people in Country Y have a job.
• Peter, who is currently finishing their degree in economics and has a part-time job, would be considered part of the work force in Country Y.
• Peter, an engineer who became a stay-at-home husband after his start-up company went bankrupt but wants to find a new engineering job, is considered part of the 6 percent of unemployed workers in Country Y.
• Policymakers might introduce policies requiring unemployed workers to participate in job training programs to mitigate the social costs of unemployment.

Labor Statistics for Two Countries

• Country B has more unemployed workers.
• Underemployed workers fall under the category of employed workers.
• If Country B is a popular place for people to retire, Country A would likely have more potential workers than Country B without these immigrant retirees.
• Per the BLS records, the number of employed workers > the number of adults out of the labor force > the number of unemployed workers in 2016 in the US Economy.
• The size of the labor force in a country equals the number of employed workers plus the number of unemployed workers in the country.
• If the number of employed people in a country is 21 million and the number of unemployed workers is 10 million, the size of the labor force in the country is equal to 31 million.

Key Equations

• Adults not in the labor force = Potential adult workers – Labor force.
• Adults not in the labor force = Potential adult workers – Employed workers – Unemployed workers.
• The unemployment rate is defined as the percentage of the labor force that is unemployed.
• If the number of adults not in the labor force of a country equals 6 million, and the number of individuals employed is 5 million, and there are 12 million potential adult workers in the economy, the current unemployment rate is 16.67 percent.
• Workers who are unemployed but are NOT actively looking for jobs are referred to as discouraged workers.
• Workers who are underemployed are considered employed.
• Unemployed workers are counted in the labor force, but discouraged workers are excluded from the labor force.
• If the number of discouraged workers in a country increases, the labor force participation rate will decrease.
• If the number of potential workers in an economy increases while the size of the labor force remains unchanged, the labor force participation rate will fall.
• If fewer high school graduates in Country B decide to go to college and instead start to work or look for work right after graduation, the difference between the two countries' labor force participation rates is likely to increase.

Employment and GDP

• As the rate of unemployment decreases, an economy is expected to see growth in GDP.
• The unemployment rate normally decreases during periods of economic expansion and increases during periods of economic contraction.
• The rate of unemployment is positive in any well-functioning economy.
• In the past 30 years, the unemployment rate in the United States has never gone below 3 percent.

Equilibrium in the Labor Market

• As a firm hires more and more workers, the value of the marginal product of the additional workers eventually decreases.
• A profit-maximizing firm will pay a worker the value of the worker's marginal product.
• The value of a worker's marginal product is the additional revenue that the worker brings in to a firm.
• For a profit-maximizing firm, Wage = The value of a worker's marginal product.
• If the value of the marginal product of the tenth worker hired by a firm is $50, the maximum wage that should be paid to the worker is $50.
• If a firm hires a worker by paying him a wage higher than the value of the marginal product of the worker, firing the worker will increase the firm's profits.
• If a firm hires a worker by paying her a wage lower than the value of the marginal product of the worker, the firm is not making an optimum decision.
• The labor demand curve represents the relationship between the quantity of labor demanded and the wage.
• The slope of the labor demand curve can be attributed to the law of diminishing marginal productivity of labor.

Average Productivity

• The average productivity of labor over the full 7 hours is 22 papers/hour.
• The marginal productivity of labor of the fifth hour of labor is 12 papers.
• The value of the marginal productivity of labor of the fifth hour of labor is $9.00.
• All else being equal, the incentive to look for a job is lower for an individual with a lower opportunity cost of time.
• If, at a given wage, the quantity of labor supplied exceeds the quantity of labor demanded, the wage rate will fall.
• If the quantity of labor demanded exceeds the quantity of labor supplied, the wage rate will rise.

The Equilibrium Wage Rate

• All workers are willing to work at the equilibrium wage rate.
• Lack of information relating to the job market can lead to unemployment.
• Joey, who would be willing to work for $20 an hour but the market clearing wage rate is $15 an hour, would be classified as being voluntarily unemployed.
• If country A is at a labor market equilibrium, the only reason a person is officially unemployed is that there is imperfect information between employers and workers, so the person is not able to find a job.
• If the market clearing wage rate in Country A decreases, the number of voluntarily unemployed people would increase, and the number of officially unemployed people would decrease.
• The current unemployment rate in Country A is 6.25 percent, .
• If the market clearing wage rate increases and now only 0.05 million people are voluntarily unemployed, the new unemployment rate is 9.1 percent.
• 20 percent of the people reported as officially unemployed are actually only looking for jobs with wages above the market clearing wage rate. Given this information, the true unemployment rate is 5.1 percent.
• If the labor market is perfectly competitive, a worker willing to work at the equilibrium wage rate can instantly find work.
• Job search refers to the activities that workers undertake to find appropriate jobs.
• In a perfectly competitive labor market, at the equilibrium wage rate, involuntary unemployment is zero.
• There always exists some amount of unemployment in an economy.
• Unemployment arising from job search is called frictional unemployment.

