Unemployment

Unemployment is a measurement reflecting the number of people actively looking for, but unable to find work.

• The unemployment rate is the percentage of the labor force that is unemployed:
  U = 100 * # of unemployed / # in labor force
• The labor force consists of all the workers that are currently working or are actively searching for work
  • Stay-at-home moms, for example, are not considered as a part of the labor force, but a mom who works outside the home (or is looking for work outside of the home) is.
  • The natural rate of unemployment or full employment is the level of unemployment or employment that corresponds to the natural rate of output around which the unemployment rate fluctuates in the short run.
    • The natural rate of unemployment is not the same for every country. In fact, the natural rate of unemployment in Europe is much higher than that in the United States.
    • The natural rate of unemployment is higher in Europe because there are laws and conditions in place that make it more difficult to hire workers, make the wage higher than it would be in the market, or make it easier to delay finding a job compared to the United States. For example, in most European countries
      • There are higher minimum wage laws than in the US.
      • Labor unions are much stronger and are able to negotiate higher wages than in the US.
      • The government supports the unemployed (with welfare payments) much more and longer than in the US.
    • Unemployment that is the result of factors such as those listed above is called structural unemployment, and leads to the relatively higher natural rate of unemployment in Europe.
  

  Note: The Euro Area is the weighted average unemployment rate of the 12 original members of the EMU.

  • The higher average unemployment rate after the mid 1980s illustrates the higher structural unemployment rate for Europe.
  • As you can also see from the chart above, the unemployment rate fluctuates through time. These short-run changes in unemployment coincide with changes in output according to Okun's Law.  Therefore the movements around the natural rate of unemployment are due to economic fluctuations.
    • Unemployment that occurs as a result of economic fluctuations is called frictional unemployment.
  • What is the role of policy?
    • The government can reduce structural unemployment by:
  • Reducing minimum wage laws.
  • Drafting laws that make the wage respond better to market conditions.
  • Providing training and job finding services for the unemployed.
  • Reducing or shortening welfare payments to the unemployed.
  • If a policy maker can control economic fluctuations, then it can exert some control on the frictional unemployment rate.
  • Policy makers can use
  • Fiscal policy to increase output and thus lower unemployment by lowering taxes or increasing spending
  • Monetary policy to increase output and thus lower unemployment by increasing the money supply in order to lower interest rates
  
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