U.S. Unemployment Set To Rise
Principles of Macroeconomics – Chapter 8
Macroeconomics – Chapters 16, 18
The Unemployment Rate Does Not Measure Labor Market Strength
What Is the Unemployment Rate Really?
Types (Causes) of Unemployment
The Natural Rate of Unemployment
How the Government Measures Unemployment
The Labor Market
Unemployment – Lesson Demonstration
How can I find data on FRED?
FRED: Master 10 Tools in 10 Minutes
FRED – Change the Time Range
FRED – Customize Data, Add Series to Existing Line
FRED – Format the Graph and Line Settings
FRED – Save Your Graphs
Downloading Data from FRED
Calculating Correlation Coefficient R (Video)
Share my FRED Graph
Types (Causes) of Unemployment
Frictional, Structural, Cyclical Unemployment Defined
The Meaning of Frictional Unemployment
Frictional Unemployment Quizlet
Structural Unemployment Quizlet
Wage and Price Adjustment and Deflation
What is Cyclical Unemployment?
Unemployment: Course Map & Recommended Resources
Looks at the measurement and determinants of unemployment in the economy arising from changes in supply and demand in the labor market. Focuses on the natural rate of unemployment as well as the different types of unemployment.
- Comprehend the determinants of important macroeconomic variables, including the level of income, the level of employment, the unemployment rate, the natural rate of unemployment, the price level, the inflation rate, productivity and the rate of interest (5)
- Comprehend unemployment and inflation tradeoffs (11)
- Weakness in measurement of unemployment statistics
- The natural rate of unemployment, the three types of unemployment, determinants of unemployment; why is this important?
- Unemployment rate, the labor force participation rate and other employment indicators
- Demand and Supply in Labor Markets
NOTE: This Module meets Ohio TAG's 5, 11 for an Intro to Macroeconomics Course
Recommended Textbook Resources
Authored by: Timothy Taylor and Steven A. Greenlawn (2016). Provided by: Openstax, Rice University. Retrieved on: November 15, 2018.
Supplemental Content/Alternative Resources
Alternative Economics Sources
Alternative open access text.
- Authored by: Rittenberg & Tregarthen. Retrieved on October 26, 2018.
Classroom activity (using SMART technology) From the Federal Reserve at Atlanta aimed at helping students visualize different types of unemployment and the economic conditions in which they are found.
- Authored by: Julie Kornegay. Retrieved on: November 15, 2018.
Quizlet questions about Unemployment to supplement Macroeconomics text.
Additional sources, grouped by Learning Topics
Weakness in measurement of unemployment statistics
- Contributor to Forbes Magazine explains weaknesses in unemployment statistics.
- Authored by: Jeffrey Dorfman (April 14, 2015).
- What Is the Unemployment Rate Really?
- Article from Indiana University School of Business about origin of unemployment numbers.
- Authored by: Kent Sellers (2015). Provided by: InContext.
The natural rate of unemployment, the three types of unemployment, determinants of unemployment; why is this important?
- Blogger known as “Econprof” gives overview of different types of unemployment.
- Authored by: Jim Luke (February 19, 2011).
- The Natural Rate of Unemployment
- Outline for lecture giving overview of the Natural Rate of Unemployment.
- Provided by: Lumen Learning (2018).
- Structural Unemployment
- Short video about structural unemployment.
- Provided by: OER Commons.
Unemployment rate, the labor force participation rate and other employment indicators
- Labor force statistics from the current population survey, with links to answers to questions.
- Provided by: Bureau of Labor Statistics.
Demand and Supply in Labor Markets
- Short video about the workings of the labor market.
- Provided by: Federal Reserve Board of St. Louis.
Non-open Access Texts
Principles of Economics, Twelfth Edition
- Authored by: Karl E. Case, Ray C. Fair, and Sharon M. Oster (2017). Provided by: Pearson Publishing.
Modern Labor Economics: Theory and Public Policy, 13th Edition
- Authored by: Ronald G. Ehrenberg and Robert S. Smith (2017). Provided by: Pearson Publishing.
Macroeconomics, Twelfth Edition
- Authored by: Robert J. Gordon. Provided by: Pearson Publishing.
Economics, Fourth Edition
- Authored by: Joseph E. Stiglitz (2007). Provided by: Pearson Publishing.
