Chapter 12: Introduction
Unemployment: A Recurring Problem
This chapter deals with unemployment--its costs, causes, and cures. In doing so, it emphasizes that unemployment has both economic and noneconomic costs.
The chapter explains how the unemployment rate is calculated and emphasizes that the average rate conceals many differences among demographic groups.
The chapter also distinguishes among three types of unemployment: frictional, structural, and cyclical. This distinction is important in terms of both costs and policy.
Various policies to reduce unemployment are considered. The impact of the minimum wage on unemployment is discussed in this context.
Finally, unemployment in Europe is discussed. Various factors cause unemployment to be higher in most European countries than in the United States.

Instructional Objectives
After completing this chapter, your students should know:

1. That unemployment has both economic and noneconomic costs and that these costs are different for society and the individual.
2. How the unemployment rate is calculated and how unemployment rates vary among demographic groups.
3. That three types of unemployment--frictional, structural, and cyclical--exist, and that these differ in terms of both costs and policy implications.
4. How the full, or natural, unemployment rate is defined.
5. How stabilization policy can be applied to achieve and/or maintain full employment.
6. That stabilization policy is unlikely to reduce frictional and structural unemployment and that other policies are, therefore, necessary.
7. That a significant increase in the minimum wage has an adverse effect on unemployment, particularly among teenagers.
8. That for various reasons, the unemployment rate in most European countries is much higher than the unemployment rate in the United States.

Terms from Previous Chapters
You should review the terms in this section at the beginning of your discussion of the chapter.

business cycles (Chapter 11)
expansion phase (Chapter 11)
peak (Chapter 11)
contraction phase (Chapter 11)
trough (Chapter 11)
real GDP (Chapter 11)
GDP deflator (Chapter 11)
personal consumption expenditures (Chapter 11)
gross private domestic investment (Chapter 11)
government purchases of goods and services (Chapter 11)
aggregate demand curve (Chapter 11)
aggregate supply curve (Chapter 11)
equilibrium (Chapter 1)
fiscal policy (Chapter 11)
disposable income (Chapter 11)
expansionary fiscal policy (Chapter 11)
contractionary fiscal policy (Chapter 11)
money supply (Chapter 11)
monetary policy (Chapter 11)
expansionary monetary policy (Chapter 11)
contractionary monetary policy (Chapter 11)

Key Terms
These terms are introduced in this chapter:

unemployment rate
civilian labor force
frictional unemployment
structural unemployment
cyclical unemployment
full employment rate of unemployment
natural rate of unemployment
stabilization policies

Additional References
In addition to the references in the text, instructors may wish to read or assign one or more of the following:

1. Charles Brown, Curtis Gilroy, and Andrew Kohen, "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature 20 (June 1982), pp. 487-528.
2. Lynn E. Browne, 'The Labor Force, Unemployment Rates, and Wage Pressures," Federal Reserve Bank of Boston, New England Economic Review (January/February 1989), pp. 21-29.
3. Keith M. Carlson, "How Much Lower Can the Unemployment Rate Go?" Federal Reserve Bank of St. Louis, Review 70 (July/August 1988), pp. 44-57.
4. Keyin M. Murphy and Robert H. Topel, "The Evolution of Unemployment in the United States: 1968-1985," in Stanley Fischer, ed., NBER Macroeconomics Annual 1987 (Cambridge, Mass.: MIT Press, 1987), pp. 11-58.
5. Stephen K. McNees, 'The 1990-91 Recession in Historical Perspective," Federal Reserve Bank of Boston, New England Economic Review (January/February 1992), pp. 3-22.
6. John L. Palmer, ed., Creating Jobs: Public Employment Programs and Wage Subsidies (Washington, D.C.: The Brookings Institution, 1978).
7. Michael J. Piore, "Historical Perspectives and the Interpretation of Unemployment," Journal of Economic Literature 25 (December 1987), pp. 1834-1850.
8. G.J. Santoni, 'The Employment Act of 1946: Some History Notes," Federal Reserve Bank of St. Louis, Review 68 (November 1986), pp. 5-16.
9. Lawrence H. Summers, "Why Is the Unemployment Rate So Very High Near Full Employment?" Brookings Papers on Economic Activity, No. 2 (1986), pp. 339-383.
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