ECON 1001 AEF / A121F

Tutorial Notes (Topic 8 Ch15)

Jobs and Unemployment
Outline
• Labor Market Indicators
• Current Population Survey
• Population Survey Criteria
• Two Main Labor Market Indicators
• Labor Market Trends and Fluctuations
• Unemployment Rate
• The Participation Rate
• Unemployment and Full Employment
• Frictional Unemployment
• Structural Unemployment
• Cyclical Unemployment
• “Natural” Unemployment
• Unemployment and Real GDP
• Discussion Questions
Labor Market Indicators
• Current Population Survey
• Example :
• Every month, 1,600 interviewers working on a
joint project of the Bureau of Labor Statistics
(BLS) and the Bureau of the Census survey
60,000 households in the US to establish the age
and job market status of each member of the
household.
• Working-age population is the total number of
people aged 16 years and over who are not in a
jail, hospital, or some other form of institutional
care or in the U.S. Armed Forces.
Labor Market Indicators
• In Hong Kong, working-age population refers
to the total land-based non-institutional
population aged 15 and over.
• The working-age population is divided into
those in the labor force and those not in the
labor force.
Working-age Population = Labor Force + Not in Labor Force

• Labor force: The number of people employed

plus the number unemployed.

Labor force = Employed + Unemployed

Labor Market Indicators
• Population Survey Criteria
• The survey counts as employed all
persons who, during the week before
the survey:
1. Worked at least 1 hour in a paid job
or 15 hours unpaid in family
business.
2. Were not working but who had jobs
from which they were temporarily
absent.
Labor Market Indicators
• The survey counts as unemployed all
persons who, during the week before the
survey:
• 1. Had no employment,
• 2. Were available for work,
• and either:
• 1. Had made efforts to find employment
during the previous four weeks, or
• 2. Were waiting to be recalled to a job
from which they had been laid off.
Labor Market Indicators (Nov. 2009)

• Two Main Labor Market Indicators

• The unemployment rate
• The labor force participation rate
• Unemployment rate is the percentage of people in
the labor force who are unemployed.
Number of
people unemployed
Unemployment rate = x 100
Labor force
Unemployment rate = 13.3 x 100%
• Labor force participation rate is the percentage of 153.9
the working-age population who are members of the = 8.64%
labor force.
Labor force participation rate
Labor force = 153.9 x 100% = 64%
Labor force participation rate = x 100
Working-age population 240.5
Labor Market Indicators
• Weakness of Unemployment Rate
in Measuring the State of
Unemployment
• Reason :
• The official definition of
unemployment omits two types of
labor:
• Marginally attached workers
• Part-time workers
Labor Market Indicators
• A marginally attached worker is a person who
does not have a job, is available and willing to Example :
work, has not made specific efforts to find a
1. In May 2013, 753,000 people were
job within the previous four weeks, but has discouraged workers and 1,372,000
looked for work sometime in the recent past. people were other marginally attached
• Discouraged worker is a marginally attached workers in the United States.
2. By adding these workers to the number
worker who has not made specific efforts to unemployed and the labor force, the
find a job within the previous four weeks unemployment rate becomes 8.8 percent.
because previous unsuccessful attempts were 3. This compares to the unemployment rate
discouraging. of 7.6 percent without these additions.

• What is the effect of considering these group Note :

of people in the official count of
unemployment rate? Before addition of discouraged & marginally
attached workers :
• It increases the unemployment rate! The unemployed = 11.8 million
The labor force = 155.7 million
Labor Market Indicators
• Part-time vs. Full-time
• Full-time workers are people who usually
work 35 hours or more a week.
• Part-time workers are people who usually
work less than 35 hours a week.
• Part-time for economic reasons are
people who work 1 to 34 hours per week
but are looking for full-time work.
• This group of workers are also called
involuntary part-time workers.
Labor Market Trends and Fluctuations
• The Unemployment Rates Table 1
• Table 1 shows US
unemployment rates between
1929 – 2019
• The Great Depression was a
period of high unemployment,
low incomes, and extreme
economic hardship that lasted
from 1929 to 1939.
• From 1948 to 2013, the
average unemployment rate
was 5.8 percent.
• In general : the unemployment
rate increases in recessions …
• and decreases in expansions.
Labor Market Trends and Fluctuations
• The Participation Rates Table 2 : US Labor Force Participation Rates (1960 – 2015)

