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Economics Textbook March 2nd, 2012
Chapter 9 – Unemployment and Its Natural Rate
Natural rate of unemployment – refers to the amount of unemployment that the economy
normally experiences. This type of unemployment does not go away on its own, even in the
Cyclical unemployment – refers to the year-to-year fluctuations in employment around its
natural rate and it is closely associates with the short-run up and downs of economic
Four explanations for the economy’s natural rate of unemployment: job search, minimum-
wage laws, unions and efficiency wages.
How is unemployment measured?
Measuring unemployment is the job of Stats Canada – monthly labor force survey, of 50,000
Puts each adult (15 and up) in each surveyed household on one of three categories:
Employed – worked within the last week at a paid job
Unemployed – temporary layoff or is looking for a job
Not in the labor force – person who fits neither above category, i.e. full time student,
homemaker or retiree.
Labor force – total number or workers, including both the employed and unemployed.
Labor force = # of employed + # of unemployed
Unemployment rate – percentage of labor force that is unemployed
# Of unemployed
Unemployment rate = ----------------------- x 100
Labor force participation rate – percentage of the adult population that is in the labor
Labor force participation rate = ----------------------- x 100
The recession affected the employment of men more than women – mancession.
Does the unemployment rate measure what we want it to?
Almost half of all spells of unemployment end when the unemployed person leaves the
Discouraged searchers – individuals who would like to work but have given up looking
for a job. These people do not show up in unemployment, eve though they are workers
Economics Textbook March 2nd, 2012
without jobs. Similarly, some workers may be working part-time when they really want
How long are the unemployed without work?
In 2009, the average spell of unemployment lasted 15.6 weeks.
Average values hide that numbers vary across the country, hide a wide dispersion of
unemployment experiences across individuals. We would fail to see that unemployment
might be a short run problem for some people but long run for others, as it averages out to
Why are there always some people unemployed?
Natural rate of unemployment – the rate of unemployment to which the economy tends
to return in the long run. Estimate 6-8 percent in Canada.
Cyclical unemployment – the deviation of unemployment from its natural rate. Arise
from short-run economic fluctuations.
Unemployment in the long run – takes time for workers to search for jobs. The process of
matching workers and jobs is sometimes called frictional unemployment, and is often
thought to explain relatively short spells of unemployment.
Frictional unemployment – unemployment that results because it takes time for workers
to search for the jobs that best suit their tastes and skills.
Structural unemployment – unemployment that results because the number of jobs
available in some labor markets is insufficient to provide a job for everyone who wants one.
Explains longer spells of unemployment. Results when wages are set above the level that
brings supply and demand into equilibrium.
Job search: the process by which workers find appropriate jobs, given their tastes and
Why some frictional unemployment is inevitable
Often the result of changes in the demand for labor among different firms.
Changes in the composition of demand among industries or regions are called sectoral
shifts. It takes time for workers to search for jobs in the new sectors, sectoral shifts
temporarily cause unemployment.
Frictional unemployment is inevitable because the economy is always changing.
Canadian companies that are expanding increase employment by roughly 10% a year.