The Goals of Macro Economic Policy Part 2

8/3/2019 The Goals of Macro Economic Policy Part 2

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Part 2

The Goals of Macroeconomic Policy

Macroeconomics

Prof. Rushen Chahal

2/12/2012 Prof. Rushen Chahal


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Measuring Unemployment

Four Groups:

1. Employed

2. Unemployed

3. Not in the labor force

4. Labor force



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Employed

The employed are people who perform any

paid work, as well as those who have jobs

but are absent from work because of illness,strikes, or vacations



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Unemployed

This group includes people who are not

employed, but are actively looking for work

or waiting to return to work.If I dont have a job, but am not looking for

work, I do not count as unemployed



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Not in the Labor Force

This includes the adult population that is

keeping house, retired, too ill to work, or

simply not looking for work.



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Labor Force

This includes all those who are either employed

or unemployed

2005 China had an estimated labor force of791.4 million

Labor force by occupation:

agriculture 49%, industry 22%, services 29%(2003 est.)

(source, CIA world factbook)



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The Unemployment Rate

People with jobs are employed

People without jobs but looking for work

are unemployedPeople without jobs who are not looking for

work are outside the labor force



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Assume the labor force of a country equals

150 million

Six million people have no job and are lookingfor work

One million have no job but are not looking

for work.

What is the unemployment rate?

4 percent (6 million/150 million)



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U.S. Adult population in 2003

137.6

75.2 Employed

Unemployed

Not in Labor Force

Not in Labor Forcemillion

Unemployed9 million

Employedmillion



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The Unemployment Rate: China

The national bureau of statistics reported Chinas 2004 unemploymentrate at 4.1 percent, down .1 percent from 2003

This number does not include those laid off from State OwnedEnterprises

China does not count rural areas when calculating unemployment

Many western analysts put Chinas unemployment rate closer to 8-10%



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Underestimated Unemployment

Rate Some workers who work part time would like to work full time =underemployed

Some workers who would like to have a job, but have tried

unsuccessfully and have given up = discouraged workers

US Govt est. 480,000 discouraged workers in 2003

This leads to underestimation of the unemployment rate



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Unemployment as an Economic and

Social Problem

High unemployment is both an economic andsocial problem

Unemployment as an economic problemrepresents waste of a valuable resource: labor

Unemployment as a social problem representssuffering of unemployed workers as they

struggle with reduced incomes



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Unemployment as an Economic

and Social ProblemWhen unemployment goes up, the economyis in effect throwing away the goods and

services that workers could have produced



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and Social ProblemAverageUnemploymentrate (%)

GDP loss ($,billion, 1996prices)

As percent ofGDP during theperiod

The greatdepression(1930-1939)

18.2 4,400 38.5

Oil and inflationcrises (1975-

1984)

7.7 1,250 2.5

Recenttranquility(1985-1996)

6.3 500 0.6



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and Social ProblemEconomic losses due to unemployment arethe greatest documented wastes in a moderneconomy

They are many times larger than theestimated inefficiencies form microeconomic

waste due to monopoly or tariffs and quotas



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Three Types of Unemployment

Frictional unemployment

Structural unemployment

Cyclical unemployment



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Frictional Unemployment

Frictional Unemployment is unemployment that is due to normalchanging of jobs in the labor market. It includes people who aretemporarily between jobs because they are moving or changing jobs.

Recently graduated students, parents who reenter the work force afterhaving children, or those looking for better work are examples offrictional unemployment.

Frictional unemployment is generally NOT harmful.



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Structural Unemployment

Structural unemployment refers to workerswho have lost their jobs because they havebeen replaced by machines or because their

skills are no longer needed in the economy.

This can be caused by such factors astechnological change, international trade, and

changing ways of doing business.



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Structural Unemployment

Structural unemployment is a necessary

part of economic growth

Progress creates structural unemployment



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Cyclical Unemployment

Cyclical Unemployment exists when theoverall demand for labor is low

Cyclical Unemployment is a result ofdecreased output in an economy, and thus adecreased demand for labor

Recessions and depressions are some of themain causes for cyclical unemployment



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Cyclical Unemployment

As economies recover from recessions or

depressions, jobs are re-created.

As a result the cyclically unemployed return to

their old jobs or find new ones.

In this way cyclical unemployment diminishes

and eventually disappears



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What type of unemployment is it?

Long term unemployment related to lack of marketableskills Structural Unemployment

Temporary unemployment related to finding a job orswitching jobs Frictional Unemployment

Unemployment related to a recession Cyclical Unemployment



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Who are the Unemployed?

Labor

MarketGroup

Recessio

n (1982)

Boom

(1989)

Recessio

n (1982)

Boom

(1989)

16-19 23.2 14.7 18.5 17.7

20+ 8.6 4.6 81.5 82.3

White 8.6 4.6 77.2 74.5Black 17.3 9.4 22.8 25.5

Male 8.8 4.3 58.5 51.1

Female 8.3 5.0 41.5 48.9

All 9.7 5.3 100.0 100.0

Age

Race

Sex

Unemployment rate ofdifferent groups

(% of labor force)

Unemployment rate ofdifferent groups

(% of labor force)



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Duration of Unemployment

05

10

15

20

25

30

35

40

Percentofunemp

loyed

workers

Less Than 5 5-14 15-26 More than

26

Duration of unemployment, 1997 (weeks)2/12/2012 Prof. Rushen Chahal


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Sources of Unemployment

0.8

1.1

2.2

5.7

0.80.6

1.5

2.4

1982 1989

Job loser

Reentrant

New Entrant

Job Leaver

Unemployment by reason(% of labor force that isunemployed for different

reasons)



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Full Employment

Over time, the natural unemployment ratetends to settle at a few percentage pointsabove zero.

This is due to the presence of structural andfrictional unemployment.

Natural rate of unemployment structuraland frictional unemployment.



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Full Employment

Full Employment equals 100% minus the natural rate of

unemployment.

Full employment occurs at less than 100% employment,because the natural rate of unemployment exceeds 0%.

The natural rate of unemployment in America is thought

to be about 5% of the U.S. workforce.

.



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Unemployment Insurance

After the great depression, the United States

implemented Unemployment Insurance.

This provides unemployed people with some

money to get by while they try and look for a

new job.



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Generally to qualify for welfare you must:

Have held a job for at least 6 monthsHave held a job recently

Have been fired

Have actively been looking for a new job



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Average weekly benefit check: $262

About 49% of average earnings

However, only about 41 percent of thoseunemployed (about 8.75 million people) were

eligible for welfare benefits


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