- Overview of labour force:
- Labour force participation rate:
- What causes changes in unemployment in the short run?
- Natural unemployment and potential real GDP:
- Productivity shifts and the natural rate of unemployment:
- Public policy implications on natural rate of unemployment:
- Overview of labour force:
To be classified as unemployed, a person must be without a job, currently able to work, and actively looking for work in the previous four weeks.
A person who doesn’t have a job, not currently able to work or has not looked for work in the past four weeks is counted as out of the labour force.
- Employed: currently working for pay
- Unemployed: out of work and looking for a job
- Out of paid work and not looking for job
- Labour force: number of employed plus the unemployed
Even with the out of the labour force category, there are still people that are mislabelled in this categorisation of employed, unemployed or out the labour force. There are some who only have part time roles and who are looking for full time work that are counted as employed.
Individuals who are underemployed: those that are trained or skilled for one type of level of work, who are working in a lower paying job, or one that does not utilise skills.
- Labour force participation rate:
Labour force participation indicates the statistic for whether adults in the economy who are either employed, or who are unemployed and looking for a job.
Unemployment report comes out each month by BLS. Aso reports on new number of jobs created. It generates a payroll employment estimate by: all employees, average hours worked weekly, average hourly, weekly and overtime earnings.
In times of rising and falling unemployment, it matches fairly well with the timing of upswings and downswings in the overall economy. In periods of recession and depression, unemployment is high. During periods of economic growth, unemployment tends to be lower.
- What causes changes in unemployment in the short run?
- Cyclical unemployment: One determinant of the demand for labour from firms is how they perceive the state of the macroeconomy. If firms believe that business is expanding, then at any given wage will desire to hire a greater quantity of labour. Cyclical unemployment explains why unemployment rises during a recession and falls during an economic expansion.
- If a firm believes that an economy is entering a recession, or slowing down, they will tend to hire lower quantity of labour at any given wage. The variation in unemployment caused by the economy changing from an expansion to a recession or from recession to expansion is known as cyclical unemployment.
Economists have a term to describe the remaining level of unemployment that occurs even when the economy is healthy: it is called the natural rate of unemployment.
- Natural rate because: it is unemployment rate assuming that the economy was neither booming nor in a recession.
- Frictional unemployment: the unemployment that occurs when workers are moving between roles. Frictional unemployment isn’t inherently bad. Takes time for employer and individual to match those looking for employment with the correct job openings. For individuals and companies to be a success and productive, want people to find the role that best suits their character, not just the first role offered. Frictional level unemployment will depend on how easy it is for workers to learn about alternative jobs, which may reflect the ease of communications about job prospects in the economy.
- Structural unemployment: Individuals that have no jobs because they lack skills valued by the labour market, either because demand has shifted away from the skills they do have, or because they never learned any skills. Some worry that technology causes structural unemployment. In the past, new technologies have put lower skilled employees out of work, but at the same time created demand for higher skilled workers to use the new technologies. Education minimises the amount of structural unemployment.
- Natural unemployment and potential real GDP:
The economy is considered to be at full employment when the actual unemployment rate is equal to the natural unemployment. When the economy is at full employment, real GDP is equal to real potential GDP.
When the economy is below full employment, the unemployment rate is greater than the natural unemployment rate.
When the economy is above full employment, then the unemployment rate is less than the natural unemployment rate.
- Productivity shifts and the natural rate of unemployment:
Unexpected shifts in productivity can impact the natural rate of unemployment. The levels of wages in an economy are determined by productivity of workers. If a business tries to pay workers less than their productivity then, in a competitive labour market, other businesses will find it worthwhile to hire away those workers and pay them more,
Adjustments for wages to productivity levels will not happen quickly or smoothly. Wages are typically reviewed only once or twice a year. In modern roles, it is hard to measure productivity at the individual level.
- Public policy implications on natural rate of unemployment:
Public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker loses a job is guaranteed a package of unemployment insurance, and benefits, the opportunity cost of being unemployed is lower and that worker will be less eager to seek a new job.
What matters is not just the amount of these benefits, but how long they last.
On the demand side of the labour market: government rules, social institutions and unions can impact the willingness of firms to hire. Government regulation can make it harder to start a business by requiring that a new business obtains many permits, and fees. Other regulations, may limit where business can be done, or whether businesses are able to be open during certain times of the day.
These social restrictions impose a barrier between some willing workers and other willing employers, and thus contribute to higher natural rates of unemployment. High minimum wages may discourage businesses from hiring low skilled workers. Government rules may encourage and support powerful unions, which can push wages for union workers up, but at a cost of discouraging businesses from hiring those workers.
