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Unemployment. A measure of wasted resources…. The Short vs. The Long Run. At Full employment. Above Full employment. Total Production. Every year we produce more than the previous year. Full Employment Output Level: what we produce when unemployment is zero and there is no excess capacity.

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unemployment

Unemployment

A measure of wasted resources…

(c) 2002 Claudia Garcia-Szekely

the short vs the long run
The Short vs. The Long Run

At Full employment

Above Full employment

Total Production

Every year we produce more than the previous year

Full Employment Output Level: what we produce when unemployment is zero and there is no excess capacity

Below Full employment

Time

Output deviates from full employment level only during “short” periods of time.

Eventually, output goes back to it’s full employment level.

If we look at long intervals of time, the economy can be expected to be at or near full employment.

measuring unemployment since 1940
Measuring Unemployment Since 1940.
  • Unemployment is measured by the Bureau of Labor Statistics (BLS) part of the Department of Labor.
  • Data is compiled from monthly surveys (60,000 households)
    • Current Population Survey
  • Data does not come from unemployment insurance (UI) records…
    • UI is one of many factors used.

(c) 2002 Claudia Garcia-Szekely

basic concepts
Basic Concepts
  • If you have a job, you are employed
  • If you do not have a job but you are available and looking for work, you are unemployed.
  • If you are neither employed nor available and looking for a job you are not in the labor force.

(c) 2002 Claudia Garcia-Szekely

employed
Employed
  • Full time, part time and temporary work…
  • Worked at least ONE hour or more forpay or profit during the survey week.
  • Worked 15 hours or more without pay in a family business.
  • Temporarily absent from work
    • Illness, vacation, labor dispute, etc.

(c) 2002 Claudia Garcia-Szekely

unemployed
Unemployed
  • Do not have a job.
  • Available for work.
  • Made specific efforts to find a a job during the previous four weeks.
  • Not working, waiting to be called back to a job from which they were temporarily laid off.

(c) 2002 Claudia Garcia-Szekely

not in the labor force
Not in the Labor Force
  • Those who have no job and are not looking for a job.
    • Retired
    • Full time students
    • Home makers.
    • Volunteers
  • Institutional Population.
    • Mental Institutions
    • Prison
    • Military

(c) 2002 Claudia Garcia-Szekely

slide10

Labor Force

Participation Rate

65.7%

154M

Labor Force

X 100

=

Active Population

154M

140M

234.3M

LF = Employed + Unemployed

14M

>

14M

9.09%

Unemployed

Unemployment

Rate (Ur)

=

X 100

Labor Force

154M

slide11

Fewer men work outside the home

2008:73%

More women work outside the home

2008: 58.7%

(c) 2002 Claudia Garcia-Szekely

see progression
Unemployment SEE PROGRESSION

(c) 2002 Claudia Garcia-Szekely

slide15

High inflation call the Fed!

Fed works it’s magic through unemployment

(c) 2002 Claudia Garcia-Szekely

slide16

Deflation

The Great Recession

(c) 2002 Claudia Garcia-Szekely

slide18

Majority of those who are unemployed find jobs in less than 5 weeks

Majority of those who are unemployed are unemployed for more than 6 months

(c) 2002 Claudia Garcia-Szekely

is unemployment measured correctly
Is Unemployment Measured Correctly?

No. There are three problems with this statistic:

  • The Discouraged Worker Effect

(c) 2002 Claudia Garcia-Szekely

discouraged workers are not in the labor force
Discouraged Workers are not in the Labor Force.

A discouraged worker is someone who gave up looking for a job.

  • They are NOT counted as unemployed but should because they are part of the active population, and would work if a job was available.

(c) 2002 Claudia Garcia-Szekely

slide21

LF = E + U

138.2+15.9=154.1

LF =_____

Ur =_____

15.9/154.1*100=10.3%

Unemployed

Unemployed

Unemployment

Rate (Ur)

=

X 100

15.9M

Labor Force

Employed

138.2M

1 1 give up looking for work

Unemployed

Employed

15.9

138.2

1.1 give up looking for work

LF =156-1.1=154.9

New Ur =

When workers lose all hope of finding a job Unemployment rate decreases!

14.8/154.9=9.6%

E=140

U=15.9-1.1=14.8

LF = 156

E=140

U=15.9

15.9/156=10.2%

Ur =

discouraged worker effect
Discouraged Worker Effect.
  • An increase in the number of discouraged workers shows up as a decrease in the unemployment rate!
  • During long recessions, more workers become discouraged reducing the Ur.

