Department of Economics, North South University

Semester: Summer 2013

ECO 104 (NMh) - Chapter 6 (Parkin)
1. Breaking down the population into different parts (Fig 6.1). Draw diagram.
- The population is divided into two parts, "working age population" and the "young and
institutionalized". The latter includes all those who are younger than 16 years, and those who are
in jail, hospital, or other form of institutional care (asylum). Rest of the population is
- Of those who are able and allowed to work ("working age population"), there are three groups:
employed, unemployed and not in labour force.
- An employed person is one who has a full time or a part time job.
- An unemployed person is one who is available for work, and satisfies one of the following
criteria; waiting to be called back to a job from which he has been laid off, waiting to start a job
within 30 days or has looked for work in the last month.
- Not everyone who doesn't have a job looks for one, and these people form the third group, " not
in labour force". An interesting component of this group are "discouraged workers", those who
are willing and able to work but have not made specific efforts to find a job within the last
month.
- The employed and the unemployed together form the labour force.
2. Three Labour Market Indicators
- We need to determine the percentage of people who are actively looking for work but can't find
them. This gives us a snapshot of the economy's ability to provide jobs as demanded.
Unemployment rate = (number of unemployed people/labour force) x 100%
- We need to determine the percentage of people who are willing to take jobs amongst the
working age population. This helps us understand women's participation in the economy and also
the situation with discouraged workers (who often stop looking for jobs during a recession and
re-enter the labour force during expansion).
Labour force participation rate = (labour force/working age population) x 100%
- Due to the way unemployed is defined, those who are interested in work but not looking for it
actively are often left out of the unemployment picture ("Not in labour force), but they are an
important component of the economy. A high number proportion of "not in labour force" shows
a weak economy. To examine this more closely, we calculate the following:
Employment-to-Population Ratio= (number of employed people/working age population) x
100%

- Fig 6.2: The unemployment rate shows the fluctuation in business cycle. The labour force
participation rate and employment-to-population ratio also show fluctuation, but they have an
upward trend. The fluctuations are caused by the business cycle and the upward trend is
explained by increasing women's participation in the workforce. Refer to Fig 6.3.
- Page 134 explains Fig 6.3.
- From Aggregate Hours (page 134) until the beginning of Types of Unemployment (page 139)
is not included in the syllabus.
- Note: The Anatomy of Unemployment (Page 137 to middle of Page 139) is indirectly needed
for Q.4 (page 149), but I expect that it is possible to do it without reading this.

3. Types of unemployment:
- Frictional: The unemployment that arises from natural frictions in the economy, from people
entering and leaving the workforce and from the ongoing creation and destruction of jobs
(business opening and closing down). The amount of frictional unemployment is influenced by
unemployment compensation.
- Structural: The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs. Structural unemployment lasts longer than
frictional unemployment because workers must retrain and possibly relocate to find a job.
- Cyclical: The fluctuating unemployment over the business cycle. E.g. Someone who is laid off
during recession and rehired during expansion.
4. Full Employment
- Frictional and structural unemployment make up natural unemployment, because this is an
inseparable part of a modern economy.
- When the economy's unemployment rate is equal to its natural rate of unemployment, we say
that it is operating at full employment
- Page 141 is not included in the syllabus
5. CPI (page 142-145)
- Not included in midterm 1, will cover it in midterm 2.