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Unemployment Review for AP Economics

By — McGraw-Hill Professional
Updated on Mar 2, 2011

Review questions for this study guide can be found at:

Macroeconomic Measures of Performance Review Questions for AP Economics

Main Topics: Measuring Unemployment Rates, Types of Unemployment

Whenever an economy has idle, or unemployed, resources, it is operating inside the production possibility frontier. Though unemployment can describe any idle resource, it is almost always applied to labor.

The Unemployment Rate

Is an infant unemployed? What about an 85-year-old retiree? A parent staying home with young children? Before we can calculate an unemployment rate, we must first define who is a candidate for employment. Once again, a monthly survey is conducted by the Bureau of Labor Statistics (BLS) and through a series of questions they classify all persons in a surveyed household above the age of 16 into one of three groups: "Employed" for pay at least one hour per week; "Unemployed" but looking for work; or "Out of the Labor Force." If a person is out of the labor force he has chosen to not seek employment. Our retiree and stayat- home parent of young children would fall into this category. Many students, at least those who choose not to work, also fall in this latter category.

The labor force is the sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U). To be counted as one of the unemployed, you must be actively searching for work.

    LF = E + U

The unemployment rate is the ratio of unemployed to the total labor force.

    UR = U/LF

Example:

Table 12.6 summarizes the 2002 and 2003 labor market in Smallville.

In 2002, 100 citizens are unemployed but are seeking work and the reported unemployment rate is 10 percent. After a year of searching, 20 of these unemployed citizens become tired of looking for work and move back home to live in the basement of their parent's home. These discouraged workers are not counted in the ranks of the unemployed and this results in an unemployment rate that falls to 8.2 percent. On the surface, the economy looks to be improving, but these 20 individuals have not found employment. The statistic hides their presence.

To give you an idea of the statistical impact that discouraged workers have on the official unemployment rate, we can look at labor force data from March 2007. The Bureau of Labor Statistics estimated a U.S. labor force of 152,979,000 people and of those, 6,724,000 were counted as unemployed. The March 2007 official unemployment rate was 4.4 percent. However, there were an estimated 381,000 people who were not in the labor force because they were discouraged over their job prospects. If you add these people to the ranks of the unemployed and also to the labor force, the adjusted unemployment rate increases to 4.6 percent.

  • The presence of discouraged workers understates the true unemployment rate.

"Be sure to give examples of each type."

    —AP Teacher

Types of Unemployment

People are unemployed for different reasons. Some of these reasons are predictable and relatively harmless and others can even be beneficial to the individual and the economy. Others reasons for lost jobs are quite damaging, however, and policies need to target these types of job loss.

Frictional Unemployment: This type of unemployment occurs when someone new enters the labor market or switches jobs. Frictional unemployment can happen voluntarily if a person is seeking a better match for his or her skills, or has just finished schooling, and is usually short lived. Employers who fire employees for poor work habits or sub-par performance also contribute to the level of frictional unemployment. The provision of unemployment insurance for six months allows for a cushion to these events and assists the person in finding a job compatible with his or her skills. Because frictional unemployment is typically a short-term phenomenon, it is considered the least troublesome for the economy as a whole.

Seasonal Unemployment: This type of unemployment emerges as the periodic and predictable job loss that follows the calendar. Agricultural jobs are gained and lost as crops are grown and harvested. Teens are employed during the summers and over the holidays, but most are not employed during the school year. Summer resorts close in the winter and winter ski lodges close in the spring. Workers and employers alike anticipate these changes in employment and plan accordingly, thus the damage is minimal. The BLS accounts for the seasonality of some employment, so such factors are not going to affect the published unemployment rate.

Structural Unemployment: This type of unemployment is caused by fundamental, underlying changes in the economy that can create job loss for skills that are no longer in demand. A worker who manually tightened bolts on the assembly line can be structurally replaced by robotics. In cases of technological unemployment like this, the job skills of the worker need to change to suit the new workplace. In some cases of structural employment, jobs are lost because the product is no longer in demand, probably because a better product has replaced it. This market evolution is inevitable, so the more flexible the skills of the workers, the less painful this kind of structural change. Government-provided job training and subsidized public universities help the structurally unemployed help themselves.

Cyclical Unemployment: Jobs are gained and lost as the business cycle improves and worsens. The unemployment rate rises when the economy is contracting, and the unemployment rate falls as the economy is expanding. This form of unemployment is usually felt throughout the economy rather than on certain subgroups and therefore policies are going to focus on stimulating job growth throughout the economy. Structural unemployment might be forever but cyclical unemployment only lasts as long as it takes to get through the recession.

Full Employment

Economists acknowledge that frictional and structural unemployment are always present. In fact, in a rapidly evolving economy, these are often beneficial in the long run. Because of these forms of unemployment, the unemployment rate can never be zero. Economists define full employment as the situation when there is no cyclical unemployment in the economy. The unemployment rate associated with full employment is called the natural rate of unemployment and in the United States this rate has traditionally been 5–6 percent. However, the recent prolonged economic expansion of the mid-1990s has caused some economists to revise this estimate to maybe 4 percent.

Review questions for this study guide can be found at:

Macroeconomic Measures of Performance Review Questions for AP Economics

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