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WHAT’S NEW IN THE EIGHTH EDITION:
A new In the News feature on “Should the Minimum Wage Be Raised to $15 per Hour?” has
been added. The FYI feature in the previous edition on “Who Earns the Miniminum Wage”
has been updated and changed to a Case Study. A new question has been added to the
Problems and Applications section and all statistics and tables have been updated.
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
the data used to measure the amount of unemployment.
how unemployment can result from minimum-wage laws.
how unemployment can arise from bargaining between /rms and unions.
450
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
28 UNEMPLOYMENT
451 ❖ Chapter 28/Unemployment
how unemployment results when /rms choose to pay e?ciency wages.
CONTEXT AND PURPOSE:
Chapter 28 is the fourth chapter in a four-chapter sequence on the level and growth of
output in the long run. In Chapter 25, we learned that capital and labor are among the
primary determinants of output and growth. In Chapter 26, we addressed how saving and
investment in capital goods aAect the production of output. In Chapter 27, we learned about
some of the tools people and /rms use when choosing capital projects in which to invest. In
Chapter 28, we see how full utilization of our labor resources improves the level of
production and our standard of living.
The purpose of Chapter 28 is to introduce students to the labor market. We will see how
economists measure the performance of the labor market using unemployment statistics.
We will also address a number of sources of unemployment and some policies that the
government might use to lower certain types of unemployment.
KEY POINTS:
The unemployment rate is the percentage of those who would like to work who do not
have jobs. The Bureau of Labor Statistics calculates this statistic monthly based on a
survey of thousands of households.
The unemployment rate is an imperfect measure of joblessness. Some people who call
themselves unemployed may actually not want to work, and some people who would like
to work have left the labor force after an unsuccessful search and therefore are not
counted as unemployed.
In the U.S. economy, most people who become unemployed /nd work within a short
period of time. Nonetheless, most unemployment observed at any given time is
attributable to the few people who are unemployed for long periods of time.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 28/Unemployment ❖ 452
One reason for unemployment is the time it takes for workers to search for jobs that best
suit their tastes and skills. This frictional unemployment is increased as a result of
unemployment insurance, a government policy designed to protect workers’ incomes.
A second reason our economy always has some unemployment is minimum-wage laws.
By raising the wage of unskilled and inexperienced workers above the equilibrium level,
minimum-wage laws raise the quantity of labor supplied and reduce the quantity
demanded. The resulting surplus of labor represents unemployment.
A third reason for unemployment is the market power of unions. When unions push the
wages in unionized industries above the equilibrium level, they create a surplus of labor.
A fourth reason for unemployment is suggested by the theory of e?ciency wages.
According to this theory, /rms /nd it pro/table to pay wages above the equilibrium level.
High wages can improve worker health, lower worker turnover, raise worker quality, and
increase worker eAort.
CHAPTER OUTLINE:
I. Unemployment can be divided into two categories.
A. The economy’s natural rate of unemployment refers to the amount of unemployment
that the economy normally experiences.
B. Cyclical unemployment refers to the year-to-year Guctuations in unemployment
around its natural rate.
II. Identifying Unemployment
A. How Is Unemployment Measured?
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
453 ❖ Chapter 28/Unemployment
1. The Bureau of Labor Statistics (BLS) surveys about 60,000 households every
month.
2. The BLS places each adult (age 16 or older) into one of three categories:
employed, unemployed, or not in the labor force.
3. De/nition of labor force: the total number of workers, including both the
employed and the unemployed.
4. De/nition of unemployment rate: the percentage of the labor force that is
unemployed.
5. De/nition of labor-force participation rate: the percentage of the adult
population that is in the labor force.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
100
forceLabor
unemployedofNumber
ratentUnemployme
Labor force Number of employed Number of unemployed= +
Figure 1
Ask students which category they are in. Remind them that to be
considered to be unemployed, they must be without a job and looking for
work. Many students are not in the labor force, but may consider
themselves to be unemployed simply because they do not have a job.
