Full Employment Standard 2b: Students will identify full employment as one of the three primary economic goals, why it is important, how it is measured, and distinguish among full employment, the natural rate of unemployment, and an unemployment rate of zero. Standard 2c: Students will distinguish among those that are employed, unemployed, & not in the labor force, distinguish among the three types of unemployment, and be able to calculate an economy's unemployment rate. Essential Questions: (a) What are the 3 macroeconomic goals? (b) What is full employment? (c) How is full employment measured? (d) What is unemployment? (e) Why is unemployment bad? (f) What are the 3 types of unemployment? (g) How do I calculate the unemployment rate? (h) What is the natural rate of unemployment? EQ: What are the 3 Macroeconomic Goals? Every economy attempts to achieve the following 3 macroeconomic goals: Economic Growth Full Employment Price Level Stability We will first focus on understanding these goals. Then, everything we learn in this course will be assessed according to its relation to these three macroeconomic goals. First, let s consider What is Employment? Employment is the use of labor resources in exchange for money wages. People who have jobs are employed. They are labor resources that are being productive. They are being paid and can spend that money. Full Employment is a condition in an economy in which no labor resource (person) is not employed because of lack of demand for labor. We will set this EQ aside and come back to it later. EQ: How is Full Employment Measured? Generally, we do not discuss the state of Full Employment in an economy. Full Employment is the goal, but the way we determine whether we are achieving the goal is by examining Unemployment. The way we measure Full Employment is by calculating the Unemployment Rate in an economy. We will now examine both of these concepts.
EQ: What is If Employment is the use of people (labor resources) in exchange for money wages. People who have jobs and get paid. Then Unemployment represents a situation where labor resources are NOT being utilized in an economy and people are NOT being paid. All the people in an economy that are not in employment (i.e., no job & no paycheck) and are in the process of moving to a new job. People not in employment and who are unable to find a job at the wage they should be paid for their skill in the labor force. EQ: What is Who is unemployed and who is not? Not everyone without a job is unemployed. Notice that when we defined unemployment, we only identified those people looking for jobs. 3 types of people in terms of employment: Employed all people who have a paying job. Includes those with part-time jobs who may be under-employed Unemployed all people who do not have paying jobs and are actively searching for paying jobs. Not in the Labor Force all people who are neither employed nor unemployed. People without paying jobs who are NOT looking for paying jobs. Usually students, retired, homemakers, & discouraged workers EQ: Why is Unemployment Bad? Why workers don t like unemployment: Unemployment means you re not working and not getting paid. Those without jobs are often despised in society. Those without paychecks cannot pay their bills. Why businesses don t like unemployment: Unemployment means fewer people with money to buy their stuff. When workers are not getting paid, not only can t they pay their bills, they also cannot go out to eat, go on vacation, buy expensive appliances, go to the movies, buy new cars, new clothes, and furniture, etc. EQ: Why is Unemployment Bad? Why economists don t like unemployment: Unemployment means that some resources are being wasted and there is lost production. Every person is a labor resource and when a person is unemployed, they are a resource that is not being used. If these people were employed, then they would be producing goods & services, which would contribute to growth in the economy and provide more consumer satisfaction. Why leaders don t like unemployment: Unemployment is usually bad for the economy. Leaders are held responsible for the welfare of the people; when the economy is bad, the welfare of the people suffers and the general morale of the populace falls (i.e., people are less happy).
When workers have the right skills for the jobs that are available, but it takes time for the workers and the jobs to find one another in the labor market. This is short-term unemployment that exists simply because of the mobility of the workforce. Example: Teacher moving to another state. There will always be frictional unemployment. When there are jobs available and there are workers to fill the job vacancies, but the unemployed workers do not have the right skills for the available jobs. Workers just need to get trained in the proper job skills and then they can fill the job vacancies. Example: Technology jobs in the late 1990 s. There will always be structural unemployment. This is considered bad unemployment. When there is an economic contraction (a recession that occurs on the downswing of an economic cycle"), there is lower demand for all goods and services in an economy (decrease in aggregate demand). People buy less stuff and businesses do not need as many employees, so many get laid off. Cyclical unemployment can only decrease when there is an increase in aggregate demand (consumers and businesses start buying more stuff). Do workers have the right skills necessary to produce what is desired by consumers? Are jobs available to hire these workers who are unemployed? What s the problem? Type of Unemployment Frictional Structural Cyclical The problem in frictional unemployment is that it takes time for employers to advertise job openings and screen applicants. It also takes time for workers to find the job openings, apply, and possibly move to where the new job is located. No The problem in structural unemployment is that it takes time for workers to acquire the skills necessary to fill the jobs that are available. Sometimes employers can hire & train. However, these skills often must be acquire through schooling. No The problem in cyclical unemployment is that there is little demand for workers. This is usually because of an economic contraction (recession). There is little hope for cyclical unemployment to decrease until economic recovery begins.
EQ: How Do I Calculate the Unemployment Rate? The unemployment rate is the percentage of the total labor force not working and actively engaged in looking for work. It is calculated as the number of people unemployed divided by the number of people in the labor force. The Labor Force includes all people who are either working a job or looking for a job. Labor Force = Employed + Unemployed Unemployment Rate = Unemployed / Labor Force EQ: How Do I Calculate the Unemployment Rate? Example: Let s say that there are: 117 million people employed in an economy 6 million people not employed but looking for work Labor Force = 117M + 6M = 123 million Unemployed = 6 million Includes frictional/structural/cyclical unemployment Unemployment Rate = 6 million = 4.878% 123 million Earlier, we said that full employment is a condition in an economy in which no labor resource (person) is not employed because of lack of demand for labor. Remember our 3 types of unemployment? With frictional & structural, there are jobs available, so there is demand for labor. Only in cyclical unemployment is there a lack of demand for labor no jobs available. So, Full Employment can exist when there is frictional or structural unemployment but NOT when there is cyclical unemployment. Full Employment is the unemployment rate in an economy equal to the rate of frictional unemployment plus the rate of structural unemployment. Full Employment = Frictional + Structural Unemployment Since there will always be frictional and structural unemployment, there will NEVER be an unemployment rate of zero. This would be a situation where the labor force is equal to the number of employed. There are always people moving from job to job and there are always people who need to gain skill before getting jobs that are available. So, Full Employment DOES NOT mean an unemployment rate of zero. It means zero cyclical unemployment.
EQ: What is the Natural Rate of Unemployment? Another way of saying Full Employment is to say the Natural Rate of Unemployment The natural rate of unemployment is the unemployment rate that exists when there is no cyclical unemployment. The natural rate of unemployment does include both frictional and structural unemployment. The Natural Rate of Unemployment is the unemployment that remains in an economy when the economy is at full employment. Increases in total product demand from consumers and businesses (aggregate demand) will not decrease unemployment at the natural rate. Full Employment = Natural Rate of Unemployment EQ: What is the Natural Rate of Unemployment? Conceptually, the natural rate of unemployment is the lowest unemployment rate that can be sustained in an economy without causing increased inflation: If the unemployment rate drops below the natural rate, that means that businesses are: Hiring people without the right skills (less structural) Hiring people without screening them (less frictional) Businesses are paying a premium for people who are not qualified paying more for the same product inflation! So, basically, the goal of leaders in an economy is to try to keep unemployment as close as possible to the natural rate of unemployment. Too high and people will be out of work BAD! Too low and there will be inflation BAD!