No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 462 The labor force participation rate for workers between 25-54 years old has fallen sharply in the aftermath of the recession, and has now plateaued at the lower level than before the recession. Other measures of the labor market also show continuing concerns. In Figure 18.8 , the broader U-6 unemployment rate (which includes marginally attached workers and part-time workers that would like full time) is plotted against the more common U-3. As the chart shows, the gap between the two accelerated sharply during the great recession, has been slow to close to previous levels, and is still greater than prior to the recession, suggesting it is still harder to find full-time employment than prior to the recession. Given the high social cost of unemployment, one might be tempted to think that the best unemployment rate might be zero—everyone should have a job. But that is not true. A dynamic, growing economy is always going to have some level of unemployment, because some businesses will be rapidly growing while others—those that do not meet consumers’ needs at a price they can afford—will be dying. Indeed, despite the social pain, we want some level of unemployment (called frictional unemployment ) as people lose jobs from dying firms and industries. This releases people to join other growing firms. This is painful in the short run for those who lose their jobs, but in the longer term everyone is better off. For example, it is really a good thing that blacksmiths were put out of business as automobiles came around. Yes, for an individual blacksmith it was a blow. But ultimately we are all better off, since the alternative is a stagnant economy with lower productivity and fewer choices. Frictional unemployment: the level of unemployment as people lose jobs from dying firms and industries Figure 18.8, Unemployment rate comparison. Comparing the U-3 with the U-6 unemployment rate shows that the number of part-time and marginally attached workers grew significantly during the last recession, and while improving, the gap between the two rates is still higher than prior to the recession.