Holt 7525-9 S15_IT

Full Employment
Though unemployment of labor is a major problem, the goal for the unemployment rate is not to
achieve an unemployment rate of zero. An unemployment rate of zero is not a practical possibility
in a market economy. The goal for the unemployment rate is to achieve full employment (or the
natural unemployment rate). The natural unemployment rate is the lowest unemployment rate
that can be sustained without causing increasing inflation. When the unemployment rate is at the
natural unemployment rate, this is considered to be “full employment”.
Measuring Unemployment
Each month the Bureau of Labor Statistics gathers information to determine the size of the labor
force, the number of unemployed workers, and the unemployment rate. In determining these
statistics, only persons 16 years old and older are included. Thus, a 15-year-old movie star
earning millions of dollars is not counted as employed. A 15-year-old who loses her job delivering
newspapers is not counted as unemployed. Those under age 16 are not counted as employed or
unemployed. Those 16 years old and older are classified into one of three categories:
1. Employed – those with paying jobs. The job does not have to be full-time. A musician laid-off
from the local orchestra and working part-time as a janitor is counted as employed.
2. Unemployed – those without paying jobs who are actively seeking employment. A person
without a paying job who has become discouraged and quit seeking a job is not counted as
unemployed.
3. Not in the labor force. Everyone who does not fall into category 1. or category 2. is not in the
labor force and has no effect on the unemployment statistics.
The labor force is the sum of the number of people employed plus the number unemployed.
Example 7A: Assume that last month there were 246 million persons aged 16 and older. Of
these, 146 million had paying jobs, 10 million did not have paying jobs, but were actively seeking
employment, 6 million wanted to work but had not sought employment in the previous four weeks,
and the other 84 million were retired or were otherwise not interested in employment. What was
the size of the labor force last month? Answer; 156 million, as computed below. Only those who
are employed (146 million) or unemployed (10 million) are included in the labor force. Potential
workers who are not actively seeking employment are not included in the labor force.
Labor Force = Employed + Unemployed = 146 million + 10 million = 156 million
The unemployment rate is the percentage of the labor force that is unemployed. It is calculated by
dividing the number of people unemployed by the number of people in the labor force.
Example 7B: Based on the information in Example 7A, what is the unemployment rate?
Unemployment Rate = Unemployed ÷ Labor Force = 10 million ÷ 156 million = .064 or
6.4%
Types of Unemployment
The basic economic problem is scarcity. In an ideal world, the unemployment rate would be zero.
All available members of the labor force would be employed. But an unemployment rate of zero is
not a practical possibility in a market economy. Even in the best economic conditions (what
economists call “full employment”), the unemployment rate will not be zero. We see why this is
true as we look at the types of unemployment.
Types of unemployment:
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
1. Frictional unemployment – due to the time required to match workers with jobs. In frictional
unemployment, workers are available and jobs are available. The workers have the skills
required in the available jobs. But it takes time to match the available workers with the
4 - 5 Inflation and Unemployment