Key Concepts and Summary

7.1 How the Unemployment Rate is Defined and Computed

Unemployment imposes high costs. Unemployed individuals suffer from loss of income and from stress. An economy with high unemployment suffers an opportunity cost of unused resources. The adult population can be divided into those in the labor force and those out of the labor force. In turn, those in the labor force are divided into employed and unemployed. A person without a job must be willing and able to work, and actively looking for work to be counted as unemployed; otherwise, a person without a job is counted as being out of the labor force. The unemployment rate is defined as the number of unemployed persons divided by the number of persons in the labor force (not the overall adult population). The CPS conducted by the BOC measures the percentage of the labor force that is unemployed. The EPS by the BLS measures the net change in jobs created for the month.

7.2 Patterns of Unemployment

The U.S. unemployment rate rises during periods of recession and depression, but falls back to the range of four to six percent when the economy is strong. The unemployment rate never falls to zero. Despite enormous growth in the size of the U.S. population and labor force in the twentieth century, along with other major trends like globalization and new technology, the unemployment rate shows no long-term rising trend.

Unemployment rates differ by group: higher for African Americans and Hispanics than for whites; higher for less educated than more educated; and higher for the young than the middle-aged. Women’s unemployment rates used to be higher than men’s, but in recent both rates have been very similar. In recent years, unemployment rates in the United States have compared favorably with unemployment rates in most other high-income economies.

7.3 What Causes Changes in Unemployment Over the Short Run

Cyclical unemployment rises and falls with the business cycle. In a labor market with flexible wages, the wages adjust so that the quantity demanded of labor always equals the quantity supplied of labor at the equilibrium wage. Many theories have been proposed for why wages might not be flexible, but instead may adjust only in a sticky way, especially when it comes to downward adjustments such as implicit contracts, efficiency wage theory, adverse selection of wage cuts, insider-outsider model, and relative wage coordination.

7.4 What Causes Changes in Unemployment Over the Long Run

The natural rate of unemployment is the rate of unemployment that would be caused by the economic, social, and political forces in the economy even when the economy is not in a recession. These factors include the frictional unemployment that occurs when people are put out of work for a time by the shifts of a dynamic and changing economy and any laws concerning conditions of hiring and firing have the undesired side effect of discouraging job formation. They also include structural unemployment, which occurs when demand shifts permanently away from a certain type of job skill.