During recessions true unemployment is underestimated

(c) 2002 Claudia Garcia-Szekely

slide24

Discouraged Workers

Thousands

(c) 2002 Claudia Garcia-Szekely

is unemployment measured correctly1
Is Unemployment Measured Correctly?

No. There are three problems with this statistic:

  • The treatment of part time work as full time.

(c) 2002 Claudia Garcia-Szekely

part time workers counted as employed
Part Time Workers counted as Employed
  • Including those who worked only one hour/week
  • These individuals would work full time if a job was available…
  • They should be counted –at least partially- as unemployed.

(c) 2002 Claudia Garcia-Szekely

is unemployment measured correctly2
Is Unemployment Measured Correctly?

No. There are three problems with this statistic:

  • Underemployment

(c) 2002 Claudia Garcia-Szekely

underemployed workers counted as employed
Underemployed workers counted as Employed

A person working on a job that does not use his/her full potential is Underemployed

    • A computer programmer delivering pizzas.
  • Underemployed individuals are counted as employed even though their skills are unemployed.
  • There are no official statistics on underemployment:
    • Difficult to develop objective criteria.
    • Difficult to quantify loss to society.

(c) 2002 Claudia Garcia-Szekely

the unemployment rate three misrepresentations
The Unemployment Rate:Three Misrepresentations

Not Unemployed

Discouraged

Workers

Underestimate true

Unemployment

Counted as employed

Part Time

Workers

Inflate Number employed

Underestimate true

Unemployment

Under-employed

Workers

Counted as employed

(c) 2002 Claudia Garcia-Szekely

employed unemployed not in the lf
Employed? Unemployed? Not in the LF?
  • After 14 months, Mrs. Smith gives up searching for a job.
  • Claudia reports wanting to work, but she made no specific efforts to find employment.
  • John works as a clerk in a government office.
  • Harry is in active duty in the military.
  • Raul was paid for 2 hours work during the survey week.
  • Joe is retired and volunteers his time at a hospital.
  • Anthony was given a 2 day suspension from work for being late.
  • Joseph works two days a week at a restaurant.
  • Mary, a part time teacher, reports searching unsuccessfully for a full time job.
  • Ron, a PhD in Philosophy, drives a delivery van after searching unsuccessfully for a job.
slide32
Suppose that the active population is 230 million, the labor force participation rate is 66% and the unemployment rate is 5%. If the number of discouraged workers increases by 5 million, what does the unemployment rate become?

Active population is 30 million, labor force participation rate 60%, number of discouraged workers 2 million, number of people with full time jobs 13 million, number of people with part time jobs is 2 million. Calculate the unemployment rate.

potential gdp

Potential GDP

Real GDP the economy produces when workers and factories are fully employed

Output produced when unemployment is zero

unemployment is never zero

Unemployment is never ZERO

Even when the economy is growing at its “potential” there will be some workers unemployed.

(c) 2002 Claudia Garcia-Szekely

three types of unemployment
Three types of unemployment:
  • Structural: workers who do not have skills currently in demand…there is no job for them.
  • Frictional: workers who have the necessary skills but have not found their job yet.
  • Cyclical: workers with the necessary skills for the job, but lack of demand prevents firms from hiring them.

(c) 2002 Claudia Garcia-Szekely

the full employment rate of unemployment natural rate
The Full Employment Rate of Unemployment: Natural Rate

At full employment:

  • CYCLICAL unemployment is zero.
  • Total unemployment is NOT zero.
  • There is frictional and structural unemployment.

(c) 2002 Claudia Garcia-Szekely

potential gdp1

Potential GDP

Real GDP the economy produces when workers and factories are fully employed

Output produced when cyclical unemployment is zero

three components to unemployment

Frictional

4%

Structural

1%

Three components to Unemployment

Natural

Rate of

Unemployment

5%

Ur=10%

Between Jobs

4%

Frictional

4%

Unemployed due to recession

5%

Cyclical

5%

Recession Ends

Unemployed due to lack of skills

1%

Structural

1%

Zero Cyclical

Unemployment

(c) 2002 Claudia Garcia-Szekely

the natural rate of unemployment
The Natural Rate of Unemployment

Natural Rate of Unemployment was estimated between 5 and 6%.

