unemployment and okun s law n.
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Unemployment and Okun’s Law. Determining Unemployment. The unemployed are searching for/available for work (4 weeks) Employed + Unemployed = Labor force Labor force participation rate = Labor force X 100 Population 16 or older Unemployment rate: Number of unemployed X 100

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Unemployment and Okun’s Law

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determining unemployment
Determining Unemployment

The unemployed are searching for/available forwork (4 weeks)

Employed + Unemployed = Labor force

Labor force participation rate = Labor force X 100

Population 16 or older

Unemployment rate: Number of unemployed X 100

Labor force

problems of unemployment rate
Problems of Unemployment Rate
  • The figure itself is an estimate based on random sampling of 60,000 households scaled up
  • Tends to understate the true level (though it can overstate it as well!)
    • Discouraged workers
    • Marginally attached workers
    • Underemployed workers
  • These are not accounted for in the standard unemployment statistics (U3), but in U6 only
Though U6 is not the standard measure, the two lines are parallel which shows that the increase/decrease trends are valid
demographics of unemployment
Demographics of Unemployment
  • Experienced workers
  • “Prime ages” (25-54)
  • White and Asian
  • Low educational attainment
  • African Americans
  • Under 25 and over 55

Most easily employed groups

Most often unemployed groups

okun s law
Okun’s Law
  • Recessions are linked to rising unemployment; expansions see falling unemployment (in the long run)
  • “Growth recession” - Below-average growth is normally accompanied by rising unemployment
  • Okun’s Law – About a 2% decrease in output (GDP) for every 1% increase in unemployment
  • Okun’s Law is based on observation, not theory, so it is approximated and has been adjusted a little over time
types of unemployment
Types of Unemployment
  • Frictional unemployment - Unemployment due to time workers spend in job search
  • Frictional unemployment is the result of constant process of job creation/destruction
types of unemployment1
Types of Unemployment
  • Structural unemployment – results when the number seeking jobs is greater than jobs offered of a certain type or at current wage structure
  • Structural unemployment can occur when wage is set permanently above the equilibrium wage, creating a surplus
  • Most often the result of:
      • Government policies
      • Unions
      • Mismatch
types of unemployment2
Types of Unemployment
  • Cyclical unemployment – result of the business cycle; accompanies downturns in growth
changes in natural rate of unemployment
Changes in Natural Rate of Unemployment
  • Natural rate of unemployment – normal rate

Natural rate = Frictional + Structural

Actual rate = Natural + Cyclical

  • Natural rate changes over time as a result of:
    • Changes in Labor Force
    • Changes in Labor Market
    • Changes in Government Policy

Categorize each of the following (C, F, or S):

  • A literary editor leaves her job in New York to look for a new job in San Francisco.
  • Advances in technology make the assembly-line worker’s job obsolete.
  • A high school graduate lacks the skills necessary for a particular job.
  • Workers are laid off when the local manufacturing plant closes because the product made there isn’t selling.