• The participation rate

increased from 59 percent
in 1960 to 67 percent at its
peak in 1999.
• Between 1960 and 1999,
the participation rate for
women increased from 37
percent to 60 percent.
• Between 1960 and 2013,
the participation rate for
men decreased from 83
percent to 70 percent.
Unemployment and Full Employment
• The key reason why there is
always some unemployment is
because the labor market is
constantly churning.
• New jobs are created and old jobs
die; and some people move into
the labor force and some move
out of it.
• This churning creates
unemployment.
Unemployment and Full Employment
• Three types of unemployment :
• 1. Frictional unemployment
• The unemployment that arises from normal labor turnover—from
people entering and leaving the labor force and from the ongoing
creation and destruction of jobs.
• Example : a graduate interviewing for his first job.
• 2. Structural unemployment
• The unemployment that arises when changes in technology or
international competition change the skills needed to perform
jobs or change the locations of jobs.
• Example : when banks introduced the automatic teller machine in
the 1970s, many bank-teller jobs were destroyed.
• 3. Cyclical unemployment
• The fluctuating unemployment over the business cycle that
increases during a recession and decreases during an expansion.
• Example : during the recession of 2008–2009, many workers were
laid off as business activity declined.
“Natural” Unemployment
• “Natural” unemployment is the unemployment that
arises from frictions and structural change when
there is no cyclical unemployment—when all the
unemployment is frictional and structural.
Natural Unemployment Rate
= Frictional Unemployment Rate +
Structural Unemployment Rate

• Natural unemployment rate is the unemployment

rate when the economy is at full employment.
• Full employment is when there is no cyclical
unemployment …
• .. or, equivalently, when all the unemployment is
frictional or structural.
“Natural” Unemployment
• The major influences on natural unemployment
are:
• Age distribution of the population
• An economy with a young population has
lots of new job seekers every year
 tend to have a higher frictional
unemployment & natural unemployment
• The pace of structural change
• Technological upheaval can sweep aside old
ways and wipe out million of jobs & makes
skills once used to perform these jobs
obsolete  increases structural
unemployment & natural unemployment
“Natural” Unemployment
• The real wage rate
• Anything that raises the real wage above the
market equilibrium wage rate creates a
surplus of labor & increases the natural
unemployment rate.
• Example : minimum wage legislation
• Unemployment benefits
• Unemployment benefits increase the natural
unemployment rate by lowering the
opportunity cost of job search.
• Example : European countries that have more
generous unemployment benefits tend to
have a higher natural unemployment rate vs.
the United States (with less generous
unemployment benefits)
Unemployment and Real GDP
• Cyclical unemployment is the fluctuating
unemployment over the business cycle
— unemployment increases during
recessions and decreases during
expansions.
• At full employment, there is no cyclical
unemployment.
• Cyclical unemployment rate = 0%
• At the business cycle trough, cyclical
unemployment is positive.
• At the business cycle peak, cyclical
unemployment is negative.
Unemployment and Real GDP
• Potential GDP is the value of real GDP when the
economy is at full employment.
• It is the value of real GDP when the economy is
at full employment – ie. all the economy’s
factors of production (labor, capital, land, and
entrepreneurial ability) are employed.
• When the unemployment rate is above the natural
rate, real GDP is below potential GDP.
• When the unemployment rate is below the natural
unemployment rate, real GDP is above potential
GDP.
• When the economy is at full employment, real GDP
equals potential GDP and there is no output gap.
Unemployment and Real GDP
• Output gap equals real GDP minus potential GDP,
expressed as a percentage of potential GDP.
Output Gap = Y – YF x 100%
YF

