Unemployment, Employment, and the Labor Market



Economics 161

Fall 2003

Study Questions on Unemployment, Employment, and the Labor Market

1. What is definition of “unemployment” used by the Bureau of Labor Statistics? What is the definition of employment? Which of the following individuals described below would be counted in the labor force by the Bureau of Labor Statistics:

a. An engineer who is not working and has not looked for work in the past few months.

b. A college student who works ten hours a week in the library.

c. An auto mechanic who is not working and wants to work, but has not looked for work in the past month because he is certain nothing will turn up.

d. Someone who is retired and is receiving a company pension.

2. Assume that Employment = 90,000, Unemployment = 10,000, and Not In Labor Force = 150,000.

What is unemployment rate? What is the labor-force-participation rate?

3. What is frictional unemployment? Explain the role of imperfect information in explaining frictional unemployment. Does frictional unemployment exist when the economy is at full-employment?

4. What is structural unemployment? What is source?

5. What is meant by "full employment" and does full-employment imply a zero unemployment rate? What is the natural rate of unemployment?

6. What is cyclical unemployment?

7. Why is it important to distinguish between the different kinds of unemployment?

Answers:

1. You are unemployed if you do not have a job but have been looking for a job in the past 4 weeks.

Labor Force = employed + unemployed.

a. Not in labor force. Has not been looking for job in past 4 weeks.

b. Is employed and is therefore in the labor force.

c. Not in labor force. Has not been looking for a job in the past 4 weeks.

d. Not in labor force. Does not have job and has not been looking for one.

2. Unemployment Rate = Unemployed/Labor Force *100% = Unemployed/(Unemployed+Employed)

= 10,000/100,000 * 100% = 10%.

Labor Force Participation Rate = Labor Force/Working-Age Population *100% .

= Labor Force/(Labor Force + Not in Labor Force) *100%.

= 100,000/(250,000) *100% = 40%.

3. Frictional unemployment occurs because it takes time to match job seekers to job openings. During this interval workers engage in job search. Jobs and job seekers have many different characteristics (experience, skill, location, benefits, etc.) and it therefore takes time to match workers and jobs with similar characteristics. This is an informational problem. If people had perfect information on jobs and job seekers, frictional unemployment would not exist--you could simply switch from one job to another without any job search. Even at full employment an economy experiences frictional unemployment.

4. Structural unemployment occurs because of (a) a mismatch between job skills demanded and job skills supplied within a given area, (b) a mismatch between supply and demand within a given geographical area. Occupational mobility costs explains (a)--it is costly for a steel worker who has lost his job to acquire, say, engineering skills which may be in demand. Geographic mobility costs explain (b). It is costly to move from one area where jobs are being lost to another area where jobs are being created. More fundamentally, this imbalance between supply and demand in specific labor markets or regions results from the wage rate

being held above the equilibrium level. This is due several factors, including minimum wage laws and labor union contracts which fix the wage rate.

5. Full-employment-Aggregate supply of labor equals aggregate demand for labor. Full employment does not imply a zero unemployment rate since you still get frictional and structural unemployment.. The natural rate of unemployment is the “normal” (or average) unemployment rate. That is, it is the unemployment rate that exists at full employment. It corresponds to frictional and structural unemployment.

6. Cyclical unemployment refers to the deviations of unemployment rate from the natural unemployment.

So if, for example, the natural rate of unemployment is 5.5% and if the actual unemployment rate is 7%, then cyclical unemployment (expressed in percentage terms) would be 7%-5.5%=1.5%. This type unemployment corresponds to the type of unemployment associated with recessions.

7. Different kinds of unemployment require different solutions (if there are solutions).

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