Those willing and able to work. Children: 70,800,000. Those who are willing and able to work who do not have a job. unable to work have a job

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1 Macro Lecture 1: and Labor Market Statistics Labor Market The Bureau of Labor Statistics reported that the unemployment rate was 5.1 percent this September. Precisely what does this mean? That is, the number of Americans unemployed was 5.1 percent of what? The total number of all Americans? or The total number of all American adults? or? Also, precisely what does it mean to be unemployed? Every American who does not have a job? or Every American who has not had a job for more than a week? for a month? or? The Bureau of Labor Statistics, an agency of the U.S. Department of Labor, calculates the unemployment rate every month. The unemployment rate equals the number of Americans unemployed divided by the number of Americans in the (civilian) labor force: Unemployed Rate = Labor Force Another important statistic that the Bureau of Labor Statistics provides is the (civilian) labor force participation rate: Labor Force Labor Force Participation Rate = Noninstitutional Population What do we mean by the terms unemployed, labor force, and noninstitutional population? The following diagram helps us understand the terms by showing how the Bureau of Labor Statistics divides the American public into various groups. The figures cited in table 1.1 and in figure 1.1 are from September, 2015 (rounded to the nearest 100,000): Total Population 322,100,000 (Civilian) Labor Force 156,700,000 Children 70,800,000 Employed 148,800,000 (Civilian) Noninstitutional Population 251,300,000 Unemployed 7,900,000 Not in (Civilian) Labor Force 94,600,000 Table 1.1: Labor market statistics: September 2014 Children: 70,800,000 Total Population: 322,100,000 (Civilian) Noninstitutional Population: 251,300,000 (Civilian) Labor Force: Not in (Civilian) 156,700,000 Labor Force: Employed: Unemployed: 94,600, ,800,000 7,900,000 Those unwilling or Those who unable to work have a job Those who are willing and able to work who do not have a job Those willing and able to work Figure 1.1: Labor market schematic The noninstitutional population represents those Americans who are of working age. The Bureau of Labor Statistics defines a working-age individual as someone who is 16 or older. In September, there were 251,300,000 Americans in in the noninstitutional population.

2 2 Those in the (Civilian) Labor Force versus Those Not in the (Civilian) Labor Force The noninstitutional population is divided into two categories: Those in the (civilian) labor force Those not in the (civilian) labor force. To be in the labor force, you must be willing and able to work. Of the 251,300,000 Americans in the noninstitutional population, 156,700,000 were in the labor force; that is, 156,700,000 Americans were willing and able to work. The remaining 94,600,000 Americans were either unwilling or unable to work; these 94,600,000 are not in the labor force. Employed versus Unemployed The labor force is divided into two categories: Employed Unemployed. If you have a job you are employed. If you do not have a job, but are willing and able to work, you are unemployed; that is, if you are in the labor force but do not have a job you are unemployed. In September, 144,300,000 Americans were employed and 7,900,000 unemployed. Now, let us calculate the unemployment rate for September: Unemployed Rate = Labor Force 7,900,000 = 5.1 percent 156,700,000 Figure 1.2 graphs the unemployment rate since 1890: Figure 1.2: U.S. rate: The Great Depression of the 1930 s stands out as the most prominent feature of figure 1.2.

3 3 Figure 1.3 focuses on the last few decades: Figure 1.3: U.S. rate: The high unemployment rates of and stand out. The U.S. economy experienced major recessions during those years. Average Duration of The duration of unemployment is the length of time spent unemployed; that is, the number of weeks required for an unemployed worker to find a job. Figure 1.4 plots the average duration of unemployment over the past few decades. Figure 1.4: Average duration of unemployment: Compare figures 1.3 and 1.4. While unemployment rates were similar in and , the average duration of unemployment was not. The duration was higher in the latter period.

4 4 Initial (First Time) Jobless Claims Every Thursday, the Department of Labor reports the number of new individuals filing for unemployment benefits in the previous week. Figure 1.5 plots the numbers. Figure 1.5: Initial jobless claims Next, we shall turn our attention to the labor force participation rate. Labor Force Participation Rates for Men and Women We begin by focusing on 2014: Labor Force = Participation Rate Labor Force 156,700,000 Working-age Population 251,300, percent Table 1.2 reports on the noninstitutioanal population, labor force, and the labor force participation rate for men and women since 1950: Men Women Year Work-Age Pop Labor Force LF Part Rate Work-Age Pop Labor Force LF Part Rate ,726,000 43,750, ,270,000 18,372, ,662,000 46,406, ,583,000 23,252, ,304,000 51,250, ,782,000 31,546, ,398,000 61,489, ,348,000 45,485, ,377,000 69,028, ,787,000 56,828, ,964,000 76,280, ,613,000 65,306, ,174,000 81,985, ,656,000 71,914, Table 1.2: Noninstitutional populations, labor force, and labor force participation rate by sex:

