MAcro CHAPTER 2.3:

CHAPTER SUMMARY

Work in an economy gets done by the labor force - all the people willing and able to work (in the US, you must be 16 to be part of the labor force). Someone who is retired would not be counted in the labor force because they are not willing to work, and a full-time student would not be counted because they are not able to work.

The number of people in the labor force divided by the total number of people who could possibly work is called the labor force participation rate. For example, if there are 100 people in my country who could work, and 60 of them are willing and able to work, then my labor force participation rate is 60%.

Unemployment is when people who are in the labor force are not working but want to work. We measure this by dividing the total number of unemployed people who want work by the total number of people in the labor force.

There are three main types of unemployment:

1) Frictional Unemployment: When people are unemployed because they are changing jobs. This might happen because they don't like their job and are looking for a new one, or because they do a job that is seasonal (like a lifeguard, who can only find work in the summer).

2) Structural Unemployment: When people are unemployed because their skills used to be valuable, but are now obsolete (not useful anymore). For example, someone who is really good at repairing DVD players might be unemployed because people don't watch DVDs anymore.

3) Cyclical Unemployment: When people are unemployed due to economic contraction in the business cycle. Their skills are still useful, but businesses are getting less customers because the economy is performing poorly and people have less money, so they had to fire workers to survive.

No matter how good the economy is, we expect that there will always be some frictional unemployment (because people will often look for better jobs) and structural unemployment (because technology & needed skills change over time). There is nothing that the government or economists can do to prevent this, so the total of frictional + structural unemployment is known as the natural rate of unemployment or full employment. The government considers this to be a "healthy" rate of unemployment.

However, the government will often step in to try to improve the economy if there is too much cyclical unemployment. If the government thinks the natural rate of unemployment is 4%, but the actual unemployment rate is 9%, it will take measures to try to reduce cyclical unemployment by 5%.

Similarly, if the natural rate of unemployment is 4%, but the actual unemployment rate is 1%, the government might say the economy is too strong, and that businesses are wasting labor as a resource. In this case, it may try to raise cyclical unemployment by 3% to get back to the natural rate of unemployment.

CHAPTER VIDEOS

CHAPTER READINGS

CHAPTER PRACTICE

EXTENSION