AP_Krugman_Textbook

the Congressional Budget Office, the independent agency that conducts budget and eco-
nomic analyses for Congress, believes that the U.S. natural rate of unemployment was
5.3% in 1950, rose to 6.3% by the end of the 1970s, but has fallen to 4.8% today. European
countries have experienced even larger swings in their natural rates of unemployment.
What causes the natural rate of unemployment to change? The most important fac-
tors are changes in the characteristics of the labor force, changes in labor market insti-
tutions, and changes in government policies. Let’s look briefly at each factor.

Changes in Labor Force Characteristics In January 2010 the overall rate of unem-
ployment in the United States was 9.7%. Young workers, however, had much higher un-
employment rates: 26.4% for teenagers and 15.8% for workers aged 20 to 24. Workers
aged 25 to 54 had an unemployment rate of only 8.6%.
In general, unemployment rates tend to be lower for experienced than for inexperi-
enced workers. Because experienced workers tend to stay in a given job longer than do
inexperienced ones, they have lower frictional unemployment. Also, because older
workers are more likely than young workers to be family breadwinners, they have a
stronger incentive to find and keep jobs.
One reason the natural rate of unemployment rose during the 1970s was a large rise
in the number of new workers—children of the post–World War II baby boom entered
the labor force, as did a rising percentage of married women. As Figure 13.3 shows,
both the percentage of the labor force less than 25 years old and the percentage of
women in the labor force surged in the 1970s. By the end of the 1990s, however, the
share of women in the labor force had leveled off and the percentage of workers under
25 had fallen sharply. As a result, the labor force as a whole is more experienced today
than it was in the 1970s, one likely reason that the natural rate of unemployment is
lower today than in the 1970s.

Changes in Labor Market Institutions As we pointed out earlier, unions that negotiate
wages above the equilibrium level can be a source of structural unemployment. Some
economists believe that strong labor unions are one reason for the high natural rate of
unemployment in Europe. In the United States, a sharp fall in union membership after
1980 may have been one reason the natural rate of unemployment fell between the
1970s and the 1990s.
Other institutional changes may also have been at work. For example, some labor econ-
omists believe that temporary employment agencies, which have proliferated in recent
years, have reduced frictional unemployment by helping match workers to jobs. Further-
more, Internet websites such as monster.com may have reduced frictional unemployment.

module 13 The Causes and Categories of Unemployment 131

Section 3 Measurement of Economic Performance

figure 13.3

The Changing Makeup of the

U.S. Labor Force, 1948–2009

In the 1970s the percentage of the labor force

consisting of women rose rapidly, as did the per-

centage under age 25. These changes reflected

the entry of large numbers of women into the paid

labor force for the first time and the fact that baby

boomers were reaching working age. The natural

rate of unemployment may have risen because

many of these workers were relatively inexperi-

enced. Today, the labor force is much more experi-

enced, which is one possible reason the natural

rate has fallen since the 1970s.

Source: Bureau of Labor Statistics.

Percent of

labor force

Year

20

10

30

40

50%

Women

Under 25

(^1948196019701980199020002009)