Frictional

Structural

Natural

+

=

(c) 2002 Claudia Garcia-Szekely

cyclical structural frictional
Cyclical? Structural? Frictional?
  • Richard loses his job at UPS due to a downturn in general business conditions.
  • Mark loses his job as a parking attendant. His job was replaced by a new automated system.
  • Sarah quits her job as a hostess to look for work that is more fun.
  • Andrew quits looking for work because he does not think he can find a suitable job.
  • Nancy lost her job as a real estate agent during the housing crisis.
  • Mathew just graduated from college and does not have a job yet.
  • Pedro lost his job as software developer for a weapons manufacturer. He is looking for a new job.
  • John lost his job as a public phone repairman because his skills are no longer needed.
true or false
True or False?

Frictional unemployment is a "necessary" cost of a dynamic economy.

Someone unemployed for a long period of time due to technological change would be described as structurally unemployed.

(c) 2002 Claudia Garcia-Szekely

unemployment increases inequality
Unemployment increases Inequality

“When the economy catches a cold minorities and young people get pneumonia”

Alan Blinder

(c) 2002 Claudia Garcia-Szekely

slide45

Less than HS

11.2%

7.9%

HS graduates

6.7%

Some College

3.8%

Bachelor Degree and higher

(c) 2002 Claudia Garcia-Szekely

the cost of unemployment 2 lost output okun s law
The Cost of Unemployment2. Lost Output: Okun’s Law

An extra percentage point of unemployment above the natural rate corresponds to an output gap of 2.5 percentage points of GDP.

14,000 *0.025 = 350 Billion worth of goods and services lost for each 1% extra unemployment

okun s law an example
Okun’s Law: an example

Ur (2007) = 4.9%; GDP in 2007 = 11,620b

Ur (2008) = 7.2%

Extra Unemployment = 7.2 – 4.9 = 2.3%

Each 1% extra unemployment = 2.5% lost GDP

Lost GDP = 2.3(2.5) = 5.75%

Lost GDP = 11,620b (5.75%)= 668billion dollars worth of goods and services.

(c) 2002 Claudia Garcia-Szekely

practice questions
Practice Questions
  • Explain the Discouraged worker effect and how it affects the calculation of the unemployment rate.
  • Explain why the unemployment rate is never zero?
  • Explain why unemployment is underestimated by treating Full time and part time work the same.
  • Explain why unemployment is underestimated due to underemployment

(c) 2002 Claudia Garcia-Szekely

slide51
Suppose that GDP is 11,000 billion and current unemployment is 7%. What would GDP be if unemployment were only 5%? Hint: use Okun’s Law.

Does the existence of unemployment insurance eliminate the economic costs of unemployment?

(c) 2002 Claudia Garcia-Szekely

okun s law the complete story
OKUN’S LAW THE COMPLETE STORY

(c) 2002 Claudia Garcia-Szekely

how do we fight inflation
How do we Fight Inflation?
  • Joblessness.
  • Slow down Aggregate Demand for goods and services.
  • Policy tool of choice: interest rate hikes by the Federal Reserve Bank.
the phillips curve
The Phillips Curve

If we plot past data on Inflation and unemployment we observe:

There is a temporary trade off between inflation and unemployment

Years of High

Inflation

Inflation

Years of Low

Inflation

Years of Low

Unemployment

High

Unemployment

Unemployment

the trade off between unemployment and inflation

The trade off between unemployment and inflation

In order to reduce inflation by 1%, we must hold unemployment above the natural rate two (to 2 and a half) percentage points.

slide56

9.9%

Inflation

Unemployment

the trade off between unemployment and inflation1
The trade off between unemployment and inflation

A reduction in inflation from 10% to 4% (6% points) costs (6x2) 12% in terms of extra unemployment…

Paul Volcker: Chairman of the Federal Reserve under Jimmy Carter and Ronald Reagan (from August 1979 to August 1987)

unemployment above the nru 5 8
Unemployment above the NRU (5.8%)

Between 1980 and 1985 a 6% reduction in inflation cost unemployment to be 12.5% points above the natural rate.

1980: 1.3 points

1981: 1.8 points

1982: 3.9 points

1983: 3.8 points

1984: 1.7 points

Total: 12.5 points

slide59

Inflation

Unemployment

Bush

89-93

Clinton 93-01

Bush 01-09

Obama 09-

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