Production, Income, and Employment Chapter 6 Part 2

1. CHAPTER Production, Income, and Employment Chapter 6 Part 2

2. Employment and Unemployment • Unemployed • Not working and actively seeking a job • Employed • http://www.bls.gov/bls/glossary.htm • Categories of unemployment • Frictional • Structural • Cyclical • Seasonal (not that important for policy)

3. Employment and Unemployment • Frictional unemployment • people who are between jobs • people who are just entering or reentering the labor market • it is short-term unemployment • these people have skills and they will get jobs

4. Employment and Unemployment • Structural unemployment • Skill mismatch: between workers’ skills and employers’ requirements • Geographic mismatch: between workers’ locations and employers’ locations • Unemployment due to structural changes in the economy that eliminate some jobs and create other jobs for which the unemployed do not have required skills. • This is a stubborn, long-term problem

5. Employment and Unemployment • Cyclical unemployment Arising from changes in production over the business cycle • A problem for macroeconomic policy • Seasonal unemployment • Related to changes in weather, tourist patterns, or other seasonal factors, ski instructors lose jobs in April • Short term and entirely predictable

6. 2013 • 10.8% • 12.7% • 7.2% • 7.1% • 5.2% • 8.0% • 6.7% • Unemployment rate higher in Europe - primarily structural. • Higher benefits, for longer periods of time which reduce incentives to accept jobs or acquire skills. • Legal obstacles laying off workers Average Unemployment Rates in Several Countries, 1995–2005, 2007 and 2013

7. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statisticshttp://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_statistics • Unemployment rates in the EU compared to Japan and the US

8. Employment and Unemployment • Natural Rate of Unemployment • Sum of Frictional and Structural • Full employment • Zero cyclical unemployment • Unemployment at full employment is equal to the natural rate of unemployment • Potential output • Level of output the economy could produce if operating at full employment • Chapter 8, The Long-Run Classical Model, explains the determination of Potential GDP

9. Natural rate of Unemployment 5 • The unemployment rate rises during recessions (shaded) and falls during expansions. Unemployment related to the business cycle is cyclical unemployment U.S. Quarterly Unemployment Rate, 1970-2011

10. Potential Actual GDP Actual and Potential Real GDP, 1990–2011

11. Actual and Potential Real GDP, 1970–2011

12. The Costs of Unemployment • When real GDP is above potential output • Unemployment is below the natural rate • Employment is higher than full-employment • When real GDP is below potential output • Unemployment rises above the natural rate and employment falls below full-employment rate

13. The Costs of Unemployment • Slump • A period during which real GDP is below potential and/or the employment rate is below normal • Recession • End of 2007 through June 2009 • Slump • The book states 2008 through the first half of 2011. We are still in a “slump”

14. Real GDP in 2009 Dollars Potential GDP Actual GDP

15. Real GDP in 2009 Dollars Potential GDP Actual GDP

16. The Costs of Unemployment • Economic cost • opportunity cost of lost output • output produced is less than the economy’s potential output • which means less Income and less consumption

17. The Costs of Unemployment • Broader costs • Psychological and physical effects • Setbacks in achieving important social goals • Burden of unemployment not shared equally among different groups in the population • Most heavily: minorities, especially minority youth

18. Unemployment Rate for Various Groups

19. How Unemployment Is Measured • Census Bureau’s Household Survey • Every month • Survey of 60,000 households across America • In the labor force and unemployed: • Don’t have a job • Actively search for work during the previous four weeks

20. BLS interviewers ask a series of questions to determine whether an individual is employed, unemployed, or not in the labor force. How the BLS Measures Employment Status

21. How Unemployment Is Measured • Labor force • Those people who have a job or are looking for one • Unemployment rate • Fraction of the labor force that is without a job

22. Employment Status of the U.S. Population—August 2011

23. How Unemployment is Measured Computing the unemployment rate for the month of July 2008: Labor force: 154.6 million Employed: 145.8 million Unemployed: 8.8 million Unemployment rate = 8.8 5.7% = 145.8 + 8.8 July 2008

24. How Unemployment is Measured unemployment rateThe percentage of the labor force that is unemployed. • Computing the unemployment rate for the months of July 2009, July 2011 and July 2012: • 2009 2011 2012 • Labor force: 154.5 million 153.2 million 155.0 million • Employed: 140.0 million 139.3 million 142.2 million • Unemployed: 14.5 million 13.9 million 12.8 million Unemployment rate2009 = Unemployment rate2011 = Unemployment rate2012 =

25. The Duration of Unemployment http://www.bls.gov/news.release/pdf/empsit.pdf Table A-12

26. Problems in Measuring Unemployment • Official measure of unemployment underestimates the extent of unemployment • Treatment of involuntary part-time workers • Treatment of discouraged workers

27. Problems in Measuring Unemployment • Involuntary part-time workers • Individuals who would like a full-time job but who are working only part time • Discouraged workers • Individuals who would like a job but have given up searching for one

28. Problems in Measuring Unemployment • BLS defines discouraged worker • Not working • Searched for a job at some point in the last 12 months • Currently want a job • State that the only reason they are not currently searching for work is their belief that no job is available for them • discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force. • It lowers the unemployment rate!

29. Problems in Measuring Unemployment • Marginally attached to the labor force • Meet the first three requirements of discouraged workers • But not necessarily the fourth: • They can give any reason for not currently searching for work

30. Alternative Measures of Employment Conditions • The Six “U”s • Six different unemployment rates • Each labeled with a “U” followed by a number • “U-3”: the official unemployment rate • The Establishment Survey • BLS surveys business establishments to track the number of jobs that have been added and lost

31. The Six “U”s http://www.bls.gov/news.release/pdf/empsit.pdf Table A-15

32. Alternative Measures of Employment Conditions • The employment-population ratio • Total employment (from the household survey) divided by the total population over age 16 • Tracks the fraction of the adult population that is working • not affected by job-searching behavior

33. The employment-population ratio often measures labor market conditions more accurately than the unemployment rate. The ratio falls during recessions, such as the deep recession of 2008 and 2009. The Employment Population Ratio: 1996–2011

34. The Employment Population Ratio: 1948–2013

35. The Employment Population Ratio: 1948–2013