Labor Market: Measures

00:01 Hello and welcome back to your online presentation of macroeconomics.

00:06 My name is James DeNicco.

00:07 This presentation will be about labor market measures.

00:11 So in this presentation we're going to go over the third of our three main macroeconomic variables that we use to measure the health of the economy.

00:20 We concentrate in here on unemployment rates, but we'll also look at other labor market measures.

00:26 So why does this matter for the health of the economy? Well, our workforce is the engine of any economy.

00:32 So you want to see how many people that want to work are able to get out there and work or how many people are participating in the labor market.

00:40 So let's dive right in first.

00:44 What are we going to be looking at? So what are the different measures of the strength of the labor market? How do we calculate unemployment rates, which is usually the headline variable that you'll see in the news if you like to watch the news on any given day, they talk about what the unemployment rate is.

01:01 It's a good measure to use over time, but like all our other manmade measures, it is flawed.

01:07 It misses some of the weakness in labor markets or it misses some of the pain of those who can't find jobs due to the rules that we put on calculating the unemployment rate.

01:18 Where does unemployment come from and what types of unemployment are out there? What are some alternative measures? The unemployment rate, if it's a flawed variable, it's a flawed measure of the health of the economy. What are some other ones that can fill in the gaps? And finally, what are the costs of unemployment? How does it affect our economy when people aren't able to find work? So first, some of our definitions.

01:44 What is our labor force? Well, we're going to define our labor force as the employed plus the unemployed. It's those that want to work out there in the economy, those that want to work and find jobs, the employed plus those that want to find work and can't find jobs, the unemployed.

02:03 So not in the labor force is everybody else.

02:06 So let's get some specific definitions that we use the calculator variables of employment and unemployment.

02:14 So these definitions in the United States come from the Bureau of Labor Statistics.

02:19 They're the ones that calculate our unemployment rate.

02:22 So the employee, anybody who's worked full or part time during the past week or is sick or on vacation from their regular job.

02:31 So if you were fired two days ago, the Bureau of Labor Statistics still considers you employed because you work sometimes.

02:40 And sometime in the past week, whenever you're going to have these accounting rules, you have to have a cut off at some point to keep the measures consistent.

02:48 The unemployed, there are people that did not work in the past week but made some effort to find work in the past four weeks.

02:56 So if you haven't made an effort to look for a job in the past four weeks and one day you're not considered unemployed even though you don't have a job, and maybe you would like a job if you're not out there actively searching in the past four weeks, you're not considered unemployed.

03:14 These are the accounting rules that we use to measure our different rates of the labor market. So unemployment, what are some reasons people can be unemployed? Well, first, you can be replaced by technology.

03:28 So you take a look at all the ATMs out there.

03:31 For every ATM out there, there might be a bank teller that has to find another job. So you could be replaced by technology.

03:39 So in the micro economy, that's bad for some people.

03:42 It might be good for other people at the macro economy.

03:45 However, over time, we normally look at increases in technology as a good thing for workers because with more technology, our workers become more efficient. If our workers are more efficient, we're going to want more workers.

04:00 However, there's going to be a transition period in there.

04:03 So when the bank teller gets replaced by the ATM, that job might go away. But there might be another job for people that fixed ATM machines.

04:13 But that doesn't do very much for the bank teller, who's probably not happy because they lost their job. Some people do get replaced by technology, or you could get fired from your job, as Donald Trump says, you're fired.

04:26 That usually has a negative connotation.

04:28 You did something bad so that they got rid of you.

04:32 You hope it's because you did something bad.

04:35 You hope it's not because the guy they want to bring in has an uncle who works for the company. They just want to replace you.

04:41 You hope you're getting fired because you didn't do a good job.

04:44 It usually has a negative connotation to it, or it could just be part of cutbacks. So a company goes through a recession and they can't afford to hire as many people, so they're cutting back.

04:56 They have to let you go.

04:58 Maybe it's just the layoff.

04:59 Maybe they plan to bring you back later when things get better.

05:03 But it's due to the business model decision, and it's not anything you did.

05:07 The company just can't afford to hire you and maximize their profits at the same time. So those are three reasons that you might be unemployed.

05:17 Now let's take a look at some of these measures we use for the health of the economy through the labor market.

05:23 The first one, our headline that you see in the news all the time is our unemployment rate. So how do we construct this unemployment rate? Well, the unemployment rate equals the unemployed over our labor force are the unemployed over the employed plus the unemployed.

05:39 We talked before that the labor force are those that want to work the employed or those that want to work and find work, the unemployed or those that are looking for work and cannot find work.

