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Econ 100b

Created 4/30/1996
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Lecture Four

Understanding Unemployment
(Economics 100b; Spring 1996)

Brad DeLong
Associate Professor of Economics, 601 Evans
University of California
Berkeley, CA 94720
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net

January 26, 1996



Scattered Reflections on Pedagogy
The Idea of "Unemployment": Cyclical, Frictional, and Structural
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Some Unemployment Magnitudes
Estimating Unemployment
Okun's Law
Next Time: Production and Distribution When the Economy Is Near "Equilibrium"


The Idea of "Unemployment": Cyclical, Frictional, and Structural

Frictional Unemployment

On May 23, 1995, I resigned from the Treasury Department. On June 1, 1995, I went onto the U.C. Berkeley payroll. For those eight days in between, I was "unemployed". Similarly, my brother's clerkship for the Hon. Ralph W. Winter, Judge on the U.S. Court of Appeals for the Second Circuit (our family judge, in fact) ended on July 1, 1995. Yet he did not accept another job until he went to work for the New York law firm of Howard, Darby at the beginning of September.

It is an abuse of language to call me "unemployed" at the end of May, even though I really was unemployed according to the Bureau of Labor Statistics' definition. My brother was more genuinely "unemployed"--although he had at least three law firms begging him to please come and work for them during July and August.

My brother was unemployed because he was hoping for a better job offer to come along--and it did. I was unemployed becasue it is a real pain in the to move across country. Both of us were examples of what you might call "frictional" unemployment--the fact that we were unemployed did not mean that we were suffering particularly, did not mean that the economy was malfunctioning in any sense, but was instead simply part of the normal process of people finding and changing jobs, just as the fact that every night a large number of full cargo containers are stacked up at the port of Oakland does not mean that our system for distributing goods to consumers has broken down: "inventories" of goods and of labor that are not "in production" at any particular point in time are a necessary grease to keep the economy operating smoothly.

However, there are other kinds of unemployment than "frictional".

Structural Unemployment

I once had dinner with a woman who was leaving for England on an assignment the following day: she had been hired--this was the mid-1980s--to retrain ex-coal miners in the north of Great Britain so that they could get jobs as clerks and cashiers in local shopping malls. She thought that this was going to be an incredibly difficult job--that the cultural heritage of the ex-coal miners whom she was going to be retraining was close to being completely inconsistent with the skills and attitudes required to be a good clerk or cashier in a shopping mall.

Now spending twenty years working underground in the highly-skilled, -specialized, and -dangerous occupation of coal mining is not going to predispose you to have the orientation toward people--and the willingness to accept the requisite social role--to be a good cashier.

But better machinery and more efficient mines elsewhere have closed the mines in Britain's north; moving to another part of the country is hard to do--especially because the structure of British local government and housing subsidies means that your housing costs quadruple if you move. And if you don't have the possibility of adding value to a business by working in a mall--if the hassle to the manager and your wage are, together, a bigger cost than is the value of the work you do--it is hard to imagine what you are supposed to do.

You are "structurally" unemployed.

Cyclical Unemployment

Over and above "frictional" and "structural" unemployment, there is "cyclical" unemployment. You can't get a job in your usual line of work. You are pretty sure that your unemployment is the result of slack demand in your particular industry in that year. Switching to another industry would be pointless: by the time you got retrained and found a job, your old employer (or someone similar) would probably be trying to hire you again.

Social balance sheet of types of unemployment:


"Frictional," "structural," and "cyclical" as ideal types. They blend into each other:


Some unemployment magnitudes:


Estimating Unemployment

Every month the U.S. Bureau of Labor Statistics picks a particular week, and sends out its surveyors. They wander around the country, and ask 60,000 households about their employment status.

Based on how you answer the questions--if you are one of those surveyed--the BLS sorts you into one of three slots:


A person is employed if he or she spent most of the previous week working at a job--as opposed to keeping house, going to school, doing something else, et cetera.

A person is unemployed if they wanted to work during that previous week, but did not--because they were temporarily laid off, because they have been hired but their new job has not yet started, or because they were looking for work but did not find any.

Note that a person who would like to hold a job, but did not look last week because he or she thought that it would be of no use, is not unemployed. Such "discouraged workers" are classified by the BLS as "out of the labor force."

Today the U.S. labor force is--roughly--133 million people, growing at about 1.5 milion people each year. The total population 16 years and older is about 197 million. Roughly two out of three "adults"--people 16 or over--are in the labor force.

Today the unemployment rate is about 5.5 percent. Spurious precision. Probably better to say 5.5 percent + or - 0.3 percent.

The Federal Reserve worries when the unemployment rate is 5.5 percent. It is scared that inflation is about to accelerate--that businesses will think that demand is so strong that they have to hire more workers, and can increase prices to pay those workers higher wages. But--so the Federal Reserve thinks, so most of us think--when the unemployment rate is south of 5.5 percent, firms are apt to mistake high aggregate demand for high relative demand for their products--and think erroneously that they can rise prices.

On the other hand, the Federal Reserve has no desire at all to keep unemployment above the sum of "frictional" and "structural" components.


Okun's Law

Arthur Okun--Chairman of the Council of Economic Advisers under President Johnson in the 1960s--noticed a striking statistical regularity:

At first thought, this is kind of odd. A one percentage point decrease in the unemployment rate seems like it ought to be more-or-less a one percent increase in the number of workers. So we would expect output to grow by at most one percent (maybe less if the new workers cannot find sufficient capital goods to boost their productivity up to the level of the previously-employed).

Instead we find--consistently--output growing by 2-3 percent.

The solution?

Thus a one percentage point fall in unemployment is associated with a 2 percent increase in labor input, and a 2-3 percent increase in production.

This suggests that in a sense our measures of unemployment are wrong:


Next Time: Production and Distribution When the Economy Is Near "Equilibrium"


>

Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/