Explain to students that the unemployment rate is a useful statistic
because it answers the following question: Of those in the economy who
Chapter 28/Unemployment ❖ 454
100x
populationAdult
forceLabor
rateionparticipatforceLabor
6. Example: Data from January 2016. In that month, there were 150.5 million
employed people and 7.8 million unemployed people.
a. Labor Force = 150.5 + 7.8 = 158.3 million.
b. Unemployment Rate = (7.8/158.3) × 100 = 4.9%.
c. Because the adult population was 252.4 million, the labor-force participation
rate was:
Labor-Force Participation Rate = (158.3/252.4) × 100 = 62.7%.
ALTERNATIVE CLASSROOM EXAMPLE:
The country of Bada has collected the following information:
Population 240,000
Employed 180,000
Unemployed 30,000
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Make sure that students understand how to make these calculations.
Make sure that the formula is written on the board and refer to it often.
Table 1
455 ❖ Chapter 28/Unemployment
7. Table 1 shows unemployment and labor-force participation rates for various
sub-groups of the U.S. population.
a. Women of prime working age (25 to 54 years old) have lower rates of
labor-force participation than men, but once in the labor market, men and
women have similar rates of unemployment.
b. Prime-age blacks have similar labor-force participation rates as prime-age
whites, but they have much higher rates of unemployment.
c. Teenagers have much lower rates of labor-force participation and much higher
rates of unemployment than older workers.
8. Figure 2 shows the unemployment rate in the United States since 1960.
B. De/nition of the natural rate of unemployment: the normal rate of
unemployment around which the unemployment rate 1uctuates.
C. De/nition of cyclical unemployment: the deviation of unemployment from its
natural rate.
D. Case Study: Labor-Force Participation of Men and Women in the U.S. Economy
1. There has been a dramatic rise in the labor-force participation rates of women
since 1950.
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Discuss how the age composition of the labor force and other
demographic and social factors can cause the natural rate of
unemployment to vary over time. For 2015, economists at the
Congressional Budget O?ce have estimated a natural rate of 4.9%.
Figure 2
Chapter 28/Unemployment ❖ 456
2. Figure 3 shows this rise in the labor-force participation rate of women. The /gure
also shows that the labor-force participation rates for men have actually fallen by
a small amount over the same time period.
E. Does the Unemployment Rate Measure What We Want It To?
1. Measuring the unemployment rate is not as straightforward as it may seem.
2. There is a tremendous amount of movement into and out of the labor force.
a. Many of the unemployed are new entrants or re-entrants looking for work.
b. Many unemployment spells end with a person leaving the labor force as
opposed to actually /nding a job.
3. There may be individuals who are calling themselves unemployed to qualify for
government assistance, yet they are not trying hard to /nd work. These
individuals are more likely not a part of the true labor force, but they will be
counted as unemployed.
4. De/nition of discouraged workers: individuals who would like to work but
have given up looking for a job.
a. These individuals will not be counted as part of the labor force.
b. Thus, while they are likely a part of the unemployed, they will not show up in
the unemployment statistics.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Figure 3
457 ❖ Chapter 28/Unemployment
Table 2
5. Table 2 presents other measures of labor underutilization calculated by the
Bureau of Labor Statistics.
Activity 1—Who Is Unemployed?
Type: In-class assignment
Topics: Unemployment categories
Materials needed: None
Time: 5 minutes
Class limitations: Works in any size class
Purpose
This assignment helps familiarize students with labor-force statistics.
Instructions
Ask the students to classify each of the following individuals in one of the
following categories: employed, unemployed, or not in the labor force.
1. Steve worked 40 hours last week in an o?ce supply store.
2. Last week, Elizabeth worked 10 hours as a computer programmer for the
National Video Company and attended night classes at the local college. She
would prefer a full-time job.
3. Roger lost his job at the R-gone Manufacturing Company. Since then he has
been trying to /nd a job at other local factories.
4.
Linda is a homemaker. Last week she was occupied with her normal household
chores. She neither held a job nor looked for a job.
F. How Long Are the Unemployed without Work?
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 28/Unemployment ❖ 458
1. Another important variable that policymakers may be concerned with is the
duration of unemployment.
2. Most spells of unemployment are short, but most unemployment observed at any
given time is long term.