5 5 Figure 1.6 plots the labor force participation rates since The rate for men has declined by 15 percent points while the rate for women has nearly doubled. The dramatic rise among women is remarkable. It reflects the increasingly important role women are playing in the American workplace. But why has the participation rate among men declined? Have American males simply become lazier in the last fifty years? One reason that the rate has declined among men is the aging of our population: Figure 1.6: Labor force participation rates: Year Total Population Population 65 and over ,300,000 12,400,000 (8.1%) ,000,000 40,900,000 (13.0%) Table 1.3: Total and 65+ population: 1950 and 2010 A larger percentage of our population is in its retirement years. When an individual retires he/she is unwilling to work and therefore is not part of the labor force. The percent of Americans 65 and over has risen from 8.1 percent to 13.0 percent as table 1.3 reports. Note that this makes the increasing labor force participation rate among women even the more impressive.

6 6 Measuring the Health of the Economy Some Complications Table 1.4 reports labor market statistics issued by the Bureau of Labor Statistics for December 2014 and January Note that the unemployment rate rose from 5.6 percent to 5.7 percent which appears to suggest a worsening economy: Dec 2014 Jan 2015 Difference Noninstutitional Population 249, , Labor Force 156, ,180 1,050 Not in Labor Force 92,900 92, Employed 147, , Unemployed 8,690 8, Rate (%) Labor Force Participation Rate (%) Table 1.4: Labor market statistics December 2014 and January 2015 (thousands) Economists React to the January Jobs Report: Astonishingly Strong Wall Street Journal February 6, 2015 The report earned a 10 out of 10 in our eyes and suggests that labor markets remain extremely strong as fears of an early-year slowdown prove unfounded.. Gennadiy Goldberg, TD Securities Employment growth is astonishingly strong;.ignore the increase in the unemployment rate; month-to-month, it is just noise. What matters is payroll growth, and the numbers are huge. With every indicator we follow screaming that payrolls will be very strong for the foreseeable future... Ian Shepherdson, Pantheon Macroeconomics Before long, the U.S. economy is going to run into a problem that was unimaginable just six months ago: we might run out of people to employ. Guy LeBas, Janney Montgomery Scott January was another strong month across a breadth of industries confirming that our economic recovery is becoming robust. Job growth is strong and the labor force participation rate ticked up slightly, indicating that people who Noninstitution Population Up 700,000 have given up looking for work are beginning to start looking again... Bill Spriggs, AFL- Labor Force Up 1,050,000 CIO Question: How can we explain the enthusiastically positive comments about the economy when the unemployment rate rose? Answer: The reason for the optimism was the decline in those Americans not in the labor force which fell by more than a quarter of a million individuals as illustrated in figure 1.7. Apparently, more of those who in December were not seeking a job decided to do so. The belief is that they did those was the fact that the prospects of getting a job had improved. In other words, workers who previously had given up on finding a job, discouraged workers, we now encouraged by the improving economy and rejoined the labor force. Not in Labor Force Down 350,000 entrants Employed Up 760,000 Unemployed Up 290,000 Figure 1.7: Labor market changes December 2014 to January 2015