Frictional Unemployment

• It takes time for an unemployed worker to find a firm with a well-matched job vacancy, explaining why frictional unemployment exists in an economy.
• Frictional unemployment exists because firms and workers have imperfect information about each other and the state of the economy.
• If there is a new technology that increases worker productivity, labor demand would shift to the right, and we would likely expect a decrease in voluntary unemployment among those who are counted as unemployed.
• Wage rigidity keeps the market wage above the level that would clear the labor market.
• Downward wage rigidity is likely to increase unemployment in an economy.
• Unemployment that arises when there is a mismatch between the quantity of labor demanded and the quantity of labor supplied is referred to as structural unemployment.
• For the textile industries of England in 1811, the invention of new technology that allowed workers to complete tasks that had previously taken hours in minutes resulted in a decrease in the demand for labor in these industries.
• Technological innovation can cause unemployment in a single industry.
• Technological innovation can cause wages to fall for some workers in an economy.
• Unemployment normally arises when wages are above the market-clearing wage level.
• Minimum wage laws can give rise to wage rigidity.
• Minimum wages can increase unemployment in an economy.
• Minimum wages are normally set above the labor market-clearing wage rate.
• When truck drivers go on strike to negotiate higher wages, and if the negotiations are successful, the new wage rate will be above WM, the new quantity of drivers supplied will be above QM, and the new quantity of drivers demanded will be below QM.
• Truck driver's employers might want to pay higher wages even if the negotiations are not successful because higher wages might incentivize more productive labor

Likely Scenarios

• Unemployment is likely to increase if the negotiations are successful because some workers would be willing to work at a lower wage but can no longer do so.
• There might be unemployment in the driver market before a wage increase is negotiated because companies may choose to pay efficiency wages, a minimum wage law may be in place, and there is some frictional unemployment.
• A minimum wage is imposed at w₁. This will result in unemployment increasing to Q3 - Q1.
• John's reservation wage is w₁ and Joy's reservation wage is w2. A minimum wage is implemented at w1. John and Joy are both unemployed, leading to the conclusion that John and Joy are both involuntarily unemployed.
• If robots replace 20 percent of workers, unemployment would decrease because the demand for labor decreases.
• The labor market will likely clear at a higher wage rate due to the shift in the demand for labor.
• If the supply of labor is equal to S1 and the demand of labor is equal to D2 and the minimum wage is set at w₁ the labor market will clear at point E.
• The quantity of labor supplied is equal to Q4, and the quantity of labor demanded is equal to Q2, assuming that the minimum wage is w2, that the supply for labor is equal to S1, and the demand for labor is equal to D2.
• A shift of the minimum wage from w2 to wz would decrease unemployment to zero unemployement.
• Contract negotiations between an employer and a labor union representing workers are referred to as collective bargaining.
• Collective bargaining can increase unemployment.
• Collective bargaining between unions and employers often leads to wages that are higher than what workers would have received at equilibrium.
• Efficiency wages increase workers' productivity and improve the profitability of a firm.

Wages

• Wages that are higher than the current market wage dissuade workers from shirking.
• At a fixed level of worker productivity, higher wages reduce profits.
• A higher wage can raise profits if productivity is directly proportional to wages.
• Efficiency wages can lead to wage rigidity.
• Downward wage rigidity arises when workers and firms resist wage cuts.
• A reduction in wages is most likely to lower worker productivity.
• Wage rigidity can cause unemployment.
• Downward wage rigidity causes the wage to be above the market-clearing wage.
• Firms usually tend to lay off workers instead of cutting wages to reduce costs.
• The larger the gap between the current market wage and the market-clearing wage, the greater will be the amount of unemployment when wages are above the market-clearing wage.
• If the labor demand curve is perfectly inelastic, a minimum-wage above the equilibrium wage rate will increase structural unemployment and raise the wage rate in a perfectly competitive labor market.
• The long-run unemployment rate is the average of the unemployment rate in a country over time.

Natural Rate of Unemployment

• The natural rate of unemployment is lower than the actual rate of unemployment during a recession.
• If the natural rate of unemployment is 6 percent and the unemployment rate is 8 percent, the cyclical unemployment must be 2 percent.
• Cyclical unemployment is the deviation of the actual unemployment rate from the natural rate of unemployment.
• Excessive dependence on cheap foreign imports can cause a left shift in the domestic labor demand curve in certain sectors of the economy.
• Rapid unemployment increases may happen in one area but not in adjacent areas.
• Areas where whole industries disappear will most likely experience increases in the unemployment rate and an ambiguous change in wage rates and decreases in the number of possible workers.
• Shifts in the demand curve of labor due to increased competition from Chinese imports are comparable to shifts in the demand curve due to technological developments that replace manual labor.
• International trade generally leads to all of the above: higher overall GDP, economic dislocation, and lower wage rates for some workers.
• Lower productivity would not increase long-term, structural unemployment, assuming competitive labor markets.