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Instability: Unemployment and inflation. The Twin Problems. A. Unemployment. one of the problems that arise from economic instability the failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force .
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Instability: Unemployment and inflation The Twin Problems Alomar_111_9
A. Unemployment • one of the problems that arise from economic instability • the failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force. • labor force: persons 16 years of age and older who are not in institutions and who are employed or unemployed seeking work. Alomar_111_9
Total population Labor force Alomar_111_9
total population is divided into several groups: • Of age <16 and not in institutions. • Not in labor force: > 16 who are unemployed and are NOT seeking work: students, homemakers… • People who are able and willing to work Employed + unemployed = labor force Alomar_111_9
How to measure unemployment? Unemployment rate = (unemployed / LF) x 100 Alomar_111_9
Types of unemployment • Frictional Unemployment: workers between jobs (searching for better job, fired, laid of b\c of seasonal demand, searching for the first job…) This is called: search unemployment and wait unemployment Alomar_111_9
2. Structural unemployment: unemployment of workers whose skills are not demanded, who lack sufficient skill to obtain employment, or who cannot move to locations where jobs are available. • The demand for the good or the service produced is important • Need to be retrained or move • More likely to be long-term Alomar_111_9
3. Cyclical unemployment: caused by a decline in total spending • more likely to occur in recession phases of the BC. • As demand decreases, employment falls and unemployment increases Alomar_111_9
Full Employment • full employment is less that 100% employment of labor force. This is because of structural and frictional unemployment. • therefore, we can say the economy is fully employed even if we have both. • Full employment occurs when there is no cyclical unemployment. Alomar_111_9
Since we have unemployment even when we are at full employment: “Full Employment Rate of Unemployment” Or “Natural Rate of Unemployment” (NRU) And the economy is producing its “potential output” Alomar_111_9
potential output: The GDPr that occurs when the economy is “fully employed”. • NRU occurs when: number of number of job job-seekers = vacancies. Alomar_111_9
even when number of job-seekers = number of job vacancies, NRU >0 • This is because it takes time for frictionally unemployed seekers to find jobs and for structurally unemployed to attain skills and locations needed for reemployment. Alomar_111_9
Note that NRU can change from time to time • The economy may operate at unemployment rate higher than the NRU • This is the case when we have cyclical unemployment • In other cases, it will be lower than the NRU (an increase in demand for employees as demand in the economy increases). Alomar_111_9
Economic Cost of Unemployment • this is the unemployment above the NRU • The forgone outputs: when the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is lost. This means that the economy operates inside the PPF. Alomar_111_9
2. Unequal Burden: Level of skill, nature of occupation, certain age and race and ethnicity, gender, and education. 3. Lost income and lower demand. 4. Social costs: self-respect, crime, health… Alomar_111_9
