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Unemployment
Calculating The Class Unemployment Rate
Todd Steen,
One of the most important macroeconomic indicators is the unemployment rate. In order to emphasize what the unemployment rate tells us, as well as what it does not tell us, I have students classify themselves into three groups (employed, unemployed, and not in the labor force; according to the definition) and then calculate the class unemployment rate. The classification process and the calculation of the unemployment rate usually leads into questions about part-time vs. full-time workers, how workers search for jobs, and the issue of "discouraged workers." In order to bring up the definition of labor force participation rates, ask the students first to give labor force data about their female family members, and then about their male family members. Then have the students calculate the labor force participation rates according to the formula given. This can lead into a discussion of the convergence of female and male labor force participation rates over the last 30 years and the reasons behind this convergence.
When progressing from introductory material in a principles class, the discussion usually begins with macroeconomic measures. Before lecturing about these numbers I give students an assignment. I have them read and summarize vignettes from Studs Terkel's Hard Times: An Oral History of the Depression and chapter six from Russell Baker's autobiography Growing Up. Both of these sources vividly portray the human fears and social conditions of the Depression. When I then put time series graphs of unemployment and GDP on the overhead projector, students in some small way can relate to what otherwise would be just peaks and troughs of a line. Student comments have been quite positive.
Baseball and Structural Unemployment
Cho Kin Leung,
When discussing the problem of unemployment, I always find that elementary students have some difficulty in conceiving that technical coefficients in production may affect the size of structural unemployment. To enhance understanding, it is helpful to use real life examples in which the students are interested. One of my favorite sources is sports. To field a baseball team, for example, you must have one pitcher, one catcher, one first baseman, one short‑stop etc. The technical coefficient is very rigid in this case. Suppose that there are two people who can play only short‑stop position; one will not be used and therefore is "structurally unemployed." To solve this particular problem of unemployment, either we have to change the rules of the game by allowing two short‑stops in the field‑‑making the technical co‑efficient flexible‑‑or one of the short‑stops must be sufficiently versatile to play in some other vacant position.
Characterizing Types of Unemployment
John P. Cochran,
Examine each type of unemployment (Frictional, Structural, Seasonal, and Cyclical) with regard to:
a. nature of the unemployment and source of the problem;
b. voluntary or involuntary;
c. type of government program to reduce this kind of unemployment;
d. market mechanisms to reduce this type of unemployment.
EXAMPLE: Frictional Unemployment
a. Jobs are available. Potential workers have the skills to fill the available jobs. The problem is generating the needed information so that the workers find the jobs and employers find workers, and then transporting workers to jobs or vice versa.
b. Usually viewed as voluntary unemployment.
c. Job Service Centers. Government expenditures must be explicitly directed towards matching workers and jobs.
d. Want‑ads and employment agencies.
Discourage Workers to Lower the Unemployment Rate
Gary Galles,
Students often have trouble keeping the differences between employment rate and unemployment rate data straight. To help them keep the differences straight, I introduce the subject of proposing a solution to lower unemployment rates. My solution to hire Sam Kinnison, Louis De Palma, Don Rickles, and others whose specialties are putting people down, to go to unemployment offices and unmercifully berate the people there about being losers. This will depress the unemployed so much that they will stop looking, which lowers the unemployment rate and obviously benefits society. At this point, I ask if there is anything wrong with my conclusion about what would happen to unemployment rates, then if there is anything wrong with my conclusion about society. Those students who have read more carefully can then explain to me (and the rest of the class) the differences between unemployment and employment rate measures and their implications. This can then be extended to make students more aware of such things as data involving discouraged workers, under employed workers, and cases where both rates move together (when welfare rules require unemployment registration or when strong employment demand generates even greater entry into the labor force). Students tend to remember this example better than they do simply memorizing the appropriate definitions.