05:50 So the pain that the unemployment rate captures in the labor market are the percentage of those that want to work, that cannot find work.

05:59 We also have our participation rate.

06:02 That's a little bit of a different measure, the participation rate, that's the labor force divided by the working age population.

06:10 So what that is looking at is the percentage of people that are eligible to work, that want to work, those that are participating in the labor market. So they look at two different things, but they're both measures of the strength of an economy.

06:25 Again, the unemployment rate, the percentage of those that want to work, that cannot find work, they want to be out there.

06:32 They want to have a job.

06:33 They want to be productive and participating in the labor market, but they can't find work.

06:39 The participation rate, on the other hand, that's the percentage of those that want to work out of those that are eligible to work.

06:47 So those are two big measures that we look at for the strength of the economy through the labor market.

06:55 So there's different types of unemployment.

06:58 First, we're going to talk about is frictional unemployment.

07:02 So frictional unemployment from the standpoint of a policymaker.

07:06 Isn't as big of a deal.

07:08 Unemployment's always a big deal.

07:09 You don't want people unemployed as few unemployed people out there as possible.

07:13 That's what you want.

07:14 However, some unemployment is unavoidable and that's frictional unemployment. It just takes time sometimes to find a job.

07:22 You graduate from college, you have to apply to jobs.

07:26 They have to receive your application.

07:29 You have to set up an interview.

07:30 You have to go to the interview, you have to talk it through, and then you have to come to a deal that works for both of you so that you accept that job.

07:38 Frictional employment just comes through the job search.

07:42 It's just part of searching for a job it's really hard to do away with.

07:47 There's very few policies that are able to do away with frictional unemployment. Frictional unemployment can change out there.

07:56 The rate of people that are frictionally unemployed, it can change different things, change the job search, things like the Internet.

08:03 That changes the job search.

08:05 Now, maybe it's easier for workers and firms to find each other.

08:08 You have this avenue to go through.

08:11 On the other hand, maybe now you have more people applying for jobs because of the Internet. That makes it harder for firms to find the matches that they want.

08:20 So it may take longer due to that.

08:22 So there's going to be things out there that affect frictional unemployment.

08:25 But from the policy makers standpoint, there's not much he can really do about frictional unemployment.

08:32 So the second type of unemployment, which there are policy prescriptions for, is going to be our structural unemployment.

08:39 Now, structural unemployment is going to arise because of a mismatch between the skills of the worker and what the firm or the business, the corporation, what the businesses are looking for.

08:51 So an example would be a guy that works in a steel mill his whole life.

08:55 Well, that steel mill shuts down and there's no more jobs out there for a steel worker. The only jobs out there are an item or information technology working with computers.

09:07 Well, this guy has worked in a steel mill his whole life.

09:09 Maybe he's not really good on computers, so there's just no job out there for him to find. That's a little bit more of an insidious type of unemployment, but there are policy prescriptions for it.

09:21 There's training and education programs.

09:24 You need to retrain people to give them the skills so that workers want them to come work for them. Give them the skills that firms are looking for.

09:35 So there are policy prescriptions for it, but it is difficult sometimes it's hard to get yourself retrained into those skills that firms want it.

09:44 Sometimes it's hard for.

09:45 An older guy in his sixties worked in a steel mill his whole life to go back and become proficient on a computer.

09:52 So that's a more difficult type of unemployment, that structural unemployment, and sometimes it's very long lasting.

10:00 Our third type of unemployment here is going to be our cyclical unemployment.

10:04 So that's due to swings in the economy.

10:07 That's due to our recessions and our expansions.

10:10 That's due to the status of the economy at that time.

10:14 Is the economy doing well or is it doing poorly? In times of recession, you're going to see high levels of cyclical unemployment in boom times or expansions.

10:24 You might see low levels of cyclical unemployment.

10:27 Tactically, how do we calculate cyclical unemployment? Well, it's going to be the actual rate of unemployment, minus our structural unemployment, minus our frictional unemployment.

10:40 Or it's our actual unemployment rate minus our natural rate of unemployment. So the natural rate of unemployment is structural plus frictional unemployment.

10:51 We consider those to our natural rate of unemployment.

10:55 Anything above and beyond that is going to be our cyclical rate of unemployment. So again, it's the actual rate minus our natural rate or the actual rate minus the frictional rate, minus the structural rate. So let's do a little example here.

11:12 So the actual unemployment rate in the economy is 10%.

11:16 The structural unemployment rate is 3% and the frictional unemployment rate is 4%. What is the natural rate of unemployment and what is the cyclical rate of unemployment? Well, again, a natural rate of unemployment.

