AP Macro Unit III Notes Part A

Labor Force Statistics

*Produced by Bureau of Labor Statistics (BLS), in the U.S. Dept. of Labor
*Based on regular survey of 60,000 households
*Based on “adult population” (16 yrs or older)

BLS divides population into 3 groups:
•employed: paid employees, self-employed, and unpaid workers in a family business
•unemployed: people not working who have looked for work during previous 4 weeks
•not in the labor force: everyone else
The labor force is the total # of workers, including the employed and unemployed.

Unemployment rate (“u-rate”): % of the labor force that is unemployed

Labor force participation rate: % of the adult population that is in the labor force

*The BLS publishes these statistics for demographic groups within the population.
*These data reveal widely different labor market experiences for different groups.

The u-rate is not a perfect indicator of joblessness or the health of the labor market:
•excludes discouraged workers
•does not distinguish between full-time and part-time work, or people working part time because full-time jobs not available
•some people misreport their work status in the BLS survey
Despite these issues, the u-rate is still a very useful barometer of the labor market & economy


Most spells of unemployment are short:
•Typically 1/3 of the unemployed have been unemployed < 5 weeks, 2/3 have been unemployed < 14 weeks.
•Only 20% have been unemployed > 6 months.
Yet, most observed unemployment is long term.
•The small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the unemployment observed over time.
Knowing these facts helps policymakers design better policies to help the unemployed.


There’s always some unemployment, though the u-rate fluctuates from year to year.
The natural rate of unemployment
•the normal rate of unemployment around which the actual unemployment rate fluctuates
cyclical unemployment
•the deviation of unemployment from its natural rate
•associated with business cycles, which we’ll study in later chapters

Even when the economy is doing well, there is always some unemployment, including:
frictional unemployment
•occurs when workers spend time searching for the jobs that best suit their skills and tastes
•short-term for most workers
structural unemployment
•occurs when there are fewer jobs than workers
•usually longer-term

Workers have different tastes & skills, and jobs have different requirements.
Job search is the process of matching workers with appropriate jobs.
Sectoral shifts are changes in the composition of demand across industries or regions of the country.
Such shifts displace some workers, who must search for new jobs appropriate for their skills & tastes.
The economy is always changing, so some frictional unemployment is inevitable.

Govt employment agencies: give out information about job vacancies to speed up the matching of workers with jobs
Public training programs: aim to equip workers displaced from declining industries with the skills needed in growing industries

Unemployment insurance (UI): a govt program that partially protects workers’ incomes when they become unemployed
UI increases frictional unemployment. To see why, recall one of the Ten Principles of Economics: People respond to incentives.

UI benefits end when a worker takes a job, so workers have less incentive to search or take jobs while eligible to receive benefits.

Benefits of UI:
*reduces uncertainty over incomes
*gives the unemployed more time to search, resulting in better job matches and thus higher productivity

The min. wage may exceed the eq’m wage for the least skilled or experienced workers, causing structural unemployment.
But this group is a small part of the labor force, so the min. wage can’t explain most unemployment.

Union: a worker association that bargains with employers over wages, benefits, and working conditions
*Unions exert their market power to negotiate higher wages for workers.
*The typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work.

“Insiders” – workers who remain employed, they are better off
“Outsiders” – workers who lose their jobs, they are worse off
*Some outsiders go to non-unionized labor markets, which increases labor supply and reduces wages in those markets.

Are unions good or bad? Economists disagree.
*Critics: Unions are cartels. They raise wages above eq’m, which causes unemployment and/or depresses wages in non-union labor markets.
*Advocates: Unions counter the market power of large firms, make firms more responsive to workers’ concerns.

§The theory of efficiency wages: firms voluntarily pay above-equilibrium wages to boost worker productivity.
§Different versions of efficiency wage theory suggest different reasons why firms pay high wages.

Four reasons why firms might pay efficiency wages:

1. Worker healthIn less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, makes them healthier, more productive.
2. Worker turnoverHiring & training new workers is costly. Paying high wages gives workers more incentive to stay, reduces turnover.

3. Worker qualityOffering higher wages attracts better job applicants, increases quality of the firm’s workforce.
4. Worker effortWorkers can work hard or shirk. Shirkers are fired if caught. Is being fired a good deterrent?
Depends on how hard it is to find another job. If market wage is above eq’m wage, there aren’t enough jobs to go around, so workers have more incentive to work not shirk.

The natural rate of unemployment consists of
frictional unemployment
•it takes time to search for the right jobs
•occurs even if there are enough jobs to go around
structural unemployment
•when wage is above eq’m, not enough jobs
•due to min. wages, labor unions, efficiency wages
In later chapters, we will learn about cyclical unemployment, the short-term fluctuations in unemployment associated with business cycles.