• When the unemployment rate is above the natural

rate, real GDP is below potential GDP and the
output gap is negative.
• When the unemployment rate is below the natural
unemployment rate, real GDP is above potential
GDP and the output gap is positive.
Discussion Questions : Question 1

• Explain the
relationship between
the percentage of
employed workers
who have part-time
jobs and the business
cycle.
Discussion Points : Q1
• A negative relationship between the percentage of employed
workers who have part-time jobs and the business cycle.
• Reason :
• When the economy goes into a recession, the percentage of
workers who have part-time jobs for economic reasons rises.
• When the economy goes into an expansion, the percentage of
workers who have part-time jobs for economic reasons falls.
• The percentage of workers who have part-time jobs for
noneconomic reasons does not change through the business
cycle.
• Because one component of part-time workers rises in a
recession and falls in an expansion, the total percentage of
workers who have part-time jobs rises in a recession and falls in
an expansion.
Discussion Questions : Question 2
• Distinguish among the three
types of unemployment:
frictional, structural, and cyclical.
• Provide an example of each type
of unemployment in Hong Kong
today.
• Can frictional unemployment
ever be totally eliminated?
Explain your answer.
Discussion Points : Q2
• Frictional unemployment is unemployment that arises from normal
labor turnover—from people entering and leaving the labor force and
from the ongoing creation and destruction of jobs.
• Example : A university student graduating and entering the labor
force to look for a job is frictionally unemployed.
• Structural unemployment is unemployment that arises when changes
in technology or international competition change the skills needed to
perform jobs or change the locations of jobs.
• Example : A bank teller who is fired when the bank switches to
internet banking is structurally unemployed.
• And cyclical unemployment is the fluctuating unemployment over the
business cycle that increases during a recession and decreases during
an expansion.
• Example : An air hostess who is laid off when the economy
contracts and Cathay Pacific’s total passenger revenue miles
declines is cyclically unemployed.
Discussion Points : Q2
• Frictional unemployment may not be
totally eliminated
• Reasons :
• There will be ongoing job creation and
job destruction
• There will be people resigning from
jobs; or employers firing unsuitable
workers.
• There will be “new-comers” into the job
market.
Discussion Questions : Question 3
• Describe the relationship The Business Cycle

between the
unemployment rate and
the natural
unemployment rate as
the output gap fluctuates
between being positive
and being negative.
Discussion Points : Q3
• When real GDP is less than potential GDP
so that the output gap is negative, the
unemployment rate is above the natural
unemployment rate.
• When real GDP is greater than potential
GDP so that the output gap is positive,
the unemployment rate is below the
natural unemployment rate.
• And, when real GDP equals potential GDP
so that the output gap is zero, the
unemployment rate equals the natural
unemployment rate.
Discussion Questions : Question 4
• In July 2023, in the economy of Sandy Island,
10,000 people were employed and 1,000 were
unemployed.
• During August 2023, 80 people lost their jobs
and didn’t look for new ones, 20 people quit
their jobs and retired, 150 people who had
looked for work were hired, 50 people became
discouraged workers, and 40 new graduates
looked for work.
• Calculate the change in the unemployment
rate from July 2023 to August 2023.
Discussion Points – Q4 In July 2023, in the economy of
Sandy Island, 10,000 people
were employed and 1,000 were
• The unemployment rate in July is 9.1
unemployed.
percent.
• The unemployment rate is the
number unemployed as a percentage
of the labor force.
• The number of unemployed workers
is 1,000.
• The labor force is the number
employed plus the number
unemployed so in July it is 11,000.
• The unemployment rate
= (1,000 ÷ 11,000)  100 = 9.1%.
 In July 2023, in the economy of
Discussion Points – Q4 Sandy Island, 10,000 people
were employed and 1,000 were
unemployed.
• The number of people who are During August 2023, 80 people
lost their jobs and didn’t look
unemployed at the end of August equals for new ones, 20 people quit
the number unemployed in July plus their jobs and retired, 150
people who had looked for
people who lost their jobs and who stayed work were hired, 50 people
in the labor market, plus new workers became discouraged workers,
entering the labor market, such as new and 40 new graduates looked
for work.
graduates, minus people who were hired
and people who stopped looking for work,
that is, became discouraged workers.
• So, the number of people unemployed
equals 1,000 + 40 − 150 − 50, which is
840.
 In July 2023, in the economy of
Discussion Points – Q4 Sandy Island, 10,000 people were
employed and 1,000 were
unemployed.
• Next the number of people who are employed at During August 2023, 80 people lost
the end of August equals the number employed in their jobs and didn’t look for new
July minus people who lost jobs plus people who ones, 20 people quit their jobs and
were hired, so the number employed is 10,050.
retired, 150 people who had
• Employed = 10,000 – 80 – 20 + 150 = 10,050
looked for work were hired, 50
• The unemployment rate equals the number people became discouraged
unemployed expressed as a percentage of the labor workers, and 40 new graduates
force. looked for work.
• The labor force equals the number employed plus Calculate the change in the
the number unemployed, so at the end of August it unemployment rate from July 2023
is 10,890. to August 2023.
• Labor force = 10,050 + 840 = 10,890
• The unemployment rate at the end of August equals
(840 ÷ 10,890)  100, which is 7.7 percent.
• Between July and August, the unemployment rate
fell by 1.4 percent from 9.1 percent to 7.7 percent.
Multiple Choice Questions
• Question 1

