Unemployment

On January 3, 2022, our fictional Dateland Statistical Agency (DSA) announced that the civilian noninstitutional population of Dateland was 100 peoples in December 2021.

On the same day, DSA also stated that the unemployment rate was 4% in the last week of 2021 in Dateland.

The findings of the survey conducted by DSA for the month of December 2021 is given by Table 1 below.

Table 1 – DSA Population Survey Results – Last Week of 2021

	The Breakdown of Dateland Population
Civilian Noninstitutional Population (Aged 16 and Older)	100
Civilian Labor Force (Aged 16 and Older)	50
Not in Civilian Labor Force (Aged 16 and Older)	50
Employed (Aged 16 and Older)	48
Unemployed (Aged 16 and Older)	2

Following the convention set by U.S. Bureau of Labor Statistics (BLS)

Dateland Statistical Agency’s survey focuses on only civilian noninstitutional population aged 16 and older.

In other words, population of interest of the survey is civilian noninstitutional population aged 16 and older. This category of population excludes active-duty members of Dateland’s armed forces, people in correctional institutions and detention centers such as jails and prisons, and people in nursing homes.

Employed

Dateland Statistical Agency, like U.S. Bureau of Labor Statistics (BLS), classifies people aged 16 and older as employed if, during the survey reference week, they meet any one of the following criteria:

01 worked at least 1 hour as a paid employee
02 worked at least 1 hour as self-employed
03 were temporarily absent from their job, business, or farm, whether or not they were paid for the time off
04 worked without pay for a minimum of 15 hours in a business or farm owned by a member of their family

Unemployed

Dateland Statistical Agency, again by following the convention set by U.S. Bureau of Labor Statistics (BLS), classifies people aged 16 and older as unemployed if, during the survey reference week, they meet all the following criteria:

01 They were not employed during the survey reference week
02 they were available for work during the survey reference week, except for temporary illness
03 They made at least one specific, active effort to find a job during the 4-week period ending with the survey reference week or they were temporarily laid off and expecting to be recalled to their job”. From another perspective, an adult person who does not have a job and who does not look for a job is not classified as unemployed.

Labor Force Unemployment Rate

At the very beginning of this section, we have said Dateland Statistical Agency (DSA) announced that the unemployment rate was 4% in the last week of 2021 in the country.

Now, step-by-step, we can show how DSA have reached this conclusion of 4% unemployment rate from the data made available by DSA in Table 1.

In Step 1, statisticians in DSA calculate the civilian labor force (from now on we will call it labor force) for Dateland by using the following formula:

Civilian labor force = labor force = number of employed + number of unemployed

Therefore,

labor force of Dateland in the last week of 2021 = 48 employed + 2 unemployed = 50 Datelanders

Then, in Step 2, statisticians in DSA calculate the unemployment rate by using the following formula:

 $u n e m p l o y m e n t r a t e = \frac{n u m b e r o f u n e m p l o y e d}{l a b o r f o r c e} \times 100$

Therefore,

 $u n e m p l o y m e n t r a t e o f D a t e l a n d i n t h e l a s t w e e k o f 2021 = \frac{2}{50} \times 100 = 4 %$

Again, an adult person who does not have a job and who are not currently looking for a job is not in the labor force. U.S. Bureau of Labor Statistics (BLS) has a schematic diagram on “people not in the labor force” (Figure 1).

Not in Labor Force

In other words, responsible agencies estimate monthly inflation from monthly CPI numbers. Furthermore, agencies also publish annualized inflation figures based on the monthly inflation – a month’s CPI number compared to the CPI number of the same month in the previous year.

One of the crucial elements in Figure 1 is “discouraged 4 ” or discouraged workers category. When the surveyors ask these discouraged workers main reason that they stop looking for a job in the last four weeks most common answers were:

01 There are no jobs available, or none for which they would qualify
02 They have been unable to find work in the past
03 They lack the education, training, or experience needed for available jobs
04 Employers think that they are too young or too old, or they are subject to some other type of discrimination.

Hence, we should keep in mind that when DSA estimates the unemployment rate in Dateland as 4%, we should know that discouraged workers are excluded from the estimation.