Discouraged Workers and Unemployment Rate "Bias"
Robert J. Thornton,
In teaching the economics of unemployment, the notion of disguised or hidden unemployment is an important one. The terms refer to individuals who have withdrawn from actively seeking work because they have become "discouraged," believing that there is no work to be had. The concept is a straightforward one, but not so easily understood is how the discouraged worker phenomenon can make the unemployment rate as reported by the Department of Labor a biased estimate of the true employment rate. Toward this end the following simple numerical example works nicely.
Assume that the labor force consists of 100 workers, of whom 95 are employed and 5 are unemployed. The unemployment rate, of course, would be equal to the number of unemployed workers divided by the number of persons in the labor force or 5/100 = 5%. Imagine now that an economic downturn occurs in which 5 more workers lose their jobs. This would result in the unemployment rate rising to 10/100 = 10%. But suppose that after a period of time, 3 of these unemployed workers become "discouraged" and stop looking for work. Since they have ceased their job‑search activity, they literally drop out of the Department of Labor's labor force count and, as a result, are also no longer considered to be among the ranks of the unemployed. This makes the unemployment rate as reported by the Department of Labor fall to 7/97 or 7.1%. In comparison with what many would consider the true jobless rate (10%), the discouraged‑ worker‑affected reported rate (7.1%) is clearly a downward‑biased estimate. In other words, the unemployment problem is much more serious than the reported figures suggest.
How To Experience The Great Depression
Principles of Economics texts record the Great Depression with employment statistics and a few examples of the harsh living conditions. The most severe economic slump of the century is ancient history for principles of economics students, most of whom don't remember the early 1980s recession.
With an inspiration provided by Studs Terkel's Hard Times, I initiated an interview assignment to make the history personal and alive for the students. They were required to find a person born before 1923 and conduct an interview that focused on the experiences of the Depression. They were directed to find out where and how the person lived, what the person observed during the period, how the person felt during the Depression, and what lasting personal effects there were, if any. The interview report was limited to four pages and was supposed to be written in a human-interest story style, suitable for inclusion in the family life section of a local newspaper. Students were also permitted to work in small groups, maximum of three, since some did not have easy access to a Depression era witness.
The stated objectives were clear: make the Depression real for the students and give them another writing opportunity. These were achieved with ease. The unstated objectives were twofold: first, I wanted students to learn about their elders and about themselves; second, I thought the unusual assignment would add variety and lighten the macroeconomic theory discussed in class. I wasn't prepared for the outpouring of emotion and human feelings expressed in many papers.
Eighty percent of the students interviewed one of their grandparents. One student wrote that he began the interview with his grandma in the living room of his parents' home. During the interview other members of the family drifted in and became involved in the discussion. What began as a simple assignment became a highly emotional family experience. The student concluded that he now understands why his grandparents appeared "cheap" and why his father had certain attitudes about money.
Other students reported similar stories. The lessons for my students went well beyond the stated objectives. Several common threads ran through their papers. They learned first hand about the physical and psychological costs of the Depression. They learned that the psychological scars formed then haven't disappeared, even after more than fifty years of better times. They learned that although their parents were not a part of the Depression, many of their attitudes and behavior are influenced by it.
Bias in the Unemployment Rate over the Business Cycle
Mark E. Schaefer,
The concept of the discouraged worker can be brought to life by asking the students if there is any pattern to the occurrence of discouragement over the duration of the business cycle. They will eventually guess that it gets worse as the downturn drags on. You ask innocently if that has any effect on the unemployment rate. They reply that it reduces two things, 1) the number of unemployed still searching, and 2) the total labor force. Thus, both the top and the bottom of the unemployment rate fall. Can we say which way the ratio moves? Yes, the top falls more proportionately than the bottom, so the ratio falls. Thus, the reported unemployment rate may mislead us either by understating the full extent of the problem or by appearing to improve late in the downturn.
Then let them show mastery of the idea by asking if a symmetrical case can be made for encouraged workers during the upturn.
Summary: In the late (early) stages of the downturn (upturn) the fraction of the labor force officially reported as unemployed is too low (high). Why? Because some job seekers become discouraged (encouraged) and drop out of (join into) the official labor force of those actively looking for work. Thus, a drop (rise) in the unemployment rate is not necessarily a good (bad) thing.
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