• The Census and Statistics Department will count Jody employed in all the
following situations except when she .
• A. works for less than 2 hours a week
• B. didn’t turn up at her workplace last week
• C. is awaiting recall to her job.
• D. quits her full-time job to take up a part-time job
Multiple Choice Questions
• Question 2

• To be considered unemployed, a worker must have had

• A. no employment during the week before the survey and be actively
looking for a job.
• B. part-time employment while actively looking for a full-time job.
• C. no employment during the day before the survey and be actively
looking for a job.
• D. Both answers A and B are correct.
Multiple Choice Questions
• Question 3

• Which of the following persons is NOT considered a part of the labor force?
• A. Mary, who has a part-time job as a day care specialist
• B. Lones, an unemployed mechanic looking for a new job
• C. Jameson, an accountant who has been temporarily laid off during the
holiday season
• D. Desire, a wealthy hedge fund manager who just took early retirement
Multiple Choice Questions
• Question 4

• If half of all unemployed individuals suddenly gave up looking for

work, the unemployment rate would and the labor force
participation rate would .
• A. decrease; decrease
• B. decrease; increase
• C. increase; decrease
• D. increase; increase
Multiple Choice Questions
• Question 5

• If the minimum wage is increased, unemployment

will .
• A. youth; decrease
• B. natural; increase
• C. structural; decrease
• D. frictional; increase
Multiple Choice Questions
• Question 6

• If the government sets up a website that helps match available jobs to

job-seekers, then unemployment will .
• A. frictional; decrease
• B. natural; increase
• C. structural; decrease
• D. cyclical; increase
Multiple Choice Questions
• Question 7
• When the economy is in the expansion phase,
unemployment is decreasing and the natural rate of unemployment is
.
• A. structural; constant
• B. frictional; decreasing
• C. structural; increasing
• D. cyclical; constant
Multiple Choice Questions
• Question 8

• Full employment occurs when

• A. structural unemployment is zero.
• B. cyclical unemployment is zero.
• C. frictional unemployment is zero.
• D. the unemployment rate equals zero.
Multiple Choice Questions
• Question 9

• At the peak of a business cycle, the

• A. cyclical unemployment rate is positive.
• B. unemployment rate is above the natural unemployment rate.
• C. natural unemployment rate is negative.
• D. unemployment rate is below the natural unemployment rate.
Multiple Choice Questions
• Question 10

• When the unemployment rate is greater than the natural

unemployment rate, real GDP is
• A. greater than potential GDP.
• B. less than potential GDP.
• C. unrelated to potential GDP.
• D. equal to potential GDP.