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247
WHAT’S NEW IN THE SEVENTH EDITION:
A new
In the News
feature on “Why Has Employment Declined” has been added 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 firms and unions.
➢ how unemployment results when firms choose to pay efficiency wages.
CONTEXT AND PURPOSE:
Chapter 15 is the fourth chapter in a four-chapter sequence on the level and growth of output in the long
run. In Chapter 12, we learned that capital and labor are among the primary determinants of output and
growth. In Chapter 13, we addressed how saving and investment in capital goods affect the production
of output. In Chapter 14, we learned about some of the tools people and firms use when choosing capital
projects in which to invest. In Chapter 15, we see how full utilization of our labor resources improves the
level of production and our standard of living.
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.
15
UNEMPLOYMENT
248 ❖ Chapter 15/Unemployment
• 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 find 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.
• 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.
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 fluctuations in unemployment around its natural
rate.
II. Identifying Unemployment
A. How Is Unemployment Measured?
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
want to work, what percentage cannot find a job?
Chapter 15/Unemployment ❖ 249
3. Definition of labor force: the total number of workers, including both the employed
and the unemployed.
4. Definition of unemployment rate: the percentage of the labor force that is
unemployed.
5. Definition of labor-force participation rate: the percentage of the adult population
that is in the labor force.
100x
populationAdult
forceLabor
rateionparticipatforceLabor =−
6. Example: Data from 2012. In that year, there were 142.5 million employed people and 12.5
million unemployed people.
a. Labor Force = 142.5 + 12.5 = 155.0 million.
7. Table 1 shows unemployment and labor-force participation rates for various sub-groups of
the U.S. population.
ALTERNATIVE CLASSROOM EXAMPLE:
The country of Bada has collected the following information:
Population 240,000
Employed 180,000
Unemployed 30,000
Labor Force = 180,000 + 30,000 = 210,000
Unemployment rate = (30,000/210,000) × 100 = 14.3%
Labor-force participation rate = (210,000/240,000) × 100 = 87.5%
Labor force Number of employed Number of unemployed=+
Table 1
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.
250 ❖ Chapter 15/Unemployment
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.
8. Figure 2 shows the unemployment rate in the United States since 1960.
B. Definition of the natural rate of unemployment: the normal rate of unemployment
around which the unemployment rate fluctuates.
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 over the past
60 years.
2. Figure 3 shows this rise in the labor-force participation rate of women. The figure 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.
Figure 2
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
2012, economists at the Congressional Budget Office have estimated a natural rate
of 5.5%.
Figure 3
Chapter 15/Unemployment ❖ 251
4. Definition of discouraged workers: individuals who would like to work but have
given up looking for a job.
5. Table 2 presents other measures of labor underutilization calculated by the Bureau of Labor
Statistics.
Table 2
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 office 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 find a job at other local factories.
Common Answers and Points for Discussion
Steve, Elizabeth, and Scott are employed. Roger is unemployed. Linda, Linda’s father, and
Mary-Helen are not in the labor force.
252 ❖ Chapter 15/Unemployment
F. How Long Are the Unemployed without Work?
1. Another important variable that policymakers may be concerned with is the duration of
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 fluctuates around the natural rate.
a. Definition of frictional unemployment: unemployment that results because it
takes time for workers to search for the jobs that best suit their tastes and
skills.
c. Three possible reasons for structural unemployment are minimum-wage laws, unions,
and efficiency 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.
III. Job Search
B. Because workers differ from one another in terms of their skills and tastes and jobs differ in their
attributes, it is often difficult 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
different firms.
This assignment can also be used to discuss measurement problems such as
underemployment (Elizabeth and Scott are examples) and discouraged workers (Mary-Helen
provides an example).
Chapter 15/Unemployment ❖ 253
a. When consumers decide to stop buying a good produced by Firm A and instead start
2. This implies that, because the economy is always changing, frictional unemployment is
inevitable. Workers in declining industries will find themselves looking for new jobs, and firms
in growing industries will be seeking new workers.
D. Public Policy and Job Search
1. The faster information spreads about job openings and worker availability, the more rapidly
the economy can match workers and firms.
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
E. Unemployment Insurance
1. Definition 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 benefits lead to
reduced job search effort and, as a result, more unemployment.
4.
In the News: Why Has Employment Declined?
