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Principles of economics openstax chapter21

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Figure 21.1

Borders was one of the many companies unable to recover from the economic recession of 2008-2009.

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Employed: Currently working for pay

Unemployed: Out of who work, but actively looking for work

Labor Force: Employed + Unemployed

Out of Labor Force: Out of who work, but not looking for work

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An unemployed person is any one who is:

• Sixteen years old or older
• Out of who work
• Actively searching for work: he/she has made specific efforts to find work
during the previous four weeks

Measuring Unemployment

population = labor force + not in labor force
labor force = employed + unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =

Employment data


The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the
unemployment rate seems to return to a range of 4% to 6%. Highest rate was about 10% in 1983-84 and 2007-09


Types of Unemployment

Frictional unemployment: Unemployment due to
searching time for jobs and waiting time between jobs

e.g., Jennifer, just graduated from college, is looking for a
job that matches her qualifications

Structural unemployment: Unemployment due to
changes in the structure of the economy that result in a
loss of jobs in certain industries

e.g., Ken, a farm laborer, lost his job due to mechanization.
He is getting trained to be a security officer.

Types of Unemployment

Cyclical unemployment: Unemployment due to
labor lay-offs in a recession

e.g., Nancy, an engineer, is let go as her employer
attempts to cut labor cost.

Seasonal unemployment: Unemployment due to
seasonal changes

e.g., Tom, a ski instructor, loses his job when winter

Types of Unemployment

Natural Rate of Unemployment: Unemployment
that occurs as a normal functioning of the economy.
Frictional Unemployment + Structural Unemployment

Usually 4 to 5 percent of the labor force is searching for
jobs, waiting between jobs, or getting trained for new jobs.

Unemployment rate above the natural rate is
considered to be cyclical, e.g., 7.5% – 5% = 2.5%

The Classical View: Wage Flexibility

The labor market is brought to equilibrium by rising and falling wage rates.
There should not be any persistent unemployment above the natural rate.

The Classical View: Wage Flexibility

In a labor market with flexible wages, the equilibrium will occur at wage W e and quantity Qe, where
the demand for labor intersect the supply of labor.

The Keynesian View: Wage Rigidity

Wages are “rigid” or “sticky” downward.

Sticky Wages refers to the downward rigidity of wages as an explanation for
the existence of unemployment.

The Keynesian View: Wage Rigidity

Because the wage rate is stuck at W, above the equilibrium, the number of job seekers (Q s) is
greater than the number of job openings (Q d). The result is unemployment = Qs – Qd.

Adjustment to increased demand


In a labor market where wages could rise, an increase in the demand for
labor leads to an increase in equilibrium wage and employment.
In a labor market where wages could not fall, a decline in the demand for
labor leads to a loss of employment at the original wage. At the fixed
wage of W0, unemployment = Q0 – Q2

Adjustment to increased demand

Adjustment to productivity increased


Productivity improves, increasing the demand for labor, wage, and


Then productivity stops increasing. Still, wages keep rising.
But, the demand for labor has not increased, so at a market wage,
unemployment exists.

 There is no improvement in productivity.
 There is no wage increase.
 Now, productivity improves, increasing the demand for labor and creating
more jobs.

Adjustment to productivity increased

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