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Figure 14-3

Labor-Force Participation Rates for Men and Women since 1950. This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

Source: U.S. Department of Labor.

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 '98

Figure 14-3

Labor-Force Participation Rates for Men and Women since 1950. This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

Source: U.S. Department of Labor.

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 '98

program that financially assists the unemployed or because they are actually working and being paid "under the table." It may be more realistic to view these individuals as out of the labor force or, in some cases, employed. On the other hand, some of those who report being out of the labor force may, in fact, want to work. These individuals may have tried to find a job but have given up after an discouraged workers unsuccessful search. Such individuals, called discouraged workers, do not show individuals who would like to work up in unemployment statistics, even though they are truly workers without jobs. but have given up looking for a job According to most estimates, adding discouraged workers would increase the measured unemployment rate by about one-half of one percentage point.

There is no easy way to fix the unemployment rate as reported by the BLS to make it a more reliable indicator of conditions in the labor market. In the end, it is best to view the reported unemployment rate as a useful but imperfect measure of joblessness.

HOW LONG ARE THE UNEMPLOYED WITHOUT WORK?

In judging how serious the problem of unemployment is, one question to consider is whether unemployment is typically a short-term or long-term condition. If unemployment is short-term, one might conclude that it is not a big problem. Workers may require a few weeks between jobs to find the openings that best suit their tastes and skills. Yet if unemployment is long-term, one might conclude that it is a serious problem. Workers unemployed for many months are more likely to suffer economic and psychological hardship.

Because the duration of unemployment can affect our view about how big a problem unemployment is, economists have devoted much energy to studying data on the duration of unemployment spells. In this work, they have uncovered a result that is important, subtle, and seemingly contradictory: Most spells of unemployment are short, and most unemployment observed at any given time is long-term.

To see how this statement can be true, consider an example. Suppose that you visited the government's unemployment office every week for a year to survey the unemployed. Each week you find that there are four unemployed workers. Three of these workers are the same individuals for the whole year, while the fourth person changes every week. Based on this experience, would you say that unemployment is typically short-term or long-term?

Some simple calculations help answer this question. In this example, you meet a total of 55 unemployed people; 52 of them are unemployed for one week, and three are unemployed for the full year. This means that 52/55, or 95 percent, of unemployment spells end in one week. Thus, most spells of unemployment are short. Yet consider the total amount of unemployment. The three people unemployed for one year (52 weeks) make up a total of 156 weeks of unemployment. Together with the 52 people unemployed for one week, this makes 208 weeks of unemployment. In this example, 156/208, or 75 percent, of unemployment is attributable to those individuals who are unemployed for a full year. Thus, most unemployment observed at any given time is long-term.

This subtle conclusion implies that economists and policymakers must be careful when interpreting data on unemployment and when designing policies to help the unemployed. Most people who become unemployed will soon find jobs. Yet most of the economy's unemployment problem is attributable to the relatively few workers who are jobless for long periods of time.

WHY ARE THERE ALWAYS SOME PEOPLE UNEMPLOYED?

We have discussed how the government measures the amount of unemployment, the problems that arise in interpreting unemployment statistics, and the findings of labor economists on the duration of unemployment. You should now have a good idea about what unemployment is.

This discussion, however, has not explained why economies experience unemployment. In most markets in the economy, prices adjust to bring quantity supplied and quantity demanded into balance. In an ideal labor market, wages would adjust to balance the quantity of labor supplied and the quantity of labor demanded. This adjustment of wages would ensure that all workers are always fully employed.

Of course, reality does not resemble this ideal. There are always some workers without jobs, even when the overall economy is doing well. In other words, the unemployment rate never falls to zero; instead, it fluctuates around the natural rate of unemployment. To understand this natural rate, we now examine the reasons why actual labor markets depart from the ideal of full employment.

To preview our conclusions, we will find that there are four ways to explain unemployment in the long run. The first explanation is that it takes time for workers to search for the jobs that are best suited for them. The unemployment that results from the process of matching workers and jobs is sometimes called frictional unemployment, and it is often thought to explain relatively short spells of unemployment.

The next three explanations for unemployment suggest that the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one. This occurs when the quantity of labor supplied exceeds the quantity demanded. Unemployment of this sort is sometimes called structural unemployment, and it is often thought to explain longer spells of unemployment. As we will see, this kind of unemployment results when wages are, for some reason, set above the level that brings supply and demand into equilibrium. We will examine three possible reasons for an above-equilibrium wage: minimum-wage laws, unions, and efficiency wages.

frictional unemployment unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills structural unemployment unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

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