IV. Minimum-Wage Laws
A. Unemployment can also occur because of minimum-wage laws.
254 ❖ Chapter 15/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 affect 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. 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 efficiency wages.
2. This situation is different from frictional unemployment where the search for the
right
job is
the reason for unemployment.
C
FYI: Who Earns the Minimum Wage?
1. In 2012, the Department of Labor released a study of which workers reported earnings at or
below the minimum wage in 2011.
a. Of those workers paid an hourly rate, about 4% of men and 6% of women reported
wages at or below the federal minimum.
Figure 4
Chapter 15/Unemployment ❖ 255
d. The industry with the highest proportion of workers with reported hourly wages at or
below the minimum wage was leisure and hospitality.
e. The proportion of workers earning the prevailing minimum wage has changed
substantially over time, trending downward from 1979 to 2006 then increasing in 2011.
The increase is partially attributable to an increase in the minimum wage.
V. Unions and Collective Bargaining
A. Definition of union: a worker association that bargains with employers over wages and
working conditions.
C. The Economics of Unions
1. Definition of collective bargaining: the process by which unions and firms agree on
the terms of employment.
2. Unions try to negotiate for higher wages, better benefits, and better working conditions than
the firm would offer if there were no union.
5. This implies that unions raise the wage above the equilibrium wage, resulting in
unemployment.
a. Unions are often believed to cause conflict between
insiders
(who benefit from high
union wages) and
outsiders
(who do not get the union jobs).
b. Outsiders will either remain unemployed or find jobs in firms that are not unionized.
c. The supply of workers in nonunion firms will increase, pushing wages at those firms
down.
D. Are Unions Good or Bad for the Economy?
VI. The Theory of Efficiency Wages
256 ❖ Chapter 15/Unemployment
A. Definition of efficiency wages: above-equilibrium wages paid by firms in order to
increase worker productivity.
B. Efficiency wages raise the wage above the market equilibrium wage, resulting in unemployment.
C. There are several reasons why a firm may pay efficiency wages.
1. Worker Health
a. Better-paid workers can afford to eat better and can afford good medical care.
3. Worker Quality
a. Offering higher wages attracts a better pool of applicants.
b. This is especially helpful for firms that are not able to perfectly gauge the quality of job
applicants.
4. Worker Effort
a. Again, if a firm 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 firms that have difficulty 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.
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
When discussing the material in this chapter, you may find 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.
Chapter 15/Unemployment ❖ 257
1. The unemployment rate is measured starting with a survey of about 60,000 households. The
2. An increase in the world price of oil increases the amount of frictional unemployment as oil-
producing firms increase output and employment, but other firms, such as those in the auto
4. A union in the auto industry raises the wages of workers employed by General Motors and
Ford by threatening to strike. To prevent the costs of a strike, the firms generally pay higher
258 ❖ Chapter 15/Unemployment
Questions for Review
1. The BLS categorizes each adult (16 years of age and older) as employed, unemployed, or not
4. Minimum-wage laws are a better explanation for unemployment among teenagers than
7. Four reasons why a firm's profits might increase when it raises wages are: (1) better paid
Chapter 15/Unemployment ❖ 259
Quick Check Multiple Choice
1. a
Problems and Applications
1. a. The adult population consists of the number of employed (143,322,000) plus the number
4. a. If an auto company goes bankrupt and its workers immediate begin looking for work, the
unemployment rate will rise and the employment-population ratio will fall.
5. a. A construction worker who is laid off because of bad weather is likely to experience
260 ❖ Chapter 15/Unemployment
b. A manufacturing worker who loses his job at a plant in an isolated area is likely to
e. An expert welder with little education who loses his job when the company installs
automatic welding machinery is likely to be without a job for a long time, because he
6. Figure 2 shows a diagram of the labor market with a binding minimum wage. At the initial
Chapter 15/Unemployment ❖ 261
b. When those workers who become unemployed in the manufacturing sector seek
8. a. Wages between the two industries would be equal. If not, new workers would choose
9. a. If a firm was not providing such benefits prior to the legislation, the curve showing the
Wage
Wage
S
S1
S2
Manufacturing Labor Market
Service Labor Market
wU
262 ❖ Chapter 15/Unemployment
c. Figure 4 shows the equilibrium in the labor market. Because the demand and supply
Wage
w1
S1
S2
Chapter 15/Unemployment ❖ 263
e. If the workers do not value the mandated benefit at all, the supply curve of labor does
