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Unemployment warm-up

  • Let’s get this out of the way. Who YOU think is unemployed, who the BLS thinks is unemployed, and who receives unemployment compensation are three different groups with lots of overlap.
  • Your definition of unemployed might be indicated by the circle.
  • The BLS could be the triangle.
  • The rectangle being those receiving unemployment compensation.
  • The over-lap of the three is striped.

Unemployment warm-up

  • What kind of numbers are involved in calculating the different unemployment statistics?


  • With that introduction…here we go.

Unemployment Basics

  • Unemployed does not just mean “without a job”.
  • There are 6 criteria that must be met to be counted as U-3* unemployed by the Bureau of Labor Statistics
  • *The BLS has 6 measurements of unemployment. U-1 being the narrowest definition of unemployed,and U-6 the most inclusive of unemployed. U-3 in the middle is what the AP uses without ever mentioning it.

Unemployment (U-3)

  • You are not unemployed IF YOU ARE:
  • 1. under the age of 16.
  • 2. not looking for a job.
  • 3. expected to be recalled (weather, strike, etc).
  • 4. starting a new job with in 30 days.
  • 5. working at least 1 hr/wk for pay.
  • 6. working at least 15 hrs/wk as a volunteer or in a family business.
  • AP exam uses these.

Unemployment types

  • Once a person is counted as unemployed their unemployment is classified as one of three types of unemployment
  • Structural unemployment: either your job skills are obsolete, or you and the job are in different geographic regions of the nation.
  • Cyclical unemployment: your job disappeared due to a nation-wide slow down.
  • Frictional unemployment: all others. Typically you are between two stages of your life: a job change, entering labor force (new graduate), reentering labor force (children are now in school, retired and now unretired).
  • The AP loves to test these.

Unemployment Basics

  • There is a fourth type of unemployment.
  • Seasonal
  • Those living in the northern tier of states know that road, house, and many other types of building stops about November 15th each year not to restart until after March 1.
  • You might think of this as ‘mini-cyclical unemployment’ but don’t use the word cyclic as it is reserved and used to describe business cycle caused fluctuations in unemployment.

General information

  • What does the AP exam test? Easier to say what it won’t. It will not test US specific information. Think of the AP exam as an international exam. They will ask about types of unemployment but not the agency that measures it, nor nation specific unemployment rates.
  • US data…most macro data are solid starting as of 1947. Anything prior maybe good but was constructed after the fact.
  • Next slide…is a perfect example of both, US specific and post-1946.

Unemployment historic

  • Non-AP, but gives you an historic perspective.

Unemployment Basics

  • Besides basic (U-3)unemployment, this unit’s topic requires you to be familiar with:
  • Labor force,
  • Labor force participation rate,
  • Discouraged workers,
  • Duration of unemployment (?),
  • Under-employment,
  • The Natural rate of Unemployment.

Unemployment Basics

  • The official unemployment rate is the number unemployed divided by the labor force, not by the general population.

Unemployment Basics

  • Labor force
  • The sum of those employed and those not employed but looking for employment age 16+. (AP)
  • That number is over 150 millions in the USA as of 2014. (not AP*)
  • *Most generally, US specific information IS NOT on the AP economics exam. Think of the exam as a USA/Canada exam.

Unemployment Basics

  • Labor force participation rate:
  • This is the labor force divided by the total working age population of a nation. (AP)
  • The total US population age 16+ is about 250 millions in 2014. (not AP)
  • The Labor Force is about 150 millions.
  • 150,000,000
  • 250,000,000
  • 60%
  • (not AP)
  • As of Sept. 2014 it is at 62.7%

Labor Force Participation Rate

  • The rise from 1965 to 1988 is attributable to a higher rate of women in the labor force and baby boomers coming of age. A good portion of the decline since 2008 is the exiting of the baby boomers.

Unemployment Basics

  • Discouraged worker: it is not uncommon for a person who has been unemployed for a along time, to stop looking for employment and dropout of the labor force.
  • #1. Losing a job is depressing enough.
  • #2. Looking for work, and being turned down is VERY depressing.

Unemployment Basics

  • Duration of Unemployment:
  • The average length of time, measured in weeks, between when a person loses their job and when they again find employment.
  • Roughly speaking, if the duration of unemployment doubles, the unemployment rate will also double.
  • While the AP exam might use the phrase ‘Duration of Unemployment’ I can not find an example where it was the focus of a multiple choice question. A few textbooks define it and not much more, so AP testing? Probably, NO.

Duration of Unemployment

  • Non-AP, but gives you an historic view.


  • This describes a worker employed at a job requiring significantly less than that worker’s skill level.
  • We like to think of a Philosophy PhD driving a taxi or a college grad bagging groceries.

