Copyright 2004 South-Western28Unemployment and Its Natural Rate Copyright 2004 South-WesternIDENTIFYING UNEMPLOYMENT Categories of Unemployment The problem of unemployment is usually divided into two categories. The long-run problem and the short-run problem: The natural rate of unemployment The cyclical rate of unemploymentCopyright 2004 South-WesternIDENTIFYING UNEMPLOYMENT Natural Rate of Unemployment The natural rate of unemployment is unemployment that does not go away on its own even in the long run. It is the amount of unemployment that the economy normally experiences.Copyright 2004 South-WesternIDENTIFYING UNEMPLOYMENT Cyclical Unemployment Cyclical unemployment refers to the year-to-year fluctuations in unemployment around its natural rate. It is associated with with short-term ups and downs of the business cycle.Copyright 2004 South-WesternIDENTIFYING UNEMPLOYMENT Describing Unemployment Three Basic Questions: How does government measure the economys rate of unemployment? What problems arise in interpreting the unemployment data? How long are the unemployed typically without work?Copyright 2004 South-WesternHow Is Unemployment Measured? Unemployment is measured by the Bureau of Labor Statistics (BLS). It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey.Copyright 2004 South-WesternHow Is Unemployment Measured? Based on the answers to the survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labor forceCopyright 2004 South-WesternHow Is Unemployment Measured? The BLS considers a person an adult if he or she is over 16 years old.Copyright 2004 South-WesternHow Is Unemployment Measured? A person is considered employed if he or she has spent most of the previous week working at a paid job.Copyright 2004 South-WesternHow Is Unemployment Measured? 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.Copyright 2004 South-WesternHow Is Unemployment Measured? A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force. Copyright 2004 South-WesternHow Is Unemployment Measured? Labor Force The labor force is the total number of workers, including both the employed and the unemployed. The BLS defines the labor force as the sum of the employed and the unemployed.Figure 1 The Breakdown of the Population in 2001Copyright2003 Southwestern/Thomson LearningAdult Population (211.9 million)Labor Force (141.8 million)Employed (135.1 million)Not in labor force (70.1 million)Unemployed (6.7 million)Copyright 2004 South-WesternHow Is Unemployment Measured? The unemployment rate is calculated as the percentage of the labor force that is unemployed.Copyright 2004 South-Western The labor-force participation rate is the percentage of the adult population that is in the labor force.How Is Unemployment Measured?Table 1 The Labor-Market Experiences of Various Demographic GroupsCopyright2004 South-WesternFigure 2 Unemployment Rate Since 1960Copyright2003 Southwestern/Thomson Learning108642019701975196019651980198519902005Percent of Labor Force19952000Natural rate of unemploymentUnemployment rateFigure 3 Labor Force Participation Rates for Men and Women Since 1950Copyright2003 Southwestern/Thomson Learning1008060402001950195519601965197019751980198519902000Labor-Force Participation Rate (in percent)WomenMen1995Copyright 2004 South-WesternDoes the Unemployment Rate Measure What We Want It To? 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, dont show up in unemployment statistics. Other people may claim to be unemployed in order to receive financial assistance, even though they arent looking for work.Copyright 2004 South-WesternHow Long Are the Unemployed without Work? Most spells of unemployment are short. Most unemployment observed at any given time is long-term. Most of the economys unemployment problem is attributable to relatively few workers who are jobless for long periods of time.Copyright 2004 South-WesternWhy Are There Always Some People Unemployed? In an ideal labor market, wages would adjust to balance the supply and demand for labor, ensuring that all workers would be fully employed.Copyright 2004 South-WesternWhy Are There Always Some People Unemployed? 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.Copyright 2004 South-WesternWhy Are There