1

Business Cycles and

Unemployment

Economics for Today by Irvin Tucker, 6th edition©2009 South-Western College Publishing

2

What puzzles will I learn to solve?

• What is the difference between a recession and a depression?

• Is a worker who has given up searching for work counted as unemployed?

• Can an economy produce more output than its potential?

3

This chapter will answer these questions:

• How are cycles measured? • What causes business cycles? • What is unemployment?

4

What is abusiness cycle?

Alternating periods of economic growth and contraction, which can be measured by changes in real GDP

5

What are the four phases of a

business cycle?• Peak• Recession• Trough• Recovery

6

What is a peak?The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

7

What iseconomic growth?

An expansion in national output measured by the annual percentage increase in a nation’s real GDP

8

Why is growth an economic goal?

It increases our standard of living - it creates a bigger “economic pie”

9

What is a trough?The phase of the business cycle in which real GDP reaches its minimum after falling during a recession

10

What is a recession?

A downturn in the business cycle during which real GDP declines

11

How long before a downturn is a

recession?At least two consecutive quarters in which GDP declines

12

When is a downturn considered a depression?

The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

13

What is a recovery?

An upturn in the business cycle during which real GDP rises

14

Hypothetical Business Cycle

Peak

Peak

Recession Recovery

Real GDPper year

Growth trend lin

e

Trough

15

Severity of Post-World War II Recessions

Recession Dates Duration % Decline in GNP Peak Unemployment Rate

Nov 1948-Oct 1949 11 -1.7 7.9%

July 1953 – May 1954 10 -2.7 5.9

Aug 1957 – Apr 1958 8 -1.2 7.4

Apr 1960 – Feb 1961 10 -1.6 6.9

Dec 1969 – Nov 1970 11 -0.6 5.9

Nov 1973 – Mar 1975 16 -3.1 8.6

Jan 1980 – July 1980 6 -2.2 7.8

July 1981 – Nov 1982 16 -2.9 10.8

July 1990 – Mar 1991 8 -1.3 6.8

Mar 2001 – Nov 2001 8 -0.5 5.6

Average 10 -1.8 7.4

16

30 35 40 45 50 55 60 65

Business Cycles in the U.S. 1929-2006

70 75 80 85 90 95 00 05

20

10

5

15

-5

-10

-15

0

Long-term average growth

Annual real GDP growth

Zero growth

17

What are the three types of economic

indicators?

• Leading• Coincident• Lagging

18

What is aleading indicator?

Variables that change before real GDP changes

19

Leading Indicators•Changes in business and consumer credit•New orders for plant and equipment•New consumer goods orders•Unemployment claims•Delayed deliveries•New business formed•Average workweek•New building permits•Changes in inventories

•Material prices•Stock prices•Money supply

20

What is acoincident indicator?

Variables that change at the same time that real GDP changes

21

Coincident Indicators

•Nonagricultural payrolls

•Personal income

•Industrial Production

•Manufacturing and trade sales

22

What is alagging indicator?

Variables that change after real GDP changes

23

Lagging Indicators•Unemployment rate

•Duration of unemployment rate

•Labor cost per unit of output

•Inventories to sales ratio

•Outstanding commercial loans

•Commercial credit to personal income ratio

•Prime interest rate

24

U.S. JapanCanada U.K.GermanyMexico FranceChina

1

2

3

4

5

6

7

8

9

Russia

10

25

What is thecivilian labor force?

People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions

26

Who is considered employed?

Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business

27

What causes unemployment?

When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

28

Who is considered unemployed?

Anyone who is 16 years of age and above who is actively seeking employment

29

Total Population age 16 and over

Not in Labor ForceNot in Labor ForceArmed forces

Household workersStudentsRetirees

Persons with disabilities

InstitutionalizedDiscourage workers

Civilian labor forceCivilian labor forceEmployedEmployees

Self-employedUnemployedNew entrantsRe-entrantsLost last jobQuit last job

Laid off

30

What is the unemployment rate?The percentage of people in the labor force who are without jobs and are actively seeking jobs

31

Unemployment rate

unemployedcivilian labor force

X 100=

32

How is the unemployment rate

calculated?60,000 households are surveyed each month

33

Who is adiscouraged worker?

A person who wants to work, but who has given up searching for work

34

What is underemployment?

People working at jobs below their level of skills

35

What are criticisms of the unemployment rate?

• Does not include discouraged workers

• Includes part-time workers• Not measure underemployment

36

20

15

10

5

1930 40 50 60

25

70 80 90 00 05

The U.S. Unemployment Rate 1929-2006

37

What are the types of unemployment?

• Seasonal• Frictional• Structural• Cyclical

38

What is seasonal unemployment?

Unemployment caused by recurring changes in hiring due to changes in weather conditions

39

What is frictional unemployment?

Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force

40

What is structural unemployment?

A mismatch of the skills of workers out of work and the skills required for existing job opportunities

41

What is cyclical unemployment?

Unemployment caused by the lack of jobs during a recession

42

What isfull employment?

Unemployment equals the sum of seasonal, frictional, and structural unemployment

43

What is considered full employment?

The natural rate of unemployment changes over time, but today it is considered to be about 5%

44

U.S.Japan CanadaU.K. GermanyItaly FranceSwitzerland0

2

4

6

8

10

12

3.4%

9.0%

4.1%4.6% 5.4%

6.3% 6.8%8.1%

45

What is the GDP gap?The difference between full-employment real GDP and actual real GDP

46

What is the cost of unemployment?

The GDP gap

47

Conclusion?The gap between actual and potential real GDP measures the monetary losses of real goods and

services when at less than full employment

48

END