Topic Data Exercise
One data question/ with suggested answer:
Graph federal minimum wage (Federal Minimum Hourly Wage for Nonfarm Workers for the United States, Dollars per Hour, Not Seasonally Adjusted (FEDMINNFRWG)) vs. the unemployment rate in the economy (Civilian Unemployment Rate, Percent, Not Seasonally Adjusted (UNRATENSA)).
Find the correlation coefficient between these two variables.
Answer the following questions:
Draw a supply and demand curve for the labor market (the vertical axis is the price of labor, w, while the horizontal axis is the amount of labor, L on it.) Show the minimum wage and the resulting unemployment on this graph. What do you expect to happen to unemployment if the minimum wage is increased?
Is this graph and the correlation coefficient you calculated what you expected? Is it larger or smaller than what you expected? How does it differ from what is predicted by the supply and demand curve that your drew?
What might be a few reasons why the magnitude of your results differ from the theoretical model you drew?
Correlation coefficient: 0.347977
See handout on the labor market (below) for examples
While positive, the relationship is not very strong, as might be expected by the model.
Other factors enter into determining the unemployment rate, such as labor force participation and attachment, technological change and the general (cyclical) state of the economy.
Possible Grading Rubric: 20 points for each correct answer, out of a possible 100 points
Active Learning Exercise
This section presents two active learning exercises exploring aspects of unemployment.
(Time Traveling) “Structural Unemployment”
“Structural Unemployment” occurs in response to changes in the economy in which some goods become more desirable and other goods become less desirable changes in unemployment depending on demand for labor, which is a “derived demand” that depends on the demand for the products or services produced by workers in particular labor markets falls as demand for the good or service they produce falls.
This activity asks students to hypothesize what will happen to different sectors of the labor market in response to changes in the economy during different time periods.
Students should be put into groups, and each group given an index card with a historical time and place on it. Drawing from previous knowledge or with the help of online information, each group should then answer these questions, to be presented to the class:
- Video describing structural unemployment.
- Provided by: Lumen Learning.
To the Student:
You and your colleagues have been hired as time-traveling consultants to help address structural unemployment at various times in history. You will be given a time and place in history, and asked to deduce what structural change in the economy was occuring at that time. To help you, a list of possible labor markets is given below. For each time period, decide which workers were being displaced by technological changes, and which workers were suddenly in demand and why. Further, decide whether there was anything that could have been done to help the newly unemployed workers adjust to the new situation, and what that might have been.
Each group should:
Decide what was a major change in the economy occuring at that time and in that place.
Would these changes have an effect on particular markets for good during that time? What are they?
What would happen to the demand for workers in the labor markets that are needed to produce these goods or services, both in the old economy and the new?
What would be needed to reach a new equilibrium in the labor markets that are involved?
Would there have been anything a government could have done at that time and place to help cure this “structural unemployment”? If so, what was it?
Times in history, and suggested labor market disruptions:
- 1430s in monasteries in Europe: monks who were scribes vs. people to build and run printing presses
- 1920s in U.S. cities: ice deliverers vs. refrigerator producers and repairers; refrigeration
- Early 1900s in U.S.: telegraph operators vs. telephone producers & operators; creation of telephone system
- Late 1800s and early 1900s: drivers on stagecoaches vs. engineers on railroads; rail travel
- End of the 1800s in U.S. and Europe: blacksmiths who made horseshoes vs. people to build cars and make tires; automobiles
- 1870s in U.S., Europe: People to make candles or supply gas for gas lamps vs. people to make light bulbs and supply electricity to homes; electric lights
- 1970s, U.S. People to take on large computations by hand vs. people to build, program and run computers; computer revolution
- 1990s: Fedex workers to deliver mail quickly to people far away vs. computer programmers who design technology to make email efficient; digital revolution
List of labor market participants:
- Computer programmers who design technology to make email efficient.
- Fedex (and similar company) workers to deliver mail quickly to people far away
- Monks who were scribes
- Ice deliverers
- People to build and run printing presses
- People to build cars and make tires
- People to build, program and run computers
- People to take on large computations by hand
- People to make candles or supply gas for gas lamps
- People to make light bulbs and supply electricity to homes
- Refrigerator producers and repairers
- Telegraph operators
- Telephone producers & operators
- Drivers on stagecoaches
- Engineers on railroads
- Blacksmiths who made horseshoes
Suggested grading rubric: 20 points for the answer to each question, with extra credit for a very original response to last question.
B. “Measuring Unemployment”
To the teacher: This activity was created by the Federal Reserve Bank of Atlanta, and is illustrated in the link below.
