Warning: These handouts are NOT a substitute for class lectures.

ALL concepts and examples illustrated

in class are required for the Midterm Exam!!!

Handout 1 - Measuring Employment and Unemployment

Labor Market Indicators – These show the condition of the labor market. There are 3 types of labor
market indicators:

1. Unemployment Rate
2. Labor Force Participation Rate
3. Employment-to-Population Ratio
 Unemployment Rate – Indicates the extent to which people who want jobs can’t find them.

Unemployment Rate = No. of People Unemployed x 100%

Civilian Labor Force

Where,
Civilian Labor Force = No. of people Employed + No. of people Unemployed

 Labor Force Participation Rate – Percentage of Civilian Non-institutional population who are
members of the labor force. It indicates the willingness of people of working age to take jobs.

Labor Force Participation Rate = Civilian Labor Force x 100%

Civilian Non-Institutional Population

 Employment-to-Population Ratio – Percentage of people of working age who have jobs. It

indicates availability of jobs and degree of match between people’s skills and jobs.

Employment to = No. of people Employed x 100%

Population Ratio Civilian Non-Institutional Population

Increase in the employment-to-population ratio means the economy has created jobs at a
faster rate than the civilian non-institutional population has grown. Its fluctuations are in the
opposite direction to changes in the unemployment rate. It falls during recession and
increases during expansion.

Sources of Unemployment:

Unemployment can occur in the following ways:

1. Job losers
2. Job leavers
3. Entrants into the Labor Force
4. Re-entrants into the Labor Force

Duration of Unemployment: Average duration of unemployment varies over the business cycle.

ECO104: Introduction to Macroeconomics

Faculty: Raisa Afsana (RsA)
 Warning: These handouts are NOT a substitute for class lectures. ALL concepts and examples illustrated
in class are required for the Midterm Exam!!!

Demographics of Unemployment:

 Unemployment is highest among young workers and ethnic minorities

 High rates of job turnover among the young
 Most young people are hired as temporary workers higher job loss

Types of Unemployment:

1. Frictional Unemployment – This is created from people entering and leaving the labor force
and the ongoing creation and destruction of jobs. It arises due to job searching by individuals
and firms and is a healthy sign of a growing economy. However, this is often induced and
prolonged by unemployment benefits and unemployment insurance.
2. Structural Unemployment – This arises from change in skills needed to perform jobs, due to
technological changes or international competition. Duration is usually longer than frictional
unemployment because workers need to re-train or re-locate. It can be a serious long-term
problem and affects older workers the most.
3. Cyclical Unemployment – This occurs due to the business cycle. It increases during recession
and decreases during expansion.

Full Employment Level of Unemployment:

 This is also known as the “Natural Rate of Unemployment”

 There is no cyclical unemployment
 All unemployment is either structural or frictional
Real
GDP
Potential
GDP

Actual
GDP
 Unemployment Rate fluctuates around the
Natural Rate of Unemployment as real GDP
fluctuates around potential GDP.
Year
 Real GDP equals Potential GDP when there is
Unemployment full employment (i.e. unemployment rate
Rate equals to natural rate of unemployment)
 If Unemployment < Natural Rate,
Real GDP > Potential GDP
Unemployment  If Unemployment > Natural Rate,
Rate Real GDP < Potential GDP
Natural Rate of
Unemployment

Year

ECO104: Introduction to Macroeconomics

Faculty: Raisa Afsana (RsA)