Unemployment (Part 2)

Beyond frictional, structural, cyclical, and overall unemployment, there are a couple more important related calculations to know.

  • Labor Force Participation Rate
  • Natural Rate of Unemployment
  • Discouraged workers

Labor Force Participation Rate explained

While it's self-explanatory in the name, it's important to explicitly state:

The Labor Force Participation Rate (LFPR) tells us what proportion of the population who is able to work is actually working at a given time.

The equation to solve for LFPR looks like this:

LFPR = Labor Force / (Population ≥ 16 yrs old)

What if I'm not given the Labor Force value?

Then calculate LFPR this way:

LFPR = (# Working + # Unemployed) / (Population ≥ 16 yrs old)

We can see the Labor Force still represented here:

LFPR = (# Working + # Unemployed) / (Population ≥ 16 yrs old)

Remember: the Labor Force is composed of those who are working plus those who are unemployed!

Why the "≥ 16 yrs old"? Because...

The government does not include anyone less than 16 years old as a participant in the labor market.

Calculating Labor Force Participation Rate (LFPR)

In Crammerville...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

...how can we find the LFPR?

Well, our labor force is 100...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

LFPR = 100 / Population ≥ 16 yrs old

...and our population is 120 with 5 children...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

...therefore we have a population of 115 people over 16 years old.

LFPR = 100 / 115

This means our LFPR is 87%!

LFPR = 100 / 115 = 87%

In other words, 87% of this country's population who are able to work are actually working!

Natural Rate of Unemployment explained

The natural rate of unemployment is essentially the unemployment rate, but without any cyclical unemployment.

The natural rate of unemployment (Un) is composed of frictional (Uf) and structural (Us) unemployment. It is the minimum sustainable unemployment rate.

The natural rate of unemployment is the "minimum sustainable unemployment rate" because frictional and structural unemployment always are present in an economy.

Why not include cyclical unemployment?

Frictional and structural unemployment naturally occur, which is why they compose the natural rate of unemployment (Un).

Cyclical unemployment, however, is due to economic environment. Sometimes, an economy is producing at its potential output and has no cyclical unemployment. Other times, an economy is in a downturn and has some cyclical unemployment.

The natural rate of unemployment (Un) aims to eliminate these economic environmental factors and provide a measure for unemployment in a given economy without economic downturns / upturns in consideration.

Since the natural rate of unemployment doesn't consider cyclical unemployment, it represents the unemployment when the economy is producing at its potential output (Yp). In other words, when GDP = Potential GDP.

Calculating natural rate of unemployment

To calculate the natural rate of unemployment (Un), we'll use the following formula:

Un% = Uf% + Us%

Remember in Unemployment (Part 1) we found frictional unemployment rate (Uf%) was 4%...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Un% = 4% + Us%

...and the structural unemployment rate (Us%) was 2%...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Un% = 4% + 2%

...therefore, the natural rate of unemployment (Un%) in Crammerville is 6%!

Un% = 4% + 2% = 6%

Discouraged workers explained

A discouraged worker is someone who is eligible for employment and can work but has given up looking for work. They are not in the labor force.

Because discouraged workers are not looking for work, they are nonparticipants in the labor market. Therefore, discouraged workers are NOT counted as unemployed or as a part of the labor force when calculating unemployment.

Calculating discouraged workers

We can find the number of discouraged workers in with the following formula:

Discouraged workers = Country’s population - Labor Force - Child population

In relation to our example, the entire country has a population of 120...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Discouraged workers = 120 - Labor Force - Child population

...with a labor force size of 100...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Discouraged workers = 120 - 100 - Child population

...and 5 children.

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Discouraged workers = 120 - 100 - 5

Therefore, there's 15 discouraged workers!

Discouraged workers = 120 - 100 - 5 = 15

To clarify, these discouraged workers are related to this part of the prompt:

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Now that we’ve determined the number of discouraged workers, we can properly exclude them in our overall unemployment percentage calculation without mistaking them as a part of the labor force!

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ApplyPRACTICE PROBLEMS (PREVIEW ONLY)
ConceptProduction Functions
ConceptUnemployment (Part 1)
ConceptUnemployment (Part 2)
ConceptConsumer Price Index (CPI) (PREVIEW ONLY)
ConceptOkun's Law (PREVIEW ONLY)

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