Question

Labour Market – Definition & measurement of:

•    Unemployment rate

•    Participation rate

•    Involuntary part-time rate

•    Working-age population

• Labour force

•   Employment

• Unemployment Employment-population ratio

• Types of unemployment – e.g., frictional, structural, cyclical

•   Definition of full employment (Tip: full employment does not mean zero unemployment)

•   Natural rate of unemployment

•    Unemployment and the business cycle (Note: unemployment tends to rise when the economy is contracting (in recession) and fall when the economy is in an expansion.

Answer 1

• Labor market is basically the supply and demand for labor which results in an equilibrium wage and an equilibrium level of labor employment. Employers are the ones who demand labor because they want to hire people in their company. Employees are the people who are supplying their labor as they work for the company.

• Unemployment rate refers to the proportion of the working population who is unemployed ( i.e. not able to get jobs in spite of actively looking for jobs at the prevailing wage rate) to the total labor force . This is often represented in percentage forms.

• Participation rate refers to the proportion of the working population (typically between 15 to 60 years , maybe upto 65 years in some cases) who are working or are interested to work, to the total working population.

• Involuntary part time rate refers to the proportion of workers in the labor force who are working only part time because they can't get a full time job.

• Working age population refers to the people lying between the working age range (i.e. 15 to 60, or 65 years).

• Labor force refers to the proportion of the total population in the economy who is capable of working. This is typically considered to be the people lying within the age 15 to 60 (or sometimes 65) years.

• Employment basically refers to the fact that you have a job and are employed by someone, who pays you a fixed wage in exchange for your labor services that you provide.

• Unemployed Employed-population ration refers to the proportion of people either employed or unemployed to the total population of the country.

• Frictional Unemployment refers to the unemployment in the economy that arises due to labor changing jobs. This is a temporary feature and is not that severe as other forms of unemployment.

• Structural Unemployment refers to the unemployment that arises due to the fact that the workers simply doesn't have the skills which the employers want from them. This is a more severe kind of unemployment because it shows that the labor force is extremely unskilled, and hence not suited for jobs that requires specific skills and talents.

• Cyclical unemployment refers to the unemployment that happens due to cyclical fluctuations in the economy.

• Full employment refers to the fact that the economy is in a situation where all the people who are willing to work at the prevailing wage rate get to work. Note that this doesn't necessarily mean zero unemployment because there maybe some people who are not willing to work at the prevailing wage rate, or maybe are changing jobs. Those people are not included in the definition.

• Natural rate of unemployment refers to the unemployment that happens due to people not willing to work at the prevailing wage rate, or maybe are changing jobs. An economy, in equilibrium, will always have a part of its working population in this category.

• Business cycles refer to the cyclical fluctuations of boom and recession that is a common feature of a capitalist economy.

When there is a boom, the aggregate demand rises. Hence, producers are willing to produce more output and earn a higher profit. So, they demand more workers, which leads to an increase in employment (or fall in unemployment). Conversely, when the economy is in a recession, the aggregate demand falls. Producers will produce less and lay off workers as demand for labor falls. This leads to an increase in unemployment in the economy.