Summary of Lecture Notes from Chapter 10 and Practice Questions
1. The unemployment rate is the percentage of those who would like to work but do not have jobs.
Statistics Canada calculates this statistic monthly based on a survey of thousands of households.
2. 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
labour force after an unsuccessful search.
3. In the Canadian economy, most people who become unemployed find work within a fairly short
period of time. The fraction of those who find themselves unemployed for periods longer than six
months is relatively small. Public policy solutions to the unemployment problem should be directed
toward providing help to those experiencing long bouts of unemployment.
4. One reason for unemployment is the time it takes for workers to search for jobs that best suit their
tastes and skills. Employment insurance is a government policy that, while protecting workers’
incomes, increases the amount of frictional unemployment.
5. A second reason why 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 labour supplied and reduce the quantity demanded. The resulting surplus
of labour represents unemployment.
6. 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 labour.
7. A fourth reason for unemployment is suggested by the theory of efficiency wages. According to this
theory, firms find it profitable to pay wages above the equilibrium level. High wages can improve
worker health, lower worker turnover, increase worker effort, and raise worker quality.
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?
1. Statistics Canada surveys about 50,000 households every month.
1 2 ☞ Chapter 10/ Unemployment and Its Natural Rate
2. Statistics Canada places each adult (aged 16 or older) into one of three
ALTERNATIVE CLASSROOM EXAMPLE:
The country of Bada has collected the following information: in the labour force.
Population 3. Definition of labour force: the total number of workers, including both
Unemployed the30,000yed and the unemployed.
Labor force = Number of employed + Number of unemployed
Labour Force = 180,000 + 30,000 = 210.000
Unemployment rate = (30,000/210,000) × 100% = 14.3%
Labour-force participation rate = (210,000/240,000) × 100% = 87.5%e of the labour force that
Number of unemployed
Unemployment rate = × 100%
5. Definition of labour-force participation rate the percentage of the adult
population that is in the labour force.
Labor -force participation rate = × 100%
6. Table 10.1 shows unemployment and labour-force participation rates for various
sub-groups of the Canadian population.
a. Women have lower labour-force participation rates than men in the
same age group, but have similar rates of unemployment.
b. Young people aged 15 to 24 have much higher rates of unemployment
than older people.
c. Teenagers have lower labour-force participation rates than adults, but
have higher unemployment rates.
7. Figure 10.2 shows the Canadian unemployment rate since 1966.
C. 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 labour force.
a. Many of the unemployed are new entrants or reentrants looking for
b. Many unemployment spells end with a person leaving the labour force as
opposed to actually finding a job. Chapter 10/ Unemployment And Its Natural Rate ☞ 3
3. There may be individuals who are calling themselves unemployed to qualify for
Employment Insurance, yet they are not trying hard to find work. These
individuals are more likely not a part of the true labour force, but they will be
counted as unemployed.
4. Definition of discouraged searchers: 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 labour force.
b. Thus, while they are likely a part of the unemployed, they will not show
up in the unemployment statistics.
5. Table 10.2 presents other measures of labour underutilization calculated by
D. How Long Are the Unemployed without Work?
1. Another important variable that policymakers may be concerned with is the
duration of unemployment.
2. Most spells of unemployment are quite short.
E. Why Are There Always People Unemployed?
1. In an ideal labour market, wages would adjust so that the quantity of labour
supplied and the quantity of labour 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 natural rate of unemployment : the rate of
unemployment to which the economy tends to return in the
b. Figure 10.4 shows the difference between the actual observed
unemployment rates and the natural unemployment rate. The difference
between the two rates is the cyclical unemployment rate.
c. Definition of cyclical unemployment : the deviation of
unemployment from its natural rate.
d. 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.
e. Definition of structural unemployment : unemployment that
results because the number of jobs available in some labour
markets is insufficient to provide a job for everyone who wants
one. 4 ☞ Chapter 10/ Unemployment and Its Natural Rate
III. Job Search
A. Definition of job search: the process by which workers find appropriate jobs
given their tastes and skills.
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
labour among different firms.
a. When workers decide to stop buying a good produced by Firm A and