G. Why Are There Always Some People Unemployed?
1. In an ideal labor market, wages would adjust so that the quantity of labor
supplied and the quantity of labor demanded would be equal.
2. However, there is always unemployment even when the economy is doing well.
The unemployment rate is never zero; it Guctuates around the natural rate.
a. De/nition of frictional unemployment: unemployment that results
because it takes time for workers to search for the jobs that best suit
their tastes and skills.
b. De/nition of structural unemployment: unemployment that results
because the number of jobs available in some labor markets is
insu8cient to provide a job for everyone who wants one.
c. Three possible reasons for structural unemployment are minimum-wage laws,
unions, and e?ciency wages.
H. FYI: The Jobs Number
1. When the Bureau of Labor Statistics announces the unemployment rate each
month, it also announces the number of jobs the economy gained or lost.
2. This information comes from a survey of 160,000 business establishments.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
459 ❖ Chapter 28/Unemployment
III. Job Search
A. De/nition of job search: the process by which workers 9nd appropriate jobs
given their tastes and skills.
B. Because workers diAer from one another in terms of their skills and tastes and jobs
diAer in their attributes, it is often di?cult for workers to match with the appropriate
job.
C. Why Some Frictional Unemployment Is Inevitable
1. Frictional unemployment often occurs because of a change in the demand for
labor among diAerent /rms.
a. When consumers decide to stop buying a good produced by Firm A and
instead start buying a good produced by Firm B, some workers at Firm A will
likely lose their jobs.
b. New jobs will be created at Firm B, but it will take some time to move the
displaced workers from Firm A to Firm B.
c. The result of this transition is a period of unemployment.
d. The same situation can occur across industries and regions as well.
e. Another source of unemployment is changing patterns of international trade.
2. This implies that, because the economy is always changing, frictional
unemployment is inevitable. Workers in declining industries will /nd themselves
looking for new jobs, and /rms in growing industries will be seeking new workers.
D. Public Policy and Job Search
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 28/Unemployment ❖ 460
1. The faster information spreads about job openings and worker availability, the
more rapidly the economy can match workers and /rms.
2. Government programs try to facilitate job search in various ways.
a. Government-run employment agencies give out information on job vacancies.
b. Public training programs can ease the transition of workers from declining to
growing industries and help disadvantaged groups escape poverty.
3. Critics of these programs argue that the private labor market will do a better job
of matching workers with employers and therefore the government should not be
involved in the process of job search.
E. Unemployment Insurance
1. De/nition of unemployment insurance: a government program that
partially protects workers’ incomes when they become unemployed.
2. Because unemployment insurance reduces the hardship of unemployment, it also
increases the amount of unemployment that exists.
3. Many studies have shown that more generous unemployment insurance bene/ts
lead to reduced job search eAort and, as a result, more unemployment.
IV. Minimum-Wage Laws
A. Unemployment can also occur because of minimum-wage laws.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
461 ❖ Chapter 28/Unemployment
1. If the minimum wage is set above the equilibrium wage in the labor market, a
surplus of labor will occur.
2. While minimum-wage laws are one reason unemployment exists in the U.S.
economy, they do not aAect everyone.
a. The vast majority of workers in the economy have wages well above the legal
minimum, so the law does not prevent most wages from adjusting to balance
supply and demand.
b. Minimum-wage laws therefore have the largest eAect on the least skilled and
least experienced members of the labor force, such as teenagers.
B. Anytime a wage is kept above the equilibrium level for any reason, the result is
unemployment.
1. Other causes of this situation include unions and e?ciency wages.
2. This situation is diAerent from frictional unemployment where the search for the
right job is the reason for unemployment.