7 7 Why is there any unemployment? The Dynamic Labor Market and Job Search Figure 1.8 illustrates and important fact: the labor market is not static. There is considerable movement among the categories all the time. Consider yourself. Where are you right now? According to the Bureau of Labor Statistics, college students are unwilling to work. (The Bureau of Labor Statistics must have been talking to your parents or your professors.) Accordingly, you are not in the labor force at the present time. What will happen next May after school ends? Not in Labor Force Unless you really want to anger your parents, I suspect that you will look for a job; you will be called an entrant. In May, you will now be willing and able to work. You will move from the not in labor force category to the labor force category; you would be unemployed while you are looking for a job, but typically within a short period of time you will succeed in finding employment. Those who quit a job, are laid off, are fired, etc. move from the employed category to the unemployed. Those who find a job, return from a layoff, etc. move from the unemployed to the employed category. Unemployed people who become discouraged and stop looking for a job are categorized as unwilling to work by the Bureau of Labor Statistics; these discouraged workers move from the unemployed to the not in the labor force category. Also, when someone retires, he/she is now unwilling to work thereby moving from the employed category to the not in labor force category. Note that because there is considerable movement among the categories, it would be unrealistic to expect the unemployment rate to be 0 at any time. The dynamic labor market explains one source of unemployment. It takes time for an unemployed worker to find a job that is acceptable. For example, this summer you go home and at your parents urging you begin to look for a job. You drive by McDonald s, they are always hiring, but they only pay minimum wage. Are you going to accept that job immediately? I doubt it; you are going to search for a better job. You may find a job in a law office or a bank perhaps. If a week or two later you have not found a more desirable job, you may go back to McDonald s and take their job, but while you are searching, you are unemployed. Persistent While the dynamic labor market explains one source of unemployment, it does not explain all of it. To explain other sources, let us review demand and supply in the labor market. A worker is unemployed whenever he/she is willing and able to work, but cannot find a job. This occurs whenever the quantity of labor demanded is less than the quantity of labor supplied as shown in figure 1.9: of labor < of labor demanded supplied entrants Employed lost job laid off fired Unemployed Figure 1.8: Labor market dynamics Figure 1.9: and market forces Question: Why would the quantity of labor demanded be less than the quantity of labor supplied? Answer: When the actual wage exceeds the equilibrium wage. But earlier we learned that market forces would push the wage to its equilibrium level. When the quantity demanded is less than the quantity retire discouraged w* w L* D S L find job return from lay off

8 8 supplied a surplus exists. When a surplus exists, the price of labor, the wage, should fall until the equilibrium is established. In equilibrium, of labor = of labor demanded supplied Now, there would be no unemployment. Based on what we learned previously, there should be no persistent unemployment. There must be something that we are missing. Let us now consider various explanations for persistent unemployment. Minimum-wage legislation 1 Many economists contend that minimum wage legislation creates unemployment among low skilled workers. They believe that the equilibrium wage for these workers is less than the federally legislated minimum wage, $7.25 per hour as illustrated in figure In absence of the legislation, market forces would push the wage down, below w the minimum wage for low skilled workers; but as a consequence of Federal minimum wage legislation, the wage S cannot fall below $7.25. At the minimum wage, the quantity of labor demanded is less than the quantity of labor supplied: w Min of labor < of labor w* demanded supplied Some low skilled workers cannot find a job; unemployment exists. D If this explanation is correct, we would expect the unemployment among low skilled workers to exceed the overall unemployment rate. This follows from the fact that low skilled workers would be the ones most affected by L L* Figure 1.10: Market for low skilled workers and the minimum wage minimum wage legislation. Doctors, lawyers, etc. earn much more than the minimum wage already; the minimum wage would not affect them directly. Consequently, to test this explanation we need to identify a group of workers who are predominantly low skilled. Would not 16 and 17- year old teenagers constitute such a group? Remember if you are in school you are not a member of the labor force. So, most 16 and 17-year old teenagers who are in the labor force during the school year must be high school dropouts. We can say with considerable confidence that these teenagers have not acquired many skills; that is, they are low skilled workers. Figure 1.11 compares the unemployment rate for 16 and 17 year olds with the overall unemployment rate: 1 Some states have enacted minimum wage legislation that exceeds the Federal standard. For example, the Massachusetts minimum wage is currently $10.00 per hour.

9 9 Figure 1.11: U.S. unemplyment rates Teens and all workers These data appear to support the view that minimum wage legislation causes unemployment since the unemployment rate for 16 and 17 year old teenagers is consistently higher than the overall unemployment rate by a substantial margin. Summary: When by law the wage exceeds the equilibrium wage, a surplus of labor, unemployment, results. Theory of efficient wages Those who subscribe to this theory suggest that firms may find it in their best interests to offer a wage above the equilibrium wage. Why might that be the case? Worker Turnover: Higher wages might reduce worker turnover. It is costly for firms to hire and train workers. Once a firm has trained a worker, the firm does not want that worker to leave. If the worker were to leave, the firm would have to incur the expense of training another worker to do the job. By offering higher wages, firms avoid worker turnover, and thereby reduce their training costs. Worker Quality: Higher wages might lead to a better applicant pool. If you offer a wage of $7.25 an hour, only low skilled workers are going to apply. If you offer a wage of $20.00 an hour, while low skilled workers will still apply, more highly skilled workers will also apply. By offering higher wages, firms attract a better applicant pool, and thereby can hire more highly skilled and productive workers. Worker Effort: Workers who earn higher wages may be more willing to work hard so that they can retain their jobs. Summary: When firms find it advantageous to offer a wage exceeding the equilibrium wage, a surplus of labor, unemployment, results.