Lecture 7
UNEMPLOYMENT

1. Measuring unemployment

• Current Population Survey of about 60,000 households every month

• Who is counted as employed?

• Who is counted as unemployed?
  • Person doesn't have a job, and
  • Has actively looked for jobs during previous week, or was temporarily laid off

• Discouraged workers are not in the labor force

• Unemployment rate
  u = 100 x No. of unemployed/Labor force

2. Types of unemployment

• Frictional unemployment: Workers between jobs

• Structural unemployment: Due to changes in technology

• Cyclical unemployment: Linked to the business cycle

• Seasonal unemployment: Linked to the seasons

3. Full employment

• Does not mean zero unemployment (WHY?)

• Potential GDP (also full-employment output)

• The natural rate of unemployment (u*)
  
  The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate demand. (BLS)

4. Unemployment insurance

• Serves as an automatic stabilizer:
  Unemployment benefits tend to cushion the effects of a recession

• Effect on job search?

5. Costs of high unemployment

• Loss in real GDP due to idle resources

• Actual GDP vs. Potential GDP (or full-employment output)

6. Comparison of labor markets in US and EU

• Flexible vs rigid labor markets:
  The ease with which employers can fire workers

• The generosity of the unemployment benefits scheme