Give each student a numbered index card describing their situation in the labor market (explanations can be as detailed and creative as you like.) Each student must then decide which part of the labor force they belong to. Are they employed, unemployed, or not even in the labor force? Once they decide, they should move to the corner of the room that is labeled with their category. Once everyone has positioned themselves, each person should read their card to the class and explain why they believe they are in the category they chose. If anyone needs to be moved, they should then move. A tally of how many people are in each category is kept, from which the students should calculate the unemployment rate in this economy. An illustration of this activity is given in the link referenced below.
- Illustrates example of using active learning to teach basics of unemployment.
- Authored by: Eric Fields. Provided by: Federal Reserve Bank of Atlanta
Follow up questions to activity: For homework, each student should record their card number and then answer the following questions:
Why did you choose to put yourself in the category you did? What about your situation inspired you to decide you were employed, unemployed, or not in the labor force?
Is there some type of policy (fiscal, monetary or social) that could address your problem (if there is a problme?) What might be the positive aspects of that policy, and what might be the negative aspects of it?
Where in history or everyday life have we seen people in your situation (examples might be: the Industrial Revolution, the Great Depression, the boom of the early 1990s, each May when students graduate from college.)
What is the unemployment rate in this classroom economy?
Information for the instructor:
Possible examples of workers in each possible category:
Not in the Labor Force:
- Retired people
- Full time students
- Full time parents
- People who are full time patients in nursing home, hospital or rehabilitation facility
- People in prison
- People who have become so discouraged about finding work that they are no longer looking
- People with full time jobs
- People with part time jobs
- People who own and run their own businesses
- People who work for a temporary agency
- People who do freelance work from home
- People who are temporarily laid off
- People who have been fired from their job
- People whose skills are no longer needed at their old job (ex. horse and buggy builders)
- People who left their job to search for another
- New graduates from high school or college who do not play to pursue full time education
Possible Grading Rubric: 25 points for each correct answer:
Did student choose correct category?
Was student able to correctly explain why they chose that category?
Was student able to name one practical example of when this might occur in real life?
Was student able to correctly calculate the unemployment rate in the classroom?
FAQS about FRED
Some general links that will help with FRED:
1. What is FRED, and how do I get into it?
- “FRED” stands for “Federal Reserve Economic Data” and is a collection of publicly available data maintained by the Federal Reserve Board of St. Louis.
- FRED may be accessed at FRED. Upon entering the web site, either create a password (“register”) or use an already created password (“sign in”). The links to do this are found in the upper right-hand corner of the page.
2. How do I create a graph from a data set I am interested in using?
- To find a data set, search using a keyword, and then select the appropriate data set from the list that appears. (Be sure to pay attention to which years are available for use. A companion collection of historical data is also available for earlier years.)
- Upon selecting a data set, a graph of that data will appear on your screen.
3. How do I change the years covered by a graph?
- Above your graph will be two spaces indicating the years that the graph is illustrating.
- To change a year, click on the appropriate box and move the cursor through possible years until the correct one appears. Once in a year, select the appropriate month for that year.
4. How do I change the type of graph?
- Go to “Format” and change the type of graph to the one desired. For example, you can create a scatter plot or a line graph using this dialogue box.
5. How do I create a two-dimensional graph?
- Go to “edit graph” and you will be able to add a variable to your graph.
- The first variable entered will become the variable on the vertical axis, while the second will be the variable on the horizontal axis. If you want to, you can in “Format” when editing the graph.
6. How do I change a graph?
- Once a graph is created, go to “edit graph” to make changes. In this dialogue box, you can make many changes. Some possible changes include adding more variables, changing which variable appears on the horizontal or vertical axis, changing the type of graph, and changing the dimensions of the graph.
7. How do I save a graph?
- In FRED, with your graph on the page, go to “Account tools” and click on “Save Graph”. This will bring up a dialogue box that will allow you to name your graph.
8. How do I download data into a spreadsheet?
- With the graph on the page, go to the “Download” button in the upper right hand corner of the page. Once there, select “CSV” from the options, and the data will soon appear in a spreadsheet.
9. How do I do statistics with my data?
- Use the statistical tools from CSV or Excel to do statistical analysis. You may need to upload a supplementary tool to allow you to do more advanced statistics, such as some types of regressions.