The Natural Rate of Unemployment

  • This is a rather different animal and will be covered later in the semester with the Phillips curve.
  • It is the unemployment rate which is neither so high that wages drop nor so low that wages rise. Think about that a moment.
  • Often thought to be 5.5% or 6% for the USA.

The Natural Rate of Unemployment

  • The Natural Rate of Unemployment (NRU) is the sum of: frictional and structural unemployment.
  • Notice that cyclical unemployment is not part of NRU as the NRU occurs when the economy is at full employment. (Once again about 5.5 or 6%)
  • The NRU is often included inside a Free Response Question (essay).

The Natural Rate of Unemployment

  • The Natural Rate of Unemployment is often set equal to these:
  • Full employment (94 to 95.5% employment rate)
  • Y*(that level of NI which occurs at full employment)
  • Long-run Potential GDP (NI at LR-AS)
  • NAIRU (non-accelerating inflationary rate of unemployment)
  • To be covered with the Phillips curve. The NRU is often included inside a Free Response Question (essay).

Unemployment: review

Practice questions

  • These are indicative of the level of knowledge about unemployment required to be a successful AP candidate.
  • On rare occasion unemployment definitions happen on Free Response Questions. More often FRQ ask about causes for changes in unemployment (employment) levels.
  • Other than specific unemployment questions it is often better to respond to think in terms of employment.

U-3 question 1

  • Labor Market Data for Country 34
  • (in thousands of persons)
  • Population 190
  • Employed 93
  • Unemployed 7
  • Not in labor force 90
  • Based on the information in the table above, what is the unemployment rate for Country X?
  • (A) 3.68%
  • (B) 7.00%
  • (C) 7.20%
  • (D) 7.77%
  • (E) 7.53%

U-3 question 2

  • The official unemployment rate understates the unemployment level in the economy because the official unemployment rate 

  • (A) ignores the duration of unemployment
  • (B) ignores underemployed and discouraged 

  • (C) includes jobs created by the underground 

  • (D) excludes all unemployed teenagers

  • (E) excludes structurally unemployed workers

U-3 question 3

  • The unemployment rate is calculated using the numbers of people
  • (A) not working divided by the population
  • (B) not working divided by the number of people working both full-time and part-time
  • (C) Not working and working part-time
but actively seeking full-time employment divided by the number of people in the labor force
  • (D) not working but actively seeking employment divided by the number of people in the labor force
  • (E) in the labor force divided by the population

U-3 question 4

  • Structural unemployment is best described as unemployment arising from 

  • (A) the elimination of jobs as a result of technological change 

  • (B) an increase in the number of workers searching for better-paying jobs
  • (C) an increase in the number of jobs demanding unskilled labor 

  • (D) the temporary reduction of jobs during a downturn in the business cycle
  • (E) the reduction in jobs due to seasonal changes in demand

U-3 question 5

  • Which of the following will be counted as unemployed by the United States Bureau of Labor Statistics?
  • (A) Persons who quit their previous jobs to stay at home to care for sick parents
  • (B) Persons who were laid off from their previous jobs and have not applied for a job in two years
  • (C) Persons who have given up looking for jobs after long searches
  • (D) Persons who were fired from their previous jobs and are actively applying for work
  • (E) Persons who quit their previous jobs to start their own businesses

U-3 question 6

  • Which type of unemployment would increase if workers lost their jobs because of a recession?
  • (A) Cyclical
  • (B) Frictional
  • (C) Seasonal
  • (D) Search
  • (E) Structural

U-3 question 7

  • Frictional unemployment occurs when which of the following happens?
  • (A) A worker is replaced by robots on factory assembly lines.
  • (B) A worker voluntarily quits a job to search for a better one.
  • (C) A worker is laid off because of a downturn in economic activity. 

  • (D) A worker undergoes on-the-job training.
  • (E) A worker switches from working full-time to part-time.

U-3 question 8

  • The natural rate of unemployment can be defined as the
  • (A) unemployment rate consistent with accelerating inflation
  • (B) unemployment rate of the least-skilled workers
  • (C) The unemployment rate which doesn’t change wage rates
  • (D) labor force participation rate plus the unemployment rate
  • (E) labor force participation rate minus the unemployment rate

U-3 question 9

  • If unemployed workers become discouraged and give up trying to find work, the number of workers
  • employed and the unemployment rate would change in which of the following ways?
  • Number of Unemployment
  • Workers Employed Rate
  • (A) Decrease Decrease
  • (B) Decrease Increase
  • (C) Decrease No change
  • (D) No change Decrease
  • (E) No change Increase

Answers 1-9

  • So that’s about it about for unemployment.

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