Chapter 34: Jobs and Unemployment

Chapter Goals State how the unemployment rate is measured and describe the debate about that measure Explain Okun’s rule of thumb and summarize the debate about the appropriate target rate of unemployment Explain why unemployment is more than a technical concept but one that involves normative judgments Discuss the advantages of, and problems with, a government-guaranteed minimum job program

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A man willing to work, and unable to find work, is perhaps the saddest sight that fortune’s inequality exhibits under this sun. ―Thomas CarlyleJobs and UnemploymentCopyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter GoalsState how the unemployment rate is measured and describe the debate about that measureExplain Okun’s rule of thumb and summarize the debate about the appropriate target rate of unemploymentExplain why unemployment is more than a technical concept but one that involves normative judgmentsDiscuss the advantages of, and problems with, a government-guaranteed minimum job programCalculating the Unemployment RateThe labor force refer to those people in an economy who are willing and able to workThe unemployment rate is measured by dividing the number of unemployed individuals by the number of people in the civilian labor force and multiplying by 100If the total unemployed stands at 12 million and the labor force stands at 150 million, the unemployment rate is:12 million / 150 million = 0.08 X 100 = 8%How Accurate Is the Official Unemployment Rate?Discouraged workers are people who do not look for a job because they feel they don’t have a chance of finding oneThe underemployed are part-time workers who prefer full-time workThe unemployment rate does not include discouraged workers or the underemployedIncluding discouraged workers and the underemployed, unemployment would have been about 18 percent in 2012 instead of falling to 8.2 percentHow Accurate Is the Official Unemployment Rate?Some Classicals contend that the way the BLS measures unemployment exaggerates the number of those truly unemployedEconomists use supplemental measures to give them insight into the state of the labor marketLabor force participation rate, which measures the labor force as a percentage of the total populationEmployment-population ratio, which is the number of people who are working as a percentage of people available to workOkun’s Rule of Thumb, Unemployment, and Changes in OutputThe secular trend rate of growth reflects both productivity increases and labor force increasesOkun’s rule of thumb states that a 1 percentage point rise in the unemployment rate will be associated with a 2 percent fall in output from its trend and vice versaWhat makes estimating this relationship difficult is that increases in productivity and increases in the number of people choosing to work fluctuateIs Unemployment Structural or Cyclical?Okun’s rule explains cyclical unemployment, which is temporary unemployment that can be expected to end as the economy recovers and can be resolved by macro policiesStructural unemployment is long-term unemployment that occurs because of changes in the structure of the economy and cannot be resolved by macro policiesReservation wage is the wage a person requires before accepting a job. The higher it is, the more likely one is to be unemployed.Another aspect of structural unemployment is geographicWhy Has the Target Rate of Unemployment Changed over Time?DemographicsChanging social and institutional structureChanges in government institutionsGlobalizationGlobalization requires structural changeExplaining the Jobless Recovery: Short-Run Causes of Structural UnemploymentThe bursting financial bubble in 2007 and 2008The bursting of the bubble in housingPeople who lost equity in their houses decreased their consumption spending and held down aggregate demand in the private sector Structural problems associated with the bursting of the financial bubble help explain why unemployment is likely to remain high in the coming yearsGlobalization and JobsThe jobs experience of U.S. workers depends on the sectors where the jobs are:Tradable sector, such as manufacturing, where production can easily be shifted to a foreign countryNontradable sector, such as education, where it can’tImmigration sector, production that can be undertaken by non-U.S., largely unskilled immigrants Globalization lowered wages and raised unemployment in both the tradable and immigrant sectors, with very little changes in the nontradable sector Exchange rate policy is buying and selling foreign currencies in order to stabilize the exchange rateFraming the Debate about Voluntary and Involuntary UnemploymentIndividual responsibility framework: unemployment is impossible if people are willing to work at any job for any paySocial responsibility framework: society owes people jobs commensurate with their training and job experience at a respectable wageAccording to the “individual responsibility” measure, there were 1 or 2 million unemployed in mid-2012; according to the “social responsibility” measure, the number of unemployed was closer to 30-40 millionA Guaranteed-Job Proposal: Government as Employer of Last ResortWith a guaranteed-jobs program, the government provides a minimum job for every eligible citizen who truly want to work and cannot find a job, and primarily benefits the least well offThere is a reason most existing government programs are designed differently—to help the middle class in addition to the least well offMuch of the current debate about unemployment is not about providing a minimum job; rather it is about providing people with a level of job that they expectChapter Summary The unemployment rate is calculated as the number of unemployed divided by the labor force. It rises during a recession and falls during an expansionThe official measure of unemployment is based on judgments about who to count as unemployedThe microeconomic approach to unemployment divides unemployment into categoriesOkun’s rule of thumb states that a 1 percentage point change in the unemployment rate will tend to be associated with a 2 percent deviation in output from its trend in the opposite directionChapter Summary The target rate of unemployment has risen because the workforce is younger, more women have entered the workforce, government has expanded income-support programs, and globalization The financial bubble resulted in unsustainably high housing construction that allowed consumers to spend far beyond their meansThe benefit of a government guaranteed jobs program is that everyone who wants to work is employed; the problem is that such a program costs money