Chapter 7

Unemployment: Wasting Talent and Productivity

IN THIS CHAPTER

Constructing unemployment measures

Classifying different types of unemployment

Finding the natural rate of unemployment

Quantifying the costs of unemployment

If you’ve ever known someone who’s been unemployed or faced a spell of unemployment yourself, you know that it can be a disheartening experience. Despite being willing and able to do plenty of jobs in return for the market wage, no job materializes. Time passes. Bills mount. And self-confidence evaporates.

That of course was the fate of millions of U.S. workers in the depths of the Great Depression. In 1932 the official unemployment rate reached 23.6 percent. Eight years later, the rate stood at 14.6 percent — down considerably from the peak but still much higher than normal. Fortunately, the economic buildup associated with the U.S. entry into the Second World War helped restore the labor market to health, and by 1942 the unemployment rate had fallen to 4.7 percent. However, it has risen to notably higher levels and stayed there for a while during each subsequent recession — reaching over 10 percent in early 1983 and about 10 percent in early 2010.

An enduring question in macroeconomics is: Why? How can the labor market, and by implication, the overall economy stay “broken” for so long? Why does Adam Smith’s “invisible hand” not move to restore full employment? In many ways, it was the effort to answer that question during the Depression that started ...

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