Example: Any local businesses that might have opened in recent months (a new restaurant) or maybe closed. This is happening all over the country.

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3 It is important to recognize that economic expansions aren t always periods of falling unemployment. The unemployment rate may continue to rise for more than a year + after the recession was officially over. The explanation is that although the economy was growing, it was not growing fast enough to reduce the unemployment rate. Example: Any local businesses that might have opened in recent months (a new restaurant) or maybe closed. This is happening all over the country. 3

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5 Ex. A college student graduates but doesn t start a job for a month Ex. A truck driver quits his job for one company because she things there is a better driving route with a competitor. Frictional unemployment is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. If workers are seeking new jobs that better fit their skills or lifestyle, this increases productivity and efficiency in the labor market. 5

6 Ex. An automobile factory worker is laid off because the company has acquired a machine that does the particular task he had been trained to do. Ex. A teacher who loses his job because the school district, in an effort to save money, has decided to offer classes online, which allows one teacher to teach twice as many students as before. Ex. The tire factory is able to produce tires more cheaply, lowering their price to consumers and increasing the quantity available, by producing in Mexico instead of the US. Workers who are structurally unemployed are likely to remain that way for a longer period of time than those who are frictionally unemployed, because they do not possess skills that are currently in demand in the nation s economy. The minimum wage is a price floor, so in some industries (i.e. fast food) there may always be structural unemployment because there may always be structural unemployment because there may always be a surplus of labor. A labor union will negotiate with employers on behalf of the workers. The goal is unusually to raise the wage above market equilibrium. As a result, there may be some structural unemployment. The members and leadership of the unions usually are willing to make this tradeoff of higher wages for lower employment. Firms may choose to pay efficiency wages wages that employers set above the equilibrium wage rate as an incentive for their workers ti deliver better performance. If the efficiency wage creates a surplus of workers, it has created structural unemployment. Most economically advanced countries provide benefits to laid off workers as a way to tide them over until they find a new job. The drawback to this generosity is that it reduces the i ti t i kl fi d j b d b k i l hi f l th 6

7 Ex. Abank s loan manager who is let go because there is a fall in demand for bank loans from households and firms. Ex. A clerk at an electronics store who is laid off because sales of consumer electronics have fallen. Ex. A massage therapist whose business fails because fewer people demand these types of services when their incomes are down. In each example above, unemployment is caused by a fall in the demand for particular goods and services (due to a decrease in usually income) 7

8 Frictional unemployment is inevitable and many factors create some structural unemployment. So a certain amount of unemployment is normal, or natural and actual unemployment fluctuates around this normal level. Natural rate of unemployment: the normal unemployment rate around which the actual unemployment rate fluctuates. Whenthe economy goes through the business cycle, jobs are created and destroyed, and this can add to, or subtract from, the natural rate. But the natural rate can also rise and fall. Change in Labor Force Characteristics: Older, more experienced, workers are more likely to be employed. As the US workforce has gradually aged, this has contributed to a declining natural rate of unemployment. Changes in Labor Market Institutions: the declining role of unions in the US labor market has weakened their ability to raise wages and some of that structural unemployment has been reduced. Better technology in job search (on line services) has lessened the time a worker is in between jobs, lessening the frictional employment. Changes in Government Policies: the government can offer subsidies to employers to employ workers who are currently unemployed. Programs to retain workers with obsolete skills can also lessen the natural rate of unemployment. 8

9 Ex. Jerome has been unsuccessfully seeking work for nearly a year, and finally decides to give up. People like Jerome are classified as discouraged workers and are not counted as unemployed, they are out of the labor force. The presence of underemployed workers and discouraged workers causes the official unemployment rate to appear lower (better) than the actual labor market conditions. Discouraged workers are part of a larger group know as marginally attached workers. These are people who say they would like to have a job and have looked for work in the recent past but are not currently looking for work. They are also not included when calculating the unemployment rate. Ex. The economy is weak and Jim has had his hours cut from 40 per week to 10. Jim is still employed, but he has certainly seen a decrease in his weekly income. Terri has a Master s degree, but can only find work as a barista in a coffee shop. She is also employed, but not in a job that matches her skills. The unemployment rate will not capture these forms of underemployment. 9

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12 For example, in 1992 the unemployment rate was 7.4%, or 1.4% above the 6.0% natural rate of unemployment then existing. 2 x 1.4 = about 2.8% of lost potential GDP 12