1. Unemployment and Its Natural
Rate

2. How Is Unemployment Measured?
– The working-age population is divided into two
groups:
– 1. People in the labor force
– 2. People not in the labor force
– The labor force is the sum of employed and
unemployed workers

3. – To be counted as unemployed, a person must be
in one of the following three categories:
– 1. Without work but has made specific efforts
to find a job within the previous four weeks
– 2. Waiting to be called back to a job from
which he or she
has been laid off
– 3. Waiting to start a new job within 30 days

4. • Three Labor Market Indicators
The unemployment rate
 The employment-to-population ratio
 The labor force participation rate


5. How Is Unemployment Measured?
• The labor-force participation rate is the percentage of the
adult population that is in the labor force.
– Labor-force Participation Rate=
(Labor Force/Adult Population)*100
• The unemployment rate is calculated as the percentage of
the labor force that is unemployed.
– Unemployment Rate= (Unemployed/Labor Force)*100
The employment ratio is the employed fraction of the
adult population
– employment ratio= (employed/adult population)

6. Employed, Unemployed, Not in the
Labor Force, Labor Force
• Employed: A person is considered employed if he or she
has spent most of the previous week working at a paid job.
• Unemployed: A person is unemployed if he or she is on
temporary layoff, is looking for a job, or is waiting for the
start date of a new job.
• Not in the Labor Force: A person who fits neither of these
categories, such as a full-time student, homemaker, or
retiree, is not in the labor force.
• Labor Force
– The labor force is the total number of workers and the
BLS defines the it as the sum of the employed and the
unemployed.

7. Employed
Labor Force
Adult
Population
(
Unemployed)
Not in labor force
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8. Issues in Measuring Unemployment
• It is difficult to distinguish between a person who
is unemployed and a person who is not in the
labor force.
– Discouraged workers, people who would like to work
but have given up looking for jobs after an unsuccessful
search, don’t show up in unemployment statistics.
– Other people may claim to be unemployed in order to
receive financial assistance, even though they aren’t
looking for work.

9. Why does unemployment occur?
• In an ideal labor market, wages would adjust to balance the
supply and demand for labor, ensuring that all workers
would be fully employed.
• Frictional unemployment refers to the unemployment that
results from the time that it takes to match workers with
jobs. In other words, it takes time for workers to search for
the jobs that are best suit their tastes and skills.
• Structural unemployment is the unemployment that results
because the number of jobs available in some labor
markets is insufficient to provide a job for everyone who
wants one.

10. Frictional Unemployment and
Job Search
• Job search
– the process by which workers find appropriate
jobs given their tastes and skills.
– results from the fact that it takes time for
qualified individuals to be matched with
appropriate jobs.

11. Structural Unemployment
• Structural unemployment occurs when the
quantity of labor supplied exceeds the
quantity demanded.
• Structural unemployment is often thought to
explain longer spells of unemployment.

12. IDENTIFYING
UNEMPLOYMENT
• Long-run versus Short-run Unemployment:
– Long-run: The natural rate of unemployment
– Short-run: The cyclical rate of unemployment
• Natural Rate of Unemployment
– The amount of unemployment that the economy
normally experiences and does not go away on its own
even in the long run.
– or
– The unemployment rate at full employment is called
the natural unemployment rate.

13. • Cyclical Unemployment
– Associated with with short-term ups and downs of the
business cycle and refers to the year-to-year
fluctuations in unemployment around its natural rate.
or
– Cyclical unemployment is the fluctuating
unemployment over the business cycle
• Full employment occurs when there is no cyclical
unemployment or, equivalently, when all unemployment is
frictional and structural