hysteresis arises when a single disturbance affects the course of the economy. An example of hysteresis in economics is the delayed effects of unemployment. As unemployment increases, more people adjust to a lower standard of living. As they become accustomed to the lower standard of living, people may not be as determined to achieve the previously desired higher living standard. In addition, as more people become unemployed, it becomes more socially acceptable to be or remain unemployed. After the labor market returns to normal, some unemployed people may be disinterested in returning to the work force.
Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify. (Source)
Labor Force Participation Rate:
The Labor Force Participation Rate (LFPR) is the percentage of the working population as well as people actively seeking employment. At the beginning of the Great Recession (Dec. 2007) the LFPR was 66% and as of May 2014 the LFPR has fallen to 62.8%, the lowest level since March 1978. (Click here for the most recent data)
Cyclical vs. Structural Changes in LFPR
Cyclical changes and structural changes describe the decline in labor force participation rate (LFPR). Structural declines in the LFPR means individuals would not return to the workforce even if economic conditions improve, e.g baby boomers retiring, serious illness or disability. If the drop in LFPR is cyclical, workers would rejoin the workforce given the opportunity and economic conditions permitting. According to some analysts, as much as two-thirds of the drop in LFPR since 2007 is cyclical. This means that many potential workers are remaining in universities, opting to retire early, or turning to social safety net programs as a means of security, but would prefer to rejoin the labor force if the conditions were right.
Long-term unemployment is defined as those who have been unemployed for 27 weeks or longer, and are still actively seeking employment. As of May 2014 there are 3.4 million people long-term unemployed in the United States.
Marginally Attached Workers:
Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached. (Source)
Natural Rate of Unemployment:
A concept, created by Edmund Phelps and Milton Friedman, stating that “real wages would adjust to make the supply of labor equal to the demand for labor, and the unemployment rate would then stand at a level uniquely associated with that real wage—the ‘natural rate’ of unemployment.” The natural rate of unemployment is considered the level full employment is reached. According to the Federal Reserve the current short term natural rate of unemployment stands at 5.8% as of Q2 2014 and will continue to drop over the next ten years to 5.2% in 2024. (Federal Reserve Data)
Open Market Operations:
It is the buying and selling of securities in the open market by a central bank. “Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate–the interest rate at which depository institutions lend reserve balances to other depository institutions overnight–around the target established by the FOMC.” (Source)
Underemployment is a state in which workers are employed part-time but wish to be full-time as well as workers who have accepted employment that is below their education or skill level due to economic reasons. Because it is difficult to measure full-time workers that have taken employment below their education and skill level the Bureau of Labor Statistics (BLS) uses the form of underemployment that measures the difference in the measurement of U-5 and U-6 which would be the part-time workers that wish to be full-time. From the May 2014 Employment Situation Summary the rate of underemployment according to the BLS is 4.6% which is historically high.
Unemployment is measured in multiple ways to get a better picture of the state of the labor market. The following are the six measurements and definitions used by the Bureau of Labor Statsistics (BLS) (current numbers can be found here):
- U-1: Persons unemployed for 15 weeks or longer as a percent of the civilian labor force.
- U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.
- U-3 Official Unemployment Rate: This is the total number of unemployed persons within the civilian labor force.
- U-4: Total Unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers.
- U-5: Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
- U-6: Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
Cyclical vs. Structural Unemployment
Cyclical and structural unemployment are forms of unemployment. It is important to know which form of unemployment is being created because the policy response to each form is different. Cyclical unemployment is when there is not enough demand for employers to employ people looking for work. This change in employment levels normally happen during the fluctuations on the business cycle. Sturctural unemployment is a longer-lasting form of unemployment caused by fundamental shifts or mismatches that occur when people searching for employment do not have the skills for the available jobs, the wage level of the jobs offered are too low, or they are geographically away from the available jobs.