Economic Economic Costs of Costs of

Unemployment Unemployment

Economic Economic Costs of Costs of

Unemployment Unemployment

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GDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s Law The basic loss of unemployment is forgone output. The basic loss of unemployment is forgone output.

• This is a set of goods and services that is This is a set of goods and services that is forever lost. forever lost. • We will be producing inside the PPC. We will be producing inside the PPC.

• We measure this as the GDP GapWe measure this as the GDP Gap.

Potential GDPPotential GDP is the capacity of the economy is the capacity of the economy

assuming the Natural Rate of Unemployment. The assuming the Natural Rate of Unemployment. The

growth of the Potential GDP assumes the normal growth of the Potential GDP assumes the normal

growth rate of the real GDP.growth rate of the real GDP.

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GDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s Law

Approximately aApproximately a2% GDP Gap occurs.2% GDP Gap occurs.

For every 1% unemploymentFor every 1% unemployment exceeds the natural rate...exceeds the natural rate...

GDP GAPGDP GAPThe amount by which actual GDPThe amount by which actual GDP falls short of potential GDPfalls short of potential GDP

Arthur Okun first to quantify the idea:Arthur Okun first to quantify the idea:

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GDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s Law

GDP Gap for recent yearsGDP Gap for recent years

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GDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s Law

The higher the unemployment rate the The higher the unemployment rate the larger the GDP Gap. larger the GDP Gap.

So… if the rate of unemployment is 4.3% and So… if the rate of unemployment is 4.3% and we assume a natural unemployment rate of 4%, we assume a natural unemployment rate of 4%, we can use Okun’s Law to calculate a loss of we can use Okun’s Law to calculate a loss of $64.8 billion (.003 x 2 x $10.8 Trillion)$64.8 billion (.003 x 2 x $10.8 Trillion)

But…if the rate of unemployment is 5.2% and But…if the rate of unemployment is 5.2% and we assume a natural unemployment rate of 4%, we assume a natural unemployment rate of 4%, we use Okun’s Law to calculate a loss of $259.2 we use Okun’s Law to calculate a loss of $259.2 billion. (.012 x 2 x $10.8 Trillion)billion. (.012 x 2 x $10.8 Trillion)

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GDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s LawGDP Gap and Okun’s Law

At times, the economy’s actual output will exceed At times, the economy’s actual output will exceed its potential— “negative” GDP gap. its potential— “negative” GDP gap.

… … when the statistics don’t agree with what’ when the statistics don’t agree with what’ happening because some facts are lost or missed.happening because some facts are lost or missed.

… … Extra shifts of workers, capital equipment Extra shifts of workers, capital equipment used beyond its design capacity, overtime work and used beyond its design capacity, overtime work and moonlighting are common statistics that cannot be moonlighting are common statistics that cannot be accurately counted. accurately counted.

In 1988-89, an economic expansion caused actual GDP to exceed potential GDP. This condition eventually caused inflation and could not be sustained.

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Unequal Burdens of Unemployment Unequal Burdens of Unemployment

• OccupationOccupation• AgeAge• Race and EthnicityRace and Ethnicity• GenderGender• EducationEducation• DurationDuration

Demographic Group Unemployment Rate 2003

Unemployment Rate 2007

Overall 5.9% 4.6 Occupation: Managerial and professional

1.9 2.1

Production occupations

6.3 7.5

Age: 16-19 15.5 17.1 Male 20+ 5.2 4.4 Female 20+ 4.4 4.4 Race: Black 10 9.0 White 5.2 4.4 Hispanic 7.4 6.3 Gender: Female 5.1 4.2 Male 5.9 4.3 Education Less than HS 8.5 7.6 High School only 5.4 4.7 College Degree or more

3.1 2.2

Duration (average weeks)

20.1 16.8

Dec 2007 DATA Source: http://www.bls.gov/home.htmDec 2007 DATA Source: http://www.bls.gov/home.htmLabor force: 153,866,000Labor force: 153,866,000 Employed 146,211,000Employed 146,211,000 Unemployed 7,078,000Unemployed 7,078,000

Labor force participation rate: 66.0% Unemployment Rate 4.6% Labor force participation rate: 66.0% Unemployment Rate 4.6% Discouraged 369,000 Discouraged 369,000

Is There A Social Cost To Is There A Social Cost To Extended Unemployment?Extended Unemployment?

Non-Economic Costs of UnemploymentNon-Economic Costs of Unemployment Cyclical Unemployment, when high, causes social Cyclical Unemployment, when high, causes social

problems. problems. 1. People out of work become depressed and crime rates 1. People out of work become depressed and crime rates rise. rise. 2. Violence in the home rises as well because of the 2. Violence in the home rises as well because of the frustration factor. frustration factor. 3. Families suffer and often fall apart. 3. Families suffer and often fall apart. 4. Severe depression can cause major political and social 4. Severe depression can cause major political and social change. change.

The Great Depression programs of the New Deal The Great Depression programs of the New Deal changed American thinking about the role of changed American thinking about the role of government in aiding citizens when they are government in aiding citizens when they are needy. needy.

Social Cost of UnemploymentSocial Cost of Unemployment

FBI crime statistics show FBI crime statistics show that that both property crime both property crime and violent crime and violent crime increased between 1985 and increased between 1985 and 19911991 and and fell dramatically fell dramatically from 1993 to 2003 in from 1993 to 2003 in step with the decrease in step with the decrease in unemployment. unemployment.

Crime rates move with the business cycle…rising Crime rates move with the business cycle…rising during periods of high unemployment and falling during periods of high unemployment and falling during periods of low unemployment.during periods of low unemployment.

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Bureau of Justice StatisticsBureau of Justice Statisticshttp://www.ojp.usdoj.gov/http://www.ojp.usdoj.gov/