Textbook Guide Economics: Frictional Unemployment, Current Population Survey (Us), Structural Unemployment
262 views7 pages
For unlimited access to Textbook Notes, a Class+ subscription is required.
Unemployment is divided into two problems: long-run unemployment and
The natural rate of unemployment is the rate of unemployment that is
normally experienced. It is not necessarily a desirable rate of
unemployment and it changes due to changes in policy and in the
economy. This is the long-run rate of unemployment around which an
economy’s unemployment rate fluctuates.
Cyclical unemployment occurs when unemployment deviates from its
natural rate. This is short-run unemployment.
The Bureau of Labor Statistics publishes employment data every month.
This data is based on the Current Population Survey of roughly 60,000
households. The survey classifies every adult (over age 16) into one of the
following three categories:
1. Employed: Part-time and full-time employees, business owners,
unpaid workers in a family business and workers who are
temporarily absent from employment are considered employed.
2. Unemployed: Those who are not employed, were available for work
and were trying to find a job over the previous month are classified
3. Not in the labor force: All adults who are not employed or
unemployed including students, retirees and discouraged workers
are classified as ‘not in the labor force.’ Discouraged workers would
like to work but have stopped looking for a job.
The unemployment rate is the percentage of the labor force that is
unemployed. It can be calculated using the following formula:
Unemployment Rate = (Number of unemployed/Labor force) x100
Unemployment rates are also calculated for specific demographic
characteristics such as age, sex and race.
The labor-force participation rate is the percent of adults participating in
the labor force. It is calculated using the following formula:
Labor-force participation rate = (Labor Force/Adult population) x100
The unemployment rate is not a perfect measure of the health of an
economy or the employment environment. Movements into and out of the
labor force are particularly common for younger workers and semi-retired
workers. Determining who is in the work force and who is not is also
difficult as some workers may not be looking very diligently for work but
may be reporting that they are unemployed to qualify for government
The length of time most unemployed workers remain unemployed is an
important indicator of economic health. Most unemployment spells are
short and are the result of workers needing time to find a position that
matches their skills and preferences – frictional unemployment. These
spells of unemployment do not account for a large part of the
unemployment rate. Most unemployment that is measured is long-run
unemployment. It can be attributed to a few workers who are unemployed
for a long time.
Long-run unemployment always exists for four reasons. The first reason is
frictional unemployment and the others are related to structural
Frictional unemployment is the unemployment that is due to the time it
takes for someone to find a job that matches his or her preferences. It
explains short spells of unemployment between jobs.
Structural unemployment occurs when wages are such that labor supply
is greater than labor demand; the labor market is not in equilibrium. Wages
are too high and unemployment rises. Wages might be higher than
competitive labor market wages for three reasons: minimum wage laws,
unions and collective bargaining and efficiency wages.
Job Search (Frictional Unemployment)
The process of matching jobs and workers takes time as workers have
different preferences and jobs have different requirements. This is one
reason there is always some unemployment in an economy.