11:29 It's our structural plus our frictional unemployment.

11:32 So it's going to be what is it here? Our 3% plus our 4% is 7%.

11:38 Our natural rate is 7%.

11:40 So we must be in a bit of a downturn in the economy here because we're going to have cyclical unemployment above and beyond that.

11:48 So our actual rate is 10%, our natural rate is 7%.

11:53 That leaves our cyclical rate of unemployment at 3%.

11:58 So those are three types of unemployment, what they mean, what's involved in them, and the policy prescriptions for them.

12:06 Cyclical rate of unemployment.

12:07 There are policy prescriptions.

12:09 What can the government do to try to speed up a recovery? So we see a lot about that.

12:14 We see a lot of policy aimed at that.

12:17 There's a lot of argument about what's best for that, how to speed up an economy.

12:22 All right. So there's other measures as well besides the unemployment rate.

12:26 I said the unemployment rate misses a lot of pain out there in the economy.

12:30 So if you haven't looked for a job in four weeks, say you looked four weeks in a day ago, you're not considered unemployed.

12:38 You won't be calculated in that unemployment rate.

12:41 You're pain will be missed by the unemployment rate.

12:44 So we have more expansive measures.

12:47 One of those more expansive measures is to include the marginally attached.

12:52 So who are these people? Are those persons not in the labor force, but they do want to work.

12:59 They haven't looked for a job in the past four weeks, but they have looked for a job in the past 12 months.

13:05 So we're just expanding the time period that they could have looked for a job.

13:10 They looked in the past 12 months, but they haven't looked in the past four weeks.

13:14 They still want to work and they can't find a job.

13:17 So if you expand that measure, the pain, the people, the rate of people experiencing that labor market weakness is going to go up.

13:25 These are our marginally attached workers.

13:28 We also have what we call our discouraged workers.

13:31 These are actually a subset of our marginally attached workers.

13:35 But these workers, they're not looking for work because they don't think there's anything out there for them.

13:41 So they were not looking for work specifically because they believe no jobs are available or there are none for which they would actually qualify.

13:51 These people are down on themselves.

13:53 You see the guy sitting in his TV's bummed out and you know, nobody loves him, everybody hates him. He can't find a job because there's just nothing he's qualified for. This is a sad subset of the marginally attached.

14:07 But these people, their pain is also missed in the unemployment rate because they haven't looked in the past four weeks, but they have looked in the past 12 months. We also have the involuntary part time workers. So these people, their pain is also missed with the unemployment rate. So it's one thing if you want to work part time, want to make a little extra money around the house- for around the house, it's Christmas time.

14:33 You want to work part time so you can buy kids presents or you retired.

14:37 You just want to work part time to have a little bit more money to take your bowling league on Monday night.

14:42 That's one thing.

14:43 But if you want to work full time and you can only find part time, work within your pain is going to be missed by the unemployment rate.

14:51 The weakness in the labor market is going to be understated.

14:56 These people, they want to work full time, but market conditions don't allow it.

15:00 That's why we call them part time for economic reasons.

15:04 They can't type, they can't find full time work.

15:06 So they just accept this part time work.

15:09 They're considered employed just as much as somebody who's fully employed full time.

15:15 So the unemployment rate misses that.

15:17 So a more expansive measure that captures the weakness in the labor market better would include these involuntary part time workers.

15:27 So again, the unemployment rate is a manmade measure.

15:30 It's flawed, it's not perfect.

15:32 But the people that do calculate these things, they do their best to adapt.

15:37 So they have these different, more expansive.

15:39 Measures to cover the weakness in the labour market.

15:44 All right. So there's some costs of unemployment.

15:46 Why do we care? Why is it a measure of the health of the economy? Well, when people are unemployed, there's costs associated with that.

15:52 So first, we have some of these direct fiscal impacts.

15:56 One is lost income, right? So as you're not working, you're not earning a wage.

16:02 When you can't earn a wage, you can't consume.

16:06 Consumption is part of GDP.

16:08 It's part of a growing economy.

16:10 So when you're not working, your consumption is going to go down because you have less income. Also, people lose their job skills as they're out of work.

16:19 Times are always changing.

16:21 Software is always changing.

16:22 Technology is always changing.

16:24 Procedures are always changing.

16:26 The longer you're out of the workforce, your job skills are going to be diminished.

16:31 So when you go back to work, you're going to have a less productive workforce.

16:34 It's going to be costly to get you trained up for the next job.

16:38 Also, as you're out of work longer and your skills go away, it's going to be harder and harder to find a job.