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Figure 4
Chapter 28/Unemployment ❖ 462
C. Case Study: Who Earns the Minimum Wage?
1. In 2015, the Department of Labor released a study of which workers reported
earnings at or below the minimum wage in 2014.
a. Of those workers paid an hourly rate, about 4% reported wages at or below
the federal minimum, which is about 2% of all workers.
b. Minimum-wage workers are more likely to be female, 5% of women compared
to 3% of men.
c. Minimum-wage workers tend to be young, with about 15% of 16 to 19-year-old
hourly workers earning the minimum wage but only 3% of hourly workers
aged 25 and over.
d. Minimum-wage workers tend to be less educated. Of those workers ages 16
and over, 7% with no high school diploma earned the minimum wage or less,
compared to 4% with a high school education, and 2% with a college degree.
e. Minimum-wage workers are more likely to be working part time.
f. The industry with the highest proportion of workers with reported hourly
wages at or below the minimum wage was leisure and hospitality.
g. The proportion of workers earning the prevailing minimum wage has changed
substantially over time, trending downward from 1979 to 2006 then increasing
again. The increase is partially attributable to an increase in the minimum
wage.
D. In the News: Should the Minimum Wage Be Raised to $15 an Hour?
1. Public outcry is growing to raise the minimum wage with the goal of reducing
income inequality and improving quality of life for the poor.
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
463 ❖ Chapter 28/Unemployment
2. In this Los Angeles Times article, economist David Neumark explains why raising
the minimum wage to $15 an hour is not likely to achieve those goals and he
recommends policy alternatives.
V. Unions and Collective Bargaining
A. De/nition of union: a worker association that bargains with employers over
wages and working conditions.
B. Unions play a smaller role in the U.S. economy today than they did in the past.
However, unions continue to be prevalent in many European countries.
C. The Economics of Unions
1. De/nition of collective bargaining: the process by which unions and 9rms
agree on the terms of employment.
2. Unions try to negotiate for higher wages, better bene/ts, and better working
conditions than the /rm would oAer if there were no union.
3. De/nition of strike: the organized withdrawal of labor from a 9rm by a
union.
4. Economists have found that union workers typically earn 10% to 20% more than
similar workers who do not belong to unions.
5. This implies that unions raise the wage above the equilibrium wage, resulting in
unemployment.
a. Unions are often believed to cause conGict between insiders (who bene/t from
high union wages) and outsiders (who do not get the union jobs).
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 28/Unemployment ❖ 464
b. Outsiders will either remain unemployed or /nd jobs in /rms that are not
unionized.
c. The supply of workers in nonunion /rms will increase, pushing wages at those
/rms down.
D. Are Unions Good or Bad for the Economy?
1. Critics of unions argue that unions are a cartel, which causes ine?ciency because
fewer workers end up being hired at the higher union wage.
2. Advocates of unions argue that unions are an answer to the problems that occur
when a /rm has too much power in the labor market (for example, if it is the only
major employer in town). In addition, by representing workers’ views, unions help
/rms provide the right mix of job attributes.
VI. The Theory of E?ciency Wages
A. De/nition of e8ciency wages: above-equilibrium wages paid by 9rms in
order to increase worker productivity.
B. E?ciency wages raise the wage above the market equilibrium wage, resulting in
unemployment.
C. There are several reasons why a /rm may pay e?ciency wages.
1. Worker Health
a. Better-paid workers can aAord to eat better and can aAord good medical care.
b. This is more applicable in developing countries where inadequate nutrition
can be a signi/cant problem.
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
465 ❖ Chapter 28/Unemployment
2. Worker Turnover
a. A /rm can reduce turnover by paying a wage greater than its workers could
receive elsewhere.
b. This is especially helpful for /rms that face high hiring and training costs.
3. Worker Quality
a. OAering higher wages attracts a better pool of applicants.
b. This is especially helpful for /rms that are not able to perfectly gauge the
quality of job applicants.
4. Worker EAort
a. Again, if a /rm pays a worker more than he or she can receive elsewhere, the
worker will be more likely to try to protect his or her job by working harder.
b. This is especially helpful for /rms that have di?culty monitoring their workers.
5. Case Study: Henry Ford and the Very Generous $5-a-Day Wage
a. Henry Ford used a high wage (about twice the going rate) to attract better
employees.
b. After instituting this higher wage policy, the company’s production costs
actually fell due to reduced turnover, absenteeism, and shirking.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 28/Unemployment ❖ 466
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in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
When discussing the material in this chapter, you may /nd that students
want to begin discussing possible policies to deal with unemployment.
Keep the focus on institutional responses such as unemployment
insurance, job training, and government-sponsored employment agencies.
