Principles of Macroeconomics

Lecture 5

UNEMPLOYMENT

Unemployment

People who are looking for work but have no jobs.

ACTIVELY LOOKING is critical to the definition.

Definitions for Unemployment Labor Force = Employed + unemployed

Unemployment Rate = number of unemployed / total labor force

Labor Force Participation Rate = labor force / population 16 and over

Definitions of Unemployment

Discouraged Workers People who left the labor force

because they could not find jobs. Underemployed

Workers holding part-time work, but prefer full-time work OR hold jobs that are far below their capabilities.

The reasons for unemployment

Frictional Unemployment

Structural Unemployment

Seasonal Unemployment

Cyclical Unemployment

Cyclical Unemployment

When GDP fluctuates, demand in the economy is not sufficient to provide jobs for all those who seek work.– Recession– Depression

Frictional Unemployment

People in between jobs.

Short period of time while changing jobs.

3% - 4% frictional employment is considered normal.

Structural Unemployment

When changes in market supply or demand conditions affect major industries or regions.

The part of unemployment that results from the mismatch of skills and jobs.

Causes of Structural Unemployment

Decline in demand for a product

Increased foreign competition

Automation of production

Increased raw material costs

Lack of labor mobility between occupations or regions.

Seasonal Unemployment

Most seasonal unemployment tends to occur in certain industries. – Hotel and catering – Tourism – Fruit picking – Christmas

Unemployment Statistics

Natural Rate of Unemployment Level of unemployment at which there

is no cyclical unemployment.

Full Employment Level of employment that occurs

when the unemployment rate is at the “natural rate.”

The Natural Rate of Unemployment

Depending on whom you talk to …

4% to 5% is considered the natural rate. Consists of only structural and

frictional unemployment.

Historic Unemployment Rates

1933 during the Great Depression – 25%

1998 – Unemployment fell to 3.9%

October 2009 – 10.2% - highest in 26 years!

March 2010 – 9.7%

3.9% Unemployment

Why wouldn’t this be good for the economy?

Wage Inflation

How do employers attract or keep employees if there is not enough workers? Higher Wages More Benefits

1999, Amigos was paying $9 per hour and McDonalds offered $500 signing bonuses.

Why would that be bad?

Costs go up (labour), so prices have to rise to cover labour.

Higher prices make workers demand more money.

Cost – Push Inflation

Current Data on Unemployment for the US

According to the Bureau of Labour Statistics (www.bls.gov)

Currently wages are stagnant to negative.

Unemployment Data

Previously: 303,000 new jobless claims were filed in March 2009.

Currently: 448000 in the week ending April 24, 2010

168000 people reported getting jobs in March 2010

Comparison of key countries December 09

BRIC Country Unemployment

Brazil – 9.7% (est.)

Russia – 6.4% (est.)

India – 6.8% (DOWN)

China – 4.0%

BTW:

Top 3 of unemployment: Nauru Liberia Zimbabwe

Countries with the lowest unemployment -

Countries with the lowest unemployment Andorra Monaco Qatar

Consequences of Consequences of UnemploymentUnemployment

Real Output Effects– Each 1% of unemployment

results in a reduction of $100-billion in output.

– Lower real investment means less growth and reduced future output.

– OKUN’S LAW!

Consequences of Unemployment

Income EffectsIncome Effects Loss of income and Loss of income and

benefits (Health benefits (Health insurance)insurance)

Loss of income to Loss of income to others because of others because of reduced purchasing reduced purchasing powerpower

Reduced tax income Reduced tax income and increased outlays and increased outlays of government.of government.

Consequences of Consequences of UnemploymentUnemployment

Social Effects– Health Problems– Increased suicides– Break up of families– Increased child abuse– Increased crime

Review

How do economists measure the unemployed?

Previously unemployed individuals who have stopped looking for work are called ____ workers.

What are the types of unemployment? The natural rate of unemployment

consists solely of frictional and structural unemployment.