16:45 And we have lost tax revenue.

16:47 So as people are out of work, they're not earning a wage that we can tax for all the things we want to spend.

16:54 On top of that, when you're out of work, you also might have to collect unemployment benefits and social, so other types of social benefits to get you through those bad times. So the government is spending more money and collecting less money.

17:08 So that hurts the budget, that hurts the fiscal budget.

17:11 So these are some of our direct fiscal impacts.

17:16 We also have some other type of costs.

17:18 We have psychological costs.

17:20 We don't care just about money and economics.

17:23 We care about the well-being of people.

17:25 And there's psychological factors that play into the well-being of people.

17:29 So when you're unemployed, it makes you feel bummed out, right? It hurts your psyche.

17:35 It hurts your self-esteem.

17:36 People that have jobs, they feel good about themselves.

17:39 They feel productive.

17:40 They feel like they're part of something.

17:41 They're out there working. They're saying, Yahoo, I feel good.

17:45 Those that can't find a job, it can be really tough on them can really hurt that self esteem. You have this poor guy here that can't even get out of bed.

17:53 So those are other costs of unemployment.

17:55 It hurts you psychologically when you can't find a job.

17:59 There's also social costs.

18:01 There's numerous social costs.

18:02 We find correlations between crime and high unemployment and bad economies. When people can't afford to buy their families the food they need, they're more likely to go out there to commit crimes so that they can feed their family.

18:16 I'm sure not all the crimes committed are as horrible as that one to feed your family. But you see the linkages in bad times.

18:24 When people don't have the money they need, they get desperate and they do things they might otherwise not do.

18:30 You also have social tensions, right? The proletariat in the bourgeoisie from the Communist Manifesto.

18:37 In periods of high unemployment and high inequality, there's going to be social unrest.

18:42 You're going to see people want changes.

18:45 It might not always be as as exaggerated or as intense as a communist revolution, but you'll see people get motivated.

18:53 They'll go out there and they'll push for social change.

18:57 There's also homelessness, homelessness associated with high unemployment rates.

19:01 If you can't afford your home or your mortgage or your rent, you might not be able to stay in there.

19:07 Your family might have to leave there.

19:09 There's a famous picture out there of homelessness with a family that's living in their cars. You can go Google it and look at it.

19:16 It's about as sad of picture as you can imagine.

19:18 You want as few of those people out there as possible.

19:22 You want people working and earning wages so that they can take care of their families and stay in their homes.

19:28 We see high rates of drug abuse associated with unemployment.

19:31 So you're unemployed, your self esteem is down.

19:34 You're not doing very well.

19:36 You're not feeling good about yourself.

19:38 You turn to drugs.

19:39 If you have children or a family, that's not a good thing either.

19:42 Those social costs, the real cost of unemployment.

19:46 And you also see correlations between domestic violence and unemployment.

19:51 So as you're unemployed and you're home and things aren't going well, sometimes people they can't handle it.

19:59 And then bad things come about and you do things you otherwise might not do.

20:03 So we have this long list of social costs associated with unemployment. Lastly, we have these political costs.

20:11 You'd be hard pressed to tell me that when there's a high unemployment rate, that the party in power isn't going to be punished at the next election at the ballot box the next time people have a chance to go out there and vote.

20:24 If there's large numbers of people out there that want to find work and can't find work, they're going to be upset about that and they're going to punish the party in charge. Now, if the party in charge, if their ideas on social values and other issues match up with what you feel on social issues and values.

20:41 Well, because of that.

20:44 They might get voted out of office.

20:45 And good luck getting your agenda through that.

20:48 So we see there's political cost also associated with these high rates of unemployment. So that is our presentation for labor market measures.

20:57 What have we done here? Well, we've defined who the employed and who the unemployed are.

21:03 Both of them want to work.

21:04 The employee, they find the jobs, the unemployment.

21:07 They haven't found the jobs.

21:09 We know how to calculate unemployment rates and participation rates.

21:13 The unemployment rates, those are the percentage of people that want to work, that can't find work.

21:18 The participation rate, it's the percentage of those eligible eligible to work who want to work.

21:25 We know how alternative measures.

21:27 We know alternative measures to the standard unemployment rate.

21:30 The unemployment rate is a manmade measure.

21:33 Again, it's not perfect.

21:34 So people have tried to compensate for this with these more expansive measures.

21:39 And also, we know the costs associated with unemployment.

21:42 We know why we care about this.

21:43 There's many costs from fiscal costs, psychological costs, the social costs, the political cost, all are important to the well-being of an economy.

21:53 Thank you very much.