10. How do I calculate a correlation coefficient in CSV?
- To calculate a correlation coefficient in CSV, download your data and open as a spreadsheet. Once in the data, click on “Data”.
- An option will appear on the upper right hand side that says “Data analysis”. Click on this, and a list of possible statistical options will appear. Click on “correlation”.
- Once in “correlation”, highlight the part of your data set that you want to use to calculate a correlation coefficient (you may need to move columns around to be able to do this.) As you highlight the correct rows and columns (be sure you are calculating the coefficient for the correct parameter; either “rows” or “columns”), the labels for these spaces will appear in the dialogue box. Once they are correct, click on “ok”. A correlation coefficient will appear on the spreadsheet.
- The correlation coefficient, “r” is a numerical value that summarizes that relationship between two variables. Values close to 1 and negative 1 indicate a strong relationship, while values close to zero indicate very little relationship between two variables.
11. How do I share graphs?
- Go to “share links” and click on “paper short URL” to have the program create a shareable URL link for your graph.
12. How do I re-access graphs I have created?
- Go to “Account tools” and select “My Account” The graphs you have saved will appear, along with a notation as to when they were created.
Works cited in “FAQS about FRED”
Federal Reserve Board of St. Louis. “FRED: Economic Research” Retrieved on October 27, 2018 from https://fred.stlouisfed.org/.
Federal Reserve Board of St. Louis. “FRED: Master 10 tools in 10 minutes” Retrieved on October 27, 2018 from https://news.research.stlouisfed.org/2016/01/fred-master-10-tool-in-10-minutes/
Federal Reserve Board of St. Louis. “Frequently Asked Questions” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/#fred-faq-frequently-asked-questions.
Federal Reserve Board of St. Louis. “Getting to Know FRED: Changing the Time Range” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/fred/graphs/customize-a-fred-graph/change-graph-time-range/
Federal Reserve Board of St. Louis. “Getting to Know FRED: Customize Data, Add Series to Existing Line.” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/fred/graphs/customize-a-fred-graph/data-transformation-add-series-to-existing-line/
Federal Reserve Board of St. Louis. “Getting to Know FRED: Downloading Data from FRED” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/fred/data/downloading/using-the-download-data-link/
Federal Reserve Board of St. Louis. “Getting to Know Fred: Save Your Graphs” Retrieved from https://fredhelp.stlouisfed.org/fred/account/fred-account-features/save/
Federal Reserve Board of St. Louis. “How can I find Data on FRED?” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/#fred-data-how-can-i-find-data-on-fred
Federal Reserve Board of St. Louis. “Getting to Know FRED: How Can I Share My FRED Graph?” Retrieved on October 27, 2018 from https://fredhelp.stlouisfed.org/category/fred/graphs/share-my-fred-graph/
Kahn, Sal. “Calculating Correlation Coefficient r (video with text)” Retrieved on October 27, 2018 from https://www.khanacademy.org/math/ap-statistics/bivariate-data-ap/correlation-coefficient-r/v/cal
Types of Unemployment (handout)
Why “classical” economists thought that there would never be unemployment
Supply and demand diagrams imply that the economy will always arrive at an equilibrium at a price where the supply and demand for labor are equal. In such a situation, everyone who wants to work at the going wage will be able to find work at that wage. In only a slight variation of the traditional supply and demand curves found in the goods markets, the labor supply curve illustrates the amount of labor that workers are willing to offer at different wages, and is assumed here to be upward sloping, while the downward sloping labor demand function illustrates the amount of labor firms are willing to hire at different wages. An equilibrium is found where the two curves intersect at we and Le.
Note that the workings of the competitive market assure that there is always a wage at which the amount of labor supplied at that wage is equal to the amount of labor demanded at that wage. Should a change occur in the market for labor, the classical model of the labor market says that the wage will adjust to bring the market to a new equilibrium. The presence of unemployment says that this adjustment does not take place as predicted.
For many years, it was assumed that any changes in this diagram would lead to smoothe changes in the equilibrium wage and labor employed. The Great Depression, with over 25% unemployment, encouraged economists to begin to doubt this and to search for explanations as to why unemployment might exist in the economy. This handout explores several theories as to why such a condition might exist.
In general, there are three explanations for the existence of unemployment:
Explanations for Unemployment
- Gives overview of three types of unemployment and causes.
- Authored by: Jim Luke (February 19, 2011).