Labor Force Participation Rate

For the policymakers in Dateland, there is another crucial metric, which is called labor force participation rate. Labor force participation rate refers to the number of people in the labor force as a percentage of the civilian non institutional adult population. It can be calculated by the following formula:

 $l a b o r f o r c e p a r t i c i p a t i o n r a t e = \frac{l a b o r f o r c e}{c i v i l i a n n o n i n i n s t i t u t i o n a l i z e a d u l t p o p u l a t i o n} \times 100$

For Dateland, using the formula above and based on the data available in Table 1, the labor force participation rate is

 $l a b o r f o r c e p a r t i c i p a t i o n r a t e o f D a t e l a n d i n t h e l a s t w e e k o f 2021 = \frac{50}{100} \times 100 = 50 %$

This means 50% of of Dateland are either employed or unemployed. The rest of the population is not in the labor force – they might be discouraged workers or simply they are not interested in participating the job market.

Let’s assume that in the last week of 2021 (the period in which the survey was conducted), there were 25 discouraged workers in Dateland. In the first survey of 2022, DSA found that with no change in , 1 of the unemployed workers becomes discouraged and drops out of the labor market.

Table 2 – DSA Population Survey Results – First Survey of 2022

	The Breakdown of Dateland's Population
Civilian Noninstitutional Population (Aged 16 and Older)	100
Civilian Labor Force (Aged 16 and Older)	50 - 1 formerly unemployed worker = 49
Not in Civilian Labor Force (Aged 16 and Older)	50+1 formerly unemployed workers = 51
Employed (Aged 16 and Older)	48
Unemployed (Aged 16 and Older)	2 -1 formerly unemployed workers who is not in the labor force = 1

From Table 2, we can calculate new unemployment and labor force participation rate. The unemployment rate decreases from 4% to 2.04%.

 $u n e m p l o y m e n t r a t e o f D a t e l a n d b a s e d o n t h e f i r s t s u r v e y o f 2022 = \frac{1}{49} \times 100 = 2.04 %$

The labor force participation rate drops to 49% from 50%

 $l a b o r f o r c e p a r t i c i p a t i o n r a t e o f D a t e l a n d i n t h e l a s t w e e k o f 2021 = \frac{49}{100} \times 100 = 49 %$

The important lesson learned from this thought experiment is that the more people drop from the labor force, the lower the unemployment rate will be. Thus, when you look at unemployment statistics you should know that the unemployment rate might decrease even if the economy does not create new jobs for the unemployed to be hired. This might create an illusion that the economy is performing well but it is not.

Frictional unemployment

Frictional unemployment happens because it takes time for a worker to find a job that fits his or her preferences and skills. Frictionally unemployed workers can be the ones have already left their jobs in search of a new one.

In a dynamic economy this type of frictional unemployment happens naturally. Workers entering the labor force for the first time and have not found a job yet are also considered frictionally unemployed. For example, each year around 3 million college students graduate from U.S. universities.

It will, therefore, take time for them to find a job. This type of frictional unemployment is also a natural occurrence.

Structural unemployment

Structural unemployment happens because of the labor market related characteristics such as costs associated with hiring and firing, the level and duration of unemployment benefits, and minimum wage laws.

Such characteristics might generate a persistent unemployment over a long period of time.

Cyclical unemployment

is the unemployment that is highly and negatively correlated with the real GDP growth rate.

During booms, under normal circumstances, the cyclical unemployment will be significantly low, whereas during recessions, it will be significantly high.

Natural Rate of Unemployment

Economists combine frictional and structural employment rates and call the resulting rate the natural rate of unemployment:

natural rate of unemployment = Frictional unemployment + Structural unemployment

We will always observe the natural rate of unemployment regardless of the level of aggregate economic activity. In other words, during booms (episodes with higher real GDP growth rates) there will be people who are either frictionally or structurally unemployed.

During recessions (episodes with either lower or negative real GDP growth rates), again, there will be naturally unemployed people.

Another way to look at Cyclical Unemployment

We can consider cyclical unemployment rate as the difference between the actual unemployment rate and the natural rate of employment.

cyclical unemployment rate = actual unemployment rate - natural rate of unemployment

Or to put it differently

actual unemployment rate = cyclical unemployment rate + natural rate of unemployment

Or

actual unemployment rate = cyclical unemployment rate + frictional unemployment rate + structural unemployment rate

Through microeconomic policies, policymakers can reduce structural unemployment. However, the same policymakers have little control over frictional unemployment. Cyclical unemployment can be dealt with macroeconomic policies that are designed to smooth out fluctuations in short-run aggregate economic activity.

As you remember at the very beginning of this section, we have mentioned that on January 3, 2022, Dateland Statistical Agency (DSA) stated that the unemployment rate was 4% in the last week of 2021 in Dateland. This 4% rate was the actual unemployment rate in Dateland. If the natural rate of unemployment is 3% in the country, then we can claim that the cyclical unemployment was 1% in the period the survey was conducted.

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