Frictional unemployment is unemployment that results from the freedom found in an economy in which people are free to change jobs and seek different employment. This type of unemployment is of the least concern for economists, as it is not involuntary, but is the result of conscious decisions made by workers to attempt to improve their lives.
- College economics professor defines the different types of unemployment in a blog.
- Authored by: Jim Luke (August 17, 2010).
- Blog post from a site advocating “lifelong learning” about frictional unemployment, including links to other sources.
- Authored by: Mike Moffatt (March 17, 2017).
- Quizlet on frictional unemployment.
Frictional unemployment is often seen in the spring, when high schools and colleges graduate a cohort of students who enter the labor market. It will probably take some time for those graduates to find a job, and, until they do, they are considered to be “unemployed.”
Structural unemployment is the type of unemployment that occurs when the type of labor needed in an economy is changing. In such a situation, there will be less of a need for many of the jobs on which the old economy operated, and more of a need for jobs on which the new economy depends. As the economy adjusts, there will be times of unemployment in the market for labor that was previously in demand in the old economy, and there will be times of labor shortage in the labor market on which the new economy depends.
- Quizlet on structural unemployment
- Video by a professor (with transcript) about Structural Unemployment.
- Authored by: Alex Tabarrok.
Structural unemployment occurs at time of great economic transition. For example, as the industrial revolution took shape towards the end of the 19th century, there was less of a demand for people to make horseshoes, and more of a demand for people to assemble cars. More recently, there is a greater demand for people who are computer literate, and less of a demand for people who are good at typing on a typewriter (remember what those are?). In theory, workers displaced from their old jobs can retrain to take on the new positions opening in the economy, but this may be difficult and take time.
Cyclical unemployment occurs in response to changes in aggregate demand in the economy. This is the kind of unemployment that tormented the United States (and the world) during the Great Depression (and the “Great Recession” of the early 2000s). As demand for labor shifts to the left, the classical model of the labor market predicts that wages will fall and workers will leave the labor market, moving down the supply curve for labor until a new wage is reached where the quantity of labor supplied is equal to the quantity of labor demanded. Unfortunately, it is not always the case that wages fall to a new equilibrium. More often, wages are “sticky downward” (when was the last time you heard of someone taking an actual cut in wages?) and the result is, instead, unemployment. To truly understand this type of unemployment, we need to examine why wages are “sticky.”
When the demand for labor shifts to the left, it is predicted that this will lead to a lower wage level (w’) and to a lower level of equilibrium labor being hired (L’). This, however, is not always the case. There are many situations in which the wage in the labor market does not instantly adjust to a lower, market clearing wage. At the old wage, there will be more labor supplied than will be demanded, causing unemployment. An inability of the wage to fall to a new, lower equilibrium level is known as “sticky wages” and will lead to more labor supplied at the previous wage than is demanded at that wage.
- Video (with transcript) of overview of sticky wages in the labor market.
- Authored by: Tyler Cowen.
Why are there sticky wages?
There are various reasons given for why wages might not fall in the face of declining demand for labor. Some of these include the existence of a minimum wage, “efficiency wages” in which workers are motivated by being paid higher than equilibrium wages,the influence of unions that do not allow for wage decreases, implicit or explicit contracts that do not allow wages to fall or even a desire for employers to not destroy the morale of workers.
- Memo on investing that proposes sticky wages are one explanation for high level of unemployment in the Great Depression.
- Authored by: Lars Christensen (March 11, 2016).
- Definition of “sticky wages” and why they might occur.
- Authored by: Renee Haltom (2013).
- Blog discussion by an economist about how wages may be sticky and some historical context to this phenomena.
- Authored by: David Glasner (February 6, 2014).
- Overview of cyclical unemployment, with links.
- Authored by: Mike Moffat (March 17, 2017).
- From economists at Washington University in St. Louis, discusses the “neoclassical synthesis” predicting that wages will eventually adjust, returning economy to full employment.
- Authored by: Muddy Water Macro.
- Video (with transcript) about Cyclical Unemployment.
- Authored by: Alex Tabarrok.
- Blog providing “clear answers to common questions” takes on cyclical unemployment.
- Authored by: Wise GEEK.
Cyclical unemployment occurs during recessions, such as the one that hit the U.S. in 2008 and the Great Depression, which started in 1929. Cyclical unemployment is found whenever the economy is experiencing a downturn, and this type of unemployment is of particular concern to economists. It is, however, a type of unemployment that economists have found ways to address, using